This is an original article written by Scott Schein, Director of National Network Programs at GENEDGE, part of the MEP National Network.
The pandemic revealed potential vendor-based weaknesses for many small and medium-sized manufacturers (SMMs). Late deliveries have increased, materials have become scarce, quality is less reliable, and prices have ticked upward. These issues and general upheaval in global supply chains make supply chain management an urgent focus for many SMMs.
Manufacturers can take immediate actions to better navigate this uncertainty without a lot of expense or complicated systems. Persistence, teamwork, a process-driven approach and some basic analysis will establish supply chain disciplines that increase the bottom line and reduce long-term business risks for SMMs.
Manage Risk by Developing Multiple Sources
Unlike larger companies, many SMMs develop relationships with suppliers based on goodwill – relying on past experience with vendors that responded to urgent orders or allowed lenient payment terms when cash flow was tight. Those suppliers answered calls and maybe even developed personal relationships within the SMM. This can be important for small businesses where individual orders and customers have significant bottom-line impact.
However, each vendor’s financial, operational and management conditions change over time. SMMs usually lack the resources and systems to monitor their supply chain efficiently. If a supplier’s performance slips – lead times grow, prices increase unexpectedly or quality degrades – then the SMM’s operations will suffer.
Maintaining three or more sources for all key materials and components helps an SMM manage its operational risks, maintain price competition and keep production running. SMMs can develop multiple sources by using requests for proposal (RFP) and requests for quote (RFQ) processes. RFPs and RFQs should contain:
- Detailed technical and business requirements
- Lead time expectations
- Opportunities for discounts
- Non-negotiable deadline
- Method of submission
- Point of contact for questions
Effectively issuing and reviewing RFPs and RFQs doesn’t require substantial training or complicated systems. It’s an investment of time that helps SMMs better manage business risks and increases pricing leverage in a difficult economic environment.
Establish Systematic Forecasting and Planning
Effective supply chain planning and material forecasting starts with a sound analytical approach. Consider targeting materials where a safety stock investment could minimize future operational disruptions or customer issues.
- Incorporate the existing production schedule that reflects customer demand
- Identify needs for critical materials and resources
- Analyze purchasing histories and future demand from key customers
- Update projections with accurate vendor lead times and quantities
Start with a small set of part numbers or critical materials that link to a high-level production plan. Test the forecast for a few months and refine your approach. Analyze the financial and production impacts, and evaluate the potential balance sheet and cash flow constraints.
For example, a company may have high confidence in a safety stock projection of $10,000 in Material A, but cash flow and balance sheet constraints may only permit $5,000. This may still help minimize disruptions, but this needs to be a broader business strategy and financial decision – not just a supply chain decision.
Once a high confidence level is achieved in the limited forecast, the company can add other critical materials and consider additional safety stocks. Adding visibility of future demand and better forecasting has a number of benefits, such as:
- Helping SMMs negotiate for long-term agreements to secure important supplies.
- Offering supply partners larger quantities and more predictable orders.
- Providing SMMs with much-needed pricing leverage.
- Reducing the potential for costly production shutdowns or future disruptions – an often hidden, but significant cost for SMMs.
Long-term, as an SMM’s forecasting capabilities improve, automation increases the efficiency of generating projections and helps the firm better synchronize its supply chain with customer needs, bills of material and production.
Evaluate Ways To Standardize Work and Identify Substitute Materials
Customers enjoy customization. Businesses grow over time by offering a broader portfolio of products that are often customized, but as growth continues, customization can become problematic. Customization requires more bills of material, more resources to manage them, and more time from supply chain managers and their teams. It also increases the complexity of planning and forecasting, as well as the possibility of operational disruptions.
Sometimes a slightly different product or service can sufficiently meet the customer’s needs, and identifying alternatives reduces the level of customization. Periodically reviewing bills of material and identifying possibilities for standardization are an important way to consolidate material requirements. Sales, production, engineering and supply chain areas can review the product portfolio in detail and look for ways to reduce complexity. Frontline sales teams should be educated on options so when a customer requests a customized attribute they can immediately respond with a suitable alternative.
Although not always feasible, using substitute materials or components can also help SMMs manage supply risks. Technical multi-sourcing is most worthwhile for reducing reliance on scarce materials, addressing problem supply, or diversifying away from costly components. Testing and detailed engineering evaluation may be needed, but the benefits can ultimately outweigh those costs.
Implement a Performance-Driven Supply Chain Approach
Underperforming suppliers can be catastrophic for SMMs in terms of lost revenue, underused production – and credibility with customers. A simple management dashboard for critical suppliers helps SMMs monitor and address problem areas, and constantly improve supply chain performance. The dashboard should include key performance indicators such as on-time delivery, quality acceptance or rejection, and pricing competitiveness. The supply chain manager may need to request monthly or quarterly data inputs from other business areas. Once established, the data collection process will not be time intensive.
IMEC Can Help With Supply Chain Management
Supply chain management experts at IMEC can help you with various aspects of your supply chain – including supply chain management and optimization, integration of software, inventory control and finding domestic suppliers. Our trusted advisors understand the challenges that smaller manufacturers face when it comes to supply chains. Get in touch to get the conversation started.
In the meanwhile, download the whitepaper: How Small Manufacturers Can Develop Risk Management Strategies for their Supply Chains.