How Procurement Can Prepare to Pivot Quickly
July 22, 2020
These days, there are countless stories about how manufacturers have rapidly pivoted from producing cars or textiles to Personal Protective Equipment (PPE). Yet others continue to deal with slowing demand, furloughs and supply chain disruptions – all while trying to lay the ground work for a spike in demand as the world recovers. To help with that preparation, it’s time to hit the “reset” button and take a fresh look at procurement best practices.
Just a few short months ago, proactive buyers and procurement managers were seeking ways to weather daily disruptions such as price fluctuations, “trade wars, on-again/off-again tariffs, increased government regulations, freight issues, poor or unacceptable part or product quality, and more,” as written in this April Metalworking Mindset blog post. The current pandemic now drives home the importance of resilience, especially for equipment manufacturers looking to ready themselves to rebound quickly.
Inventory Challenges with COVID-19
MIT’s Yossi Sheffi recently penned a Wall Street Journal commentary calling on companies to act immediately “to minimize short- and long-term impact on their operations.” Discussing “the so-called supply-chain bullwhip effect,” the director of the Massachusetts Institute of Technology’s Center for Transportation and Logistics noted that slowing demand leads to reduced orders to wholesalers. They then cut their orders to the manufacturers, which in turn reduce their orders to part suppliers…and so on. Then, when there is recovery, the pattern reverses and orders jump to strain inventory all the way back through the chain.
Certainly, inventories are shrinking. “Nonfarm inventories values fell nearly $10 billion in the first quarter of 2020 compared to the fourth quarter of 2019, according to early estimates from the Bureau of Economic Analysis (BEA).” And the drop is “the first sign of contracting inventories since the second quarter of 2018.”
The problem is that there are so many unknowns. Sheffi suggested a central emergency management team review the company’s product portfolio, customer base, and suppliers to set priorities. Further, he proposed a company “plan for operating to maximize cash flow rather than profits.”
Supply & Demand Chain Executive picked up the discussion with suggestions that could benefit procurement “beyond this short-term contingency mode.” Its first suggestion was to look to digital manufacturing suppliers to help “tame supply chain disruption.” With a digitized process offering reliable, rapid manufacturing, a digital manufacturer could support quick adaptations.
Partnering with regional suppliers could also help a company better ride out global supply chain disruptions, “especially if those regional suppliers also use regional suppliers.” Onshoring, after all, has the potential to lead to higher quality products, offset rising labor costs in other markets, and reduce language and cultural barriers as well as transportation complexities.
Yet PwC’s survey of 305 CFOs during the week of April 20 indicated companies planned to relocate supply chains only as a last resort. Although the COVID-19 situation has brought home the need for supplier diversification, the CFOs still saw it as a “three-year goal” rather than an immediate necessity.
Another approach is to move more to on-demand production. Offering a way to counter demand volatility and control inventory costs, turning to manufacturing on demand means the manufacturer can prioritize customer demand. The manufacturer also no longer spends money, space and energy warehousing excess product.
Other Pandemic Problems
Procurement professionals rely heavily on data. Historical trends and customer behavior data help guide demand forecasting and inventory levels. Yet, how does one predict the future right now? “It’s a horrible dilemma,” Simon Ellis, the program VP for supply chain strategy at IDC, told Supply Chain Dive. Plus, he noted, in China, which has already reopened, a lack of demand for some products has further complicated matters.
“If consumers don’t come back, we got a big problem with the economy in this country,” Ellis said. “So, I worry much more about the demand, frankly, than I do supply.”
Richard Wilding, professor of supply chain strategy at Cranfield School of Management, reiterated another procurement best practice in a Supply Management discussion of adapting to COVID-19. The current situation highlights the need for a deep understanding of the extended supply chain, he said.
“At the end of the day to make this work, procurement needs to have an understanding of the manufacturing capabilities their suppliers have,” Wilding said. “It will be a matter of industry coming together and seeing what capabilities there are in their networks.”
More supplier scrutiny is likely throughout the supply chain, said PwC, based on its early April survey of CFOs. “This crisis has highlighted where supply chains are more fragile, especially around the dependency on key suppliers, and geographies,” said Amity Millhiser, PwC vice chair and chief clients officer.
Ultimately, for procurement officers to protect their supply chain and position their companies to pivot quickly when demand picks back up, they’ll need to revisit procurement best practices. Diversifying through digital manufacturing, on-demand production, and increasing regional supply relationships can help. Having intense conversations with supplier-partners and keeping a constant pulse on customer needs now will also make a difference for supply chain success going forward.
Prepare your equipment manufacturing supply chain for rebound readiness by reaching out to a Miller Fabrication Solutions expert today.