OEMs Seek to Innovate as Global Trade Disputes Bite
November 5, 2018
2018 has been the year of trade disputes, with tariffs and counter-tariffs on everything from imported steel to blue jeans coming fast and furious. So much so that it has become difficult for some supply chain managers to know the exact cost of the parts and supplies they import to keep production running smoothly.
If you find yourself in this position, then take solace in the fact that you are not alone. A recent article in The Wall Street Journal noted that part shortages are starting to wreak havoc on manufacturers large and small.
To make matters worse, the root cause of the shortage might be something which wasn’t even evident months ago. This can be due to an obscure part on the Bill of Material (BOM), which, due to tariffs or other trade restrictions, has now been hard to come by. However, production needs to keep moving forward while OEMs seek to innovate as the impact from global trade disputes starts to bite.
Even before the introduction of tariffs, data from the Institute for Supply Management showed that deliveries from suppliers had been slowing for 22 months dating back to August 2016. However, the economy has continued to expand, and this points to better efficiency in supply chains – largely through scheduling.
However, as tariffs begin to bite, improvements from scheduling have become harder to come by. Harder, but not impossible. In some cases, it is a matter of securing new sources of raw materials from countries without tariffs – though this does not discount the costs tied to setting up a new supplier.
In other cases, it has led to something which is antithetical to lean manufacturing – bulking up on buffer stocks. However, this approach is not without risk as it can lead to a massive balance sheet exposure as the build-up in inventory not only drains cash but also leads to an increase in accounts payable.
Enough with the accounting class: another reason why bulking up on buffer stocks is not always the best option is that the increased inventory levels can mask defects or make the supply chain less agile when it comes to addressing corrective actions.
A third way has emerged, and that is to work with metal fabrication partners on long-term contracts. Not only does this help to lock in the cost of parts and supplies, but it also makes it easier to manage delivery schedules.
This approach is not a one-size-fits-all solution, as it requires a certain level of collaboration to work properly. This includes looking at the production plan over the long-term and setting up structures to manage material costs.
Another approach which can yield results during times of supply uncertainty is to review the BOM with an eye towards simplifying the build as well as substituting materials, if needed. Doing so not only limits the number of material sources but it can also make it easier to identify where parts will come from.
However, this process is not something which can be taken lightly – especially in industries where tolerances are extremely tight. As such, it is an approach which must include supplier-partners, quality engineers, and design engineers.
The goal is not to analyze the change to death, but to identify the critical performance metrics needed to ensure any change will not impact customer expectations in the field.
Keep Your Friends Close
One unintended consequence of the recent trade disputes is that nearshoring is not exactly the shortcut to trade barriers that it used to be. Just because your metal fabrication partner is just down the road doesn’t mean their material supplier is as well. It is what it is, as just about every industry has a globalized supply chain to one extent or another.
How are OEMs working through this challenge? It starts by working even more closely with their supplier-partners. For example, there might be common materials which can be ordered across the supply chain. Or the solution might be increased transparency. Either way, the goal is to foster an open relationship between OEMs and supplier-partners, one which cultivates tradeoffs but with trust and not through a win-lose paradigm.
What Can You Do?
Let’s face it, these tariffs are probably going to be with us for a while. Given that these challenges largely fall into the category of things we can’t control, then your only way to be successful is to find innovative solutions. Done correctly, and these solutions might even lead to competitive advantages.
- Work with supplier partners on long-term contracts. Not only will this lock-in costs, but it will also make it easier to manage production schedules.
- Simplify builds by either switching materials or reducing sensitivity to supply disruptions brought about by tariffs.
- Work more closely with metal fabrication partners with a focus on building trust rather than focusing on win-lose outcomes.
If your supply chain is facing uncertainty, contact the Miller team to see how we can help you.