Having to pay more for materials, parts or shipping is a difficult dynamic as you may not be able to absorb short-term losses or even a lower margin. But cost becomes less important if you can't deliver a product, and as uncertainty has been magnified, it is now essential for you to manage risk by preparing for and adapting to unexpected disruptions in order to increase your resilience and be responsive to customers.
In many ways the disruptions show how small manufacturers are more critical than ever. Many big companies are looking for additional domestic sourcing and do not want to take on additional liabilities and capital investments from bringing more in-house. Those companies also are looking for trusted relationships in their supply chains that will work with them to provide added value from sustainable solutions and even product development.
A key aspect of being a trusted supplier and providing sustainable solutions is being resilient. Resilient manufacturers operate with situational awareness of all aspects of their business environment, from their supply chain inputs, to their in-factory processes, to their customer and market outputs. Resilience doesn't just mean reacting to catastrophic changes to remain in business. Rather, resilience means being proactive about understanding and anticipating all kinds of inevitable change and putting in place the strategies and tactics that allow a company to be both stable and agile at the same time.
Risk management is key
It starts with risk awareness that can be realized by conducting assessments of the full system of business operations: inputs, processes, and outputs. Systems-based risk awareness allows a company to understand challenges in their supply chain, in their factory, and with their customers and markets – before those challenges become pressing problems – and manage them accordingly.
This includes pricing and costing.
Many small manufacturers are now looking at more than just the per unit price. They are now looking at the total cost of ownership (TCO) in their supply chains and asking how they can add value for their customers. Part of the strategic shift is from manufacturers realizing that the costs are considerable for freight, tariffs and time. Looking at the true cost via the TCO approach rather than at just the per unit purchase cost can help you better evaluate sourcing.
Many manufacturers are pursuing domestic sourcing for materials and supplies as a way to overcome supply chain disruptions. There are substantial long-term benefits to reshoring including:
1. Reliability: Overseas suppliers means living with tariffs, global politics and economies and natural disasters in faraway places.
2. Trust: It's easier to establish a relationship with common languages, cultures and proximity, and relationships become critical during disruptions. Relationships are key in understanding if a supplier can grow with your business and innovate alongside you.
3. Business Ethics: Concerns about overseas suppliers with intellectual property (IP), knockoffs and tooling are well documented. The U.S. has some of the strongest IP protections in the world, so working with a domestic supplier decreases the chances of IP theft.
It's difficult and time-consuming to build and maintain relationships, but growth in domestic sourcing will come from medium and larger manufacturers who invest more in smaller domestic suppliers to solve shortages and other arising issues. It's an important part of the reshoring mindset.
Responding to Impacts and Preparing For What Comes Next
The global supply chain crisis has evolved from a cascading series of events that began with the shutdown of factories in China at the onset of the COVID-19 pandemic. Subsequent changes in buying behaviors and shifting demands have led to a variety of disruptions, including shortages of materials, parts and components, which in turn created shipping backlogs and bottlenecks that have impacted almost every industry.
The dynamic quickly shifted from the tactical, problem-solving approach to focus on resilience and becoming more strategic. The biggest increase is in multi-sourcing, which adds redundancies as an additional source of a supply to minimize risk while increasing options. But supply chain experts also are seeing an interest in relying, long-term, on domestic supply sources.
Shifting from a reactive to proactive approach requires a continuous cycle of risk mobilizing, sensing, analysis, configuration, and operation. This will help optimize results while mitigating risks. In essence, the questions a manufacturer asks in a dire, problem-solving scenario are similar for reshoring as reactive problem solving:
Can we go without?
Can we substitute it?
Can we build it?
Can we re-tool or get someone else to re-tool to produce it?
Manufacturers should seek to improve their overall resilience and move from reactive to proactive with long-term contingency plans, multi-sourcing to build in redundancy, and rating their existing suppliers. The benefits for manufacturers who source from within the U.S. are extensive and include:
More transparency and control of their supply chains, which can improve quality control, flexibility and time to market, while lowering supply chain risk that often comes from offshore production.
Producing near the consumer often reduces total costs by shortening supply chains and contributing to a lean and agile strategy, with reduced waste.
Tapping into a large network of local and regional supply chain stakeholders, from your local MEP Center, to trade, economic development and workforce development organizations and local and regional govern- ment agencies that might have timely incentives.
MEP Tips for Manufacturers
How the MEP Can Help: The Importance of Relationship Capital
Relationship capital is the value of a manufacturer's relationships with its customers, suppliers, vendors and stakeholders in the marketplace. It is difficult and time-consuming for manufacturers to build and maintain relationships, but success in sourcing will come from manufacturers who invest in strengthening supplier relationships. Many manufacturers are now looking for more reliable domestic suppliers to solve their shortages.
Your local MEP Center has experts who can help manufacturers find new sources of supplies, which is not easy for many resource-challenged manufacturers that are occupied with their own operation and deal in relatively narrow networks associated with their specialties. Local MEP Center staff reach out to their expansive networks of manufacturers – locally and nationally, state and regional economic development organizations, and trade groups to raise the manufacturer's visibility.
