Where products come from will become crucial, and complex
Supply chains have always been vital to success in manufacturing, but in the past they came into focus only when they broke down, much like the public transportation systems that underpin many cities. This is quickly changing. Rather than merely supporting the manufacturing process, the supply-chain network increasingly provides critical differentiation, a potential source of intellectual property and competitive advantage.
Multiple factors, most rooted in changing consumer realities, are driving the awakening to the importance of supply-chain management and visibility. The rise of connected technologies and e-commerce means consumers increasingly expect goods available anywhere on an on-demand basis, and often tailored to their preferences. Few are still willing to “meet the manufacturer halfway” by waiting patiently for a product to arrive at the nearest retail outlet. This could strain supply chains used to producing a once-size-fits-all product for a single distributor.
More consumers are also seeking reassurances from manufacturers that their goods are sourced and produced in an environmentally- and socially-sustainable fashion. High-profile incidents like the collapse of the Rana Plaza building in Bangladesh, which killed over 1,000 workers producing textiles for multiple global brands, heighten this scrutiny. In a global study published in 2014 by certification firm DNV Business Assurance and research house GFK Eurisko, 80% of companies said they felt pressure from customers to demonstrate the sustainability of their supply chains.
National regulation increasingly reflects these consumer demands. The UK government, for example, recently introduced legislation that requires many companies doing business there to report on efforts to ensure their supply chains are free of slavery and human trafficking, following similar steps in the United States for firms seeking some federal contracts.
“Multiple factors are driving the awakening to the importance of supply-chain management and visibility.”
The proliferation of free-trade agreements (FTAs), in particular ambitious multilateral trade frameworks like the 12-nation Trans-Pacific Partnership, will also force supply chains to adapt to new realities. In theory these offer manufacturers a host of tariff and trade benefits. However, to qualify for concessions under an FTA, manufacturers typically have to demonstrate their products originate in a country party to an agreement under its rules of origin, which usually dictate a certain amount of local content, assembly or other criteria.
Given the staggering technical complexity of many modern-day products—and, by extension, their supply chains—pinpointing even something as relatively straightforward as a good’s ultimate place of origin may be no easy task. A medical diagnostic system, for example, may be assembled in South Korea from x-ray, imaging and chemical analysis equipment developed in Germany, the United States and Japan (see infographic). Verifying the environmental standards or efficiency of suppliers a few steps or jurisdictions removed, then, is even tougher.
Not surprisingly, given the scope of these challenges, supply-chain management and transparency remain ideals rather than realities for many manufacturers. In a 2015 report [PDF] on the manufacturing outlook by consultancy KPMG, only 14% of manufacturers surveyed claimed to have complete visibility into multiple tiers of their supply chains.
Whilst attaining absolute supply-chain control is unrealistic, manufacturers can take several steps to address some of these gaps. Companies will have to deepen their relationships with their suppliers, shun “hands off” approaches which leave suppliers free to engage in cascading levels of subcontracting, establish clear and consistent lines of communication, and set out in detail everything from the standards they are expected to adhere to, to the data they are required to furnish on a regular basis. Waiting to take action until suppliers fail to meet agreements is no longer acceptable.
Manufacturers also need to consider whether they themselves truly grasp the importance of supply-chain management and establish a framework to address supply-chain risks, and a team responsible for implementing the framework, where none may currently exist. A senior executive or executives should sit atop a clear ladder of accountability for supply-chain risk mitigation and transparency initiatives.
While the pace of technological change makes supply chains more complicated, it also presents some possible remedies to this complexity. Adopting now well-established techniques such as electronic bidding, order fulfilment and inventory management can help companies build a real-time window into supply-chain events, and flag potential problems or inconsistencies before they develop into full-blown crises.
The advent of data analytics and software-as-a-service solutions has put these capabilities within the reach even of smaller firms with more limited technology budgets. KPMG’s survey indicated many manufacturers are already taking steps in this direction; over one-third of respondents said they intend to make significant investments into improving procurement systems, while 31% planned to allocate substantial investment into integrated business planning (IBP) systems, which connect and share data across elements of the supply chain.
“While the pace of technological change makes supply chains more complicated, it also presents some possible remedies to this complexity.”
While outsourcing various segments of the supply chain—and even outsourcing supply-chain management itself—will remain a common practice, over the longer term, the drive for transparency and control is likely to encourage more manufacturers to maintain or retake supply-chain ownership. Some may also move their supply chains closer to home, where quality control can be easier and standards more familiar.
Indeed, “nearshoring” is coming into prominence as a supply-chain transparency strategy, as well as a means to boost speed to market and lower logistics costs. In a 2014 survey of manufacturers selling into the US by consultancy AlixPartners, 81% of respondents described nearshoring as important, and 86% of those who see nearshoring as an opportunity reported already nearshoring or expecting to nearshore within the next two to three years.
Shifts in regulation and consumer behaviour are compounding the potential costs of disruption or scandal in an entirely outsourced and largely invisible supply chain. Nearshoring may thus look like a relative bargain when these issues are taken into account. This trend could well contribute to the renewed efforts of countries like the UK, the US and India to foster local manufacturing industries, just as the current crop of manufacturing-centric economies, particularly China, pursues a more services-oriented economic model.
-TE
Comments