This is an original article from NIST Manufacturing Innovation Blog.
Disruptions in the global supply chain have led to a new dynamic for many small and medium-sized manufacturers (SMMs) – the need to be more strategic about “second sourcing” and reshoring. The biggest increase is in what’s referred to as second sourcing, which adds redundancies such as a second source of a supply to minimize risk while increasing options. But supply chain experts also are seeing an interest in relying long term on domestic supply sources.
In one recent example, a manufacturer was paying $5,000 per roll for material and shipping from China, but delays in shipping forced it to use air freight instead of ocean freight, which raised the cost of just the shipping to $7,500. A traditional tactical approach of reducing shipping costs is not enough to address the potential risk for that manufacturer. The manufacturer is now using supplier scouting to reshore that base material and source it domestically. The SMM realizes that a more integrated approach to its supply chain will help its business planning.
Risk has always been a factor in the acquisition and delivery of supplies, but with the recent breakdowns in the global supply chain, risk has become a much bigger consideration. For many SMMs getting supplies from Asia, disruptions are more of a “when” than an “if.”
Uncertainty has been magnified, and cost becomes less important if you can’t deliver a product. Having to pay more for materials, parts or shipping is a difficult dynamic for many SMMs that may not be able to absorb short-term losses or even a lower margin.
But some SMMs have emerged with greater acceptance for the realities of higher pricing for supplies if it reduces significant risks. Many SMMs are also beginning to use the lens of total cost of ownership (TCO) and asking how they can add value for their customers. Three elements that contribute to a more holistic view of sourcing include:
Let’s look more at these three elements and how they can align domestic sourcing efforts with business success.
Costs are the primary reason SMMs use overseas suppliers as materials and workforce are significantly less expensive in Asia. But when you calculate TCO, you include overhead expenses, such as the cost of managing overseas suppliers, the company’s balance sheet (i.e., having higher inventory costs), risks including lost sales and poor customer experience, and other external and internal business considerations. It is a more integrated view that takes into account freight, tariffs and lead time. It is not simply looking at a per-unit purchase cost. TCO becomes more manageable when there are fewer uncertainties.
With the extensive disruptions in the global supply chain, many SMMs now view the search for domestic sourcing more strategically and less as having to solve immediate problems with a triage approach. Using domestic sourcing for materials and parts instead of overseas suppliers means the time allocated for risk mitigation is significantly reduced and begins much earlier in the entire process. The shorter distance a part or material must travel and the fewer touchpoints involved equates to less potential uncertainty.
Trust is essential in any important relationship, and trust with suppliers is no different. Do you have assurances the supplier won’t drop your account for a better deal? Would the supplier be able to accommodate an increase in your business? Building a trusting relationship can be difficult under any circumstances; it can be even more difficult without common cultures, languages and close proximity. Different cultures also have different business ethics. Will your supplier let you know if it is changing the specs or processes for your part in order to keep its costs down?
Suppliers also encounter disruptions. In a strong relationship, a supplier will be as transparent as possible and help the buyer make alternative arrangements to ensure continuity of supply.
Typically, a product goes through life cycle phases of introduction, growth, maturity and decline. Finding suppliers who understand their role in the product life cycle is critical to supply chain integration and strategy. Meeting production standards at the right price is not enough to add long-term value.
The competitive advantage in a supply chain is the ability to respond to changing customer demands. Those demands may include a need for rapid product development or addressing problems related to the speed, quantity, quality, and cost of delivering the products to customers.
The global supply chain, in many ways, behaves like the end of a product life cycle. For many SMMs, sourcing supplies from Asia is not adding enough value to warrant the risk of demands potentially not being met.
The efforts to find domestic sourcing is shedding light on the many benefits that SMMs might not have considered in the past, such as TCO and supplier flexibility. Supply chain management experts at IMEC or your local MEP Center can help you find domestic sourcing and assist with supply chain optimization.
Watch the webinar: How Smaller Manufacturers Can Develop Risk Management Strategies for their Supply Chains Webinar to learn how to mitigate the business risks of today's disruptions while building a more resilient supply chain.