Lessons Learned: Don't Fall Into the Low-Cost Trap
Many manufacturers work hard to reduce uncertainties in their operation. They often focus on cost, which is a known quantity. Costs are the reason manufacturers use overseas suppliers to begin with – materials and workforce are typically less expensive in Asia on a per unit cost basis. But "cheaper" is where innovation and value go to die. Competing on cost per unit makes you replaceable.
It is not sustainable.
Mapping Your Supply Chain Network
Manufacturers can map their supply chain to gain better visibility into those organizations' exposures and opportunities. The most common approach to mapping is to use the "bill of materials" to drill down on the top five products by revenue, looking at component suppliers and raw material suppliers. A supply chain mapping process might look like this:
Learn where suppliers and their suppliers are located
Research your suppliers to understand inherent risks associated with the company and external factors z Conduct a risk assessment
Once you have a good idea of your top-tier sites, start looking at the sites that supply to them.
Experts suggest analyzing as many tiers as possible in the supply chain, because there may be hidden critical suppliers that manufacturers are not aware of. The network map should include:
Primary site activities performed at the supplier
Alternative sites the supplier has that could perform the same activity
How long it would take the supplier to begin shipping from the alternate site
Using domestic sourcing for materials and parts instead of overseas suppliers means risk mitigation begins much earlier in the entire process. The shorter distance a part or material must travel, and the fewer touchpoints involved and the less potential uncertainty.
What Supply Chain Disruptions Have Taught Us About Lean Manufacturing
"Just-in-Time" inventory is a popular concept in lean manufacturing which is meant to lower cycle times, reduce waste, and increase productivity. But that concept is not nearly as relevant now as it appeared to be years ago. The reality is that risk has always been a significant factor in supply chains. The current dynamic requires flexibility and risk management. It's not that lean principles don't apply anymore, but the right question to ask may be "what's the healthiest approach for us right now?" Continuous improvement should be the overarching mindset.
MEP Tips for Manufacturers
How MEP Can Help: Supplier Scouting
The fast-changing supply chain dynamics have led to a greater demand for supplier scouting – which is essentially identifying sources for domestic products and capabilities. The MEP National Network Supplier Scouting program works like this: a manufacturer seeking a new supplier contacts its local MEP Center, which shares the details and technical requirements of the opportunity across the MEP National Network — 51 MEP Centers located in all 50 states and Puerto Rico, with over 1,400 trusted advisors and experts at more than 385 MEP service locations.
Local MEP Center staff, through their own best practices, scout for domestic manufacturers within their state that have the capacity, capability, and interest to meet the immediate need. Results are aggregated from input provided by MEP Centers across the nation and sent to the sponsoring MEP Center so they can start a dialogue with the potential suppliers. MEP Centers facilitate company interactions.
Self Assessment Tool for Supply Chain Risk Management
Supply chain issues rarely can be viewed as black and white by smaller manufacturers because there are so many dependencies, both upstream and downstream. While cost will always be a critical factor in finding both suppliers and customers, it's no longer the main consideration. Manufacturers are now looking at how they can balance cost with risk and supply chain resilience.
This self assessment is necessary as reducing uncertainty comes at a cost. There are always tradeoffs. Supply chain issues now are being viewed in somewhat of a business insurance mindset.
An end-to-end supply chain visibility self assessment (see example below) will cross reference three stages of product flow with activities from the three lenses of a business plan.
Product flow:
Upstream - suppliers
Internal - production
Downstream - channels
Business model execution:
Strategic - yearly
Tactical - monthly
Operational - daily
The self assessment tool includes three questions for each aspect of the assessment. A manufacturer can quickly see if it has yet to begin addressing the area, it is a work in progress or it has an established approach or plan. This reveals a snapshot of not only the supply chain but also the value chain development, such as product lifecycle management, market and customer segmentation and distribution management.
There is no question that resource-challenged manufacturers have many choices when it comes to focus and attention for ensuring the growth and sustainability of their business. The self assessment tool is a great starting point to help them prioritize needs.
MEP Tips for Manufacturers
How the MEP Can Help: Build A Balanced KPI Scorecard
Key performance indicators (KPIs) used to be an afterthought for supply chains as securing materials or parts was the emphasis. But one imbalance in a supply chain can make everything else irrelevant. Keep in mind that a balanced scorecard is a mix of quantitative and qualitative data. Your KPIs should measure 2-3 key metrics such as supply chain risk and quality performance. Your KPIs should use industry standards where relevant including responsiveness, on-time delivery (OTD), etc. and should be tailored by vendor. Visibility and clarity in communication is a must both internally and externally. It's essential to properly weight KPIs in a dynamic nature as they provide insight but are lagging indicators.
Key uses for a supplier scorecard include:
Measuring performance and driving improvements
Justifying which suppliers to keep in your supplier base
Strengthening a negotiating position
Developing suppliers into better partners
Rewarding good performers based on objective data
Gaining consensus on strategic relationships
Your local MEP Center experts can help you with all aspects of supply chain management and show you how to proactively operate with situational awareness of potential backlogs, the economy, and the state of your market.