Covid-19 pandemic has affected all business areas including the supply chains. The article below provides five tips to help you stabilize the supply chain.
Table of Contents
- 5 Tips for Supply Chain Management
- An Extra Tip
Covid-19! The words strike fear in a lot of people these days. Global business has been greatly impacted. One of the business areas most affect by the pandemic has been the supply chains. During the past century there have been other pandemics and wars that adversely affected supply chains, but possibly to the extent this pandemic has, due to the global business environment.
The upside to crisis is the learning opportunities presented by flaws, failures, or just plain black swans that appear. During the crisis and when events turn, one doesn’t see the actions as an opportunity. But, if there are flaws in the Supply Chain, a crisis will bring most of them into view.
Sometimes one doesn’t need a pandemic for flaws or weaknesses in the supply chain to show up. A few years ago, China was buying all of the cement (powder) that the companies in the US could produce. This action impacted US construction projects. In another case, a supplier was going through a major reorganization and it was affecting deliveries. These may not happen every year and the chance this type of interruptions will occur on more than a few projects may be small, but they do happen. The corrective actions for Black Swans cannot be planned, by definition, Black Swans are not predictable. But planning in general can reduce or shorten the impact of these events.
1. Do not select supplier primarily on cost of the product. By now, one would think this lesson will have been learned, but we see examples to the contrary frequently enough. Rather than work with only the material costs, consider the entire costs, logistics, and cost of the quality of the product in the field, as well as yield rates. By yield rates, we mean the ratio of the amount of parts useable from the production run, divided by the total number of parts built. We need something close to 100% and not 85%, especially for large volume runs such as automotive applications. Anything less than 100% represents waste or rework at best. The capacity that makes products, but the product is not useable, represents waste. Similarly, and equally important, is ensuring the company has a true continuous improvement program before accepting this supplier. Check out the writings of W. Edwards Deming.
In Procurement, this tip should be considered regularly, even before pandemics or wars happen. Every Buyer and Project Manager should be skeptical of the lowest bid. For example, review of bids for a project to upgrade the electrical systems of schools in one school district, one bid was below 50% of the other submitted bids. The Buyer & Project Manager held a conference call with the low bidder. The bid had specified ‘All New Equipment’. The bidder had just completed a demolition project on a newly built building. Since, in the bidder’s eyes, the electrical equipment was ‘like new’ and he was including that equipment at no charge for material. The bidder was requested to rebid with new equipment. He declined. The bid was marked ‘Not to Specification’.
2. Develop a partnership with the supplier. Unless the product or component is a commodity product, it is best to develop a partnership with them. That does not mean just trust across the board but treat them as an equal. Trust with metrics (trust but verify), agreed upon metrics and specific dimensions of those metrics as well as an understanding of the measurement gathering. Adopt a trust be verify approach, while treating the supplier as an extension of your company as much as possible.
3. Develop a supplier evaluation selection model. This is a list of all of the items to consider before selecting a supplier that are important to your organization, and specific evaluation metrics and perhaps scoring system to homogenize the way supplier evaluations are performed. This will allow you to objectively compare each supplier against those attributes your company believes to be pertinent.
Yet another tip that should be standard policy in Procurement, some of the items should not be weighted or scored. These items are straight positive/negative or yes/no. For example, Financial Stability, Current Legal Action, and Payment to their Supplies. These items are critical to protect your organization from any future legal entanglements.
4. Clear identification of the key players and areas of expertise. When things fall apart, quick responses can be the difference between success and a costly failure. It is also difficult to find these key personnel when there is a metaphoric storm swirling through the organizations. Quick responses are predicated upon quick identification of the pending disturbances.
Procurement or at very least, the Project Manager (PM) should have single point contact at the supplier’s organization. The PM should not have to call all departments to get a status of what is happening at their facility. But the PM should know who the key person is in each department. In a crisis, the single point contact and the PM may plan to talk daily until such time a path forward is worked out and approved. The supplier contact may choose to have one of the department people involved depending on the situation. That is why it is good for the PM to know who the key players are so not to be surprised when and if the single point contact changes.
5. Understand the association with long lead times and inventory and the cost. There are costs associated with carrying inventory. The inventory carrying costs have multiple components, from storage and handling costs, floor space, taxes, through to opportunity costs. Longer lead times for producing and shipping the material will require a larger inventory, not just of the final product but also of the sub-components or constituent parts.
The purchasing organization’s Procurement and ultimately the project will (probably) be charged for any inventorying of parts at either by the suppliers or by within their organization.
Develop a Second supplier. There should be a second supplier from the selection process that could be engaged if something happens to the primary supplier. Building or maintaining a relationship with the second supplier might be advantageous. Particularly if the primary supplier is offshore and the second supplier is ‘local’. Not always the situation, but, having a second or possibly a third supplier that could step in if the supply from the offshore supplier is interrupted.
We are not advocating leading a supplier on with promises of work, just engagement. Referring to Tip #4, Identify the key players at the second and third suppliers. Depending on their locations make a trip to their facility to learn more about them. If your company has events such as company anniversary or a special occasion, invite the suppliers. A company that sponsors a formula one racing team, brings the car & driver to its location once a year and has a picnic atmosphere. Some suppliers are invited, not just those currently doing work for the company. Management considers it a chance to build relationships. And then there are golf outings.
The supply chain is a system that consists of a variety of subsystems, from parts to other interfacing suppliers, there are many associated subsystems. The manner in which we construct the system, will determine the types of risks to which the system and the company will be subjected. Some of these risks are predictable, there is such a thing as unintended consequences, but in our experience, many times these unintended consequences are often the result of insufficient diligence exploration of the system incarnation. All along the supply chain development, we are making trade-offs, prioritizing these specific attributes at the expense of other attributes. Focusing solely on cost is not the way to a long-term viable company.