When we talk about the manufacturing and distribution supply chain, we mean raw materials and finished goods that travel back and forth for thousands of miles before arriving at their final stop. These trips include a complex mix of trucks, trains, container ships and storage facilities plus countless touches by humans and computers. In this overview, we will look at the supply chain obstacles facing mid-market manufacturing and distribution companies and what businesses like yours can do about them.
1. Pricing is at the center of everything.
When it comes to understanding your supply chain risks, everything eventually points back to pricing and cash flow. Supply chain costs can show up in many direct and indirect forms:
- Raw material costs including seasonal price changes
- Fuel costs
- Warehousing costs
- Packaging costs
- Changes in the terms and conditions of sourcing contracts
- New or changing taxes at the destination or point of origin
- Labor costs for factory, handling, or transportation workers and premiums for labor shortages
On top of these routine cost factors, other variables can make planning extremely difficult.
- Timing and quantity of material purchases
- Commodity market shifts
- Opportunity cost of unforeseen delays in transit
The combined effects of lockdowns and illness during the pandemic triggered widespread shortages of manufacturing, dock, and warehouse workers, container ship crews and long-haul truckers who were all essential to keeping things moving.
Companies like yours are faced with hard choices about which costs to absorb and which ones to pass on to customers. Overcoming the pricing obstacle means making sure that your internal systems give you the visibility you need to make timely pricing decisions. Procurement strategies and contract terms also demand a more rigorous look. Smart companies are considering longer buys on inventory now that pre-pandemic “just in time” approaches are no longer viable.
2. Where you buy matters as much as the price you pay.
As companies gain deeper insights into the pricing factors that apply to their markets, another area to explore is contract structure and management. For decades, the manufacturing and distribution sector was able to thrive on reliably cheap offshore labor and services. This included low-cost, easily accessible, high-efficiency container shipping, which seemed like it would be available forever.
With the onset of worldwide Covid-19 lockdowns and rippling shortages of labor, raw materials, and intermediate goods, those offshore cost advantages quickly diminished or disappeared altogether. For example, in the container shipping segment alone, steep premiums for container space and newly scarce workers quickly erased any offshore savings. These unplanned events put tremendous new financial pressure on players at almost every stage of the supply chain.
In today’s environment, businesses can benefit from an end-to-end assessment of their procurement, transportation, and warehousing contracts to ensure they align with realities on the ground. “On-shoring” has become a serious conversation topic for U.S. businesses as they consider shifting from China to Mexico (or elsewhere in North America) for recurring costs like sourcing, assembly and test, or warehousing. Apart from direct supply chain issues, volatile fuel costs make proximity an even more crucial planning factor.
3. It may be time to update and diversify your vendor mix.
In addition to analyzing and updating specific terms and conditions of individual contracts, companies are also reconsidering who they do business with. One way to gain a competitive edge with your supply chain strategy is to make sure that you are not relying on a single source for anything you depend on for production reliability or product quality. Winning companies try to get rid of over-reliance on too few suppliers – or on the wrong mix of suppliers.
There is more than one way to approach vendor diversity and quantity. One obvious remedy is to ensure there is always at least one fully vetted alternate source for any item that is vital to your company’s manufacturing and revenue streams. Another is to question your underlying sourcing strategy and see if there is a process or profit benefit to outsourcing some operations to third parties who can provide them as a service. In addition to the upfront efficiency benefit, you are also benefitting long-term by converting fixed overhead expense to a variable cost you can manage more directly.
Could some service or product purchases be unbundled from a single supplier to multiple vendors who can deliver at more favorable rates or at a less expensive point in the value chain? Could adjustments like this shorten time-to-value on your top revenue drivers for a given product line? By getting creative and having transparent leadership conversations, strategies like these give you an opportunity to unlock hidden margin by questioning the “one commodity, one supplier” way of doing business.
4. Workforce realities impact every step of your company’s supply chain.
The initial pandemic worker shortage is still gradually working its way out of the system, but new labor factors are coming into play. The original “work from home” measures from the coronavirus peak are slowly morphing. Employees in many occupations that don’t require hands-on operation are starting to adopt a “work from anywhere” expectation. To be seen as an employer of choice in this environment, your company will need to update recruiting and retention strategies to address increasing demand for remote and mobile workforce options.
Robotic process automation (RPA) is getting a lot of attention in the manufacturing and distribution sector. There may be opportunities for you to get more done with smaller headcounts by investing not just in physical automation tools, but also in software automation. By reducing the number of manual data capture points in your process, you can not only gain efficiency but also increase the speed and value of insights you need to make business decisions. Conventional wisdom is that automation alternatives like these can reduce labor-related pinch points in your supply chain. While this is partly true, keep in mind that you will still need a base number of people (or vendors) to build, maintain, and operate the automation.
Generational factors are also impacting the global supply chain. As older workers age out and retire from traditional transportation and logistics jobs, your company may also need to retire some outdated workforce assumptions. To attract younger employees, it is important to integrate new work models into your staffing plans, modernize job descriptions, and reposition your brand as an employer. Younger candidates coming out of school want to see a connection between their evolving values and the career paths manufacturing and distribution companies have to offer.
5. Technology can help you make better and faster business decisions.
Many companies with expensive ERP systems are still not utilizing them to their full potential. Reaching back to the warehousing discussion, inventory management is a prime example of a process improvement opportunity that can be addressed by technology. Even if the capability is not an out-of-the-box feature, numerous third-party software solutions exist for adding or expanding dashboards that integrate your process, inventory, and financial data for deeper visibility and more timely insights.
By increasing the quality and variety of your analytics capabilities, you can make more timely and effective improvements in purchasing, production, packaging, warehousing, and shipping. Going digital provides far more visibility into how many times an item is touched, handed off, or left to sit idle before it generates profit for you. These kinds of insights can help you rapidly prototype process improvements with real margin potential. The same goes for customer communication and shipping efficiency. By increasing the intelligence of your touchpoints with both consumers and shippers, you can stay ahead of market changes and eliminate wasted motion in your system.
While technology is a valuable management and business process improvement tool, software and hardware innovation can also play a significant part in direct production and warehousing improvements. For example, companies that are taking the lead in supply chain recovery measures are making targeted investments in artificial intelligence applications that make your data do more work for you. Smarter dashboards, artificial intelligence applications, and automation feedback can all provide insights to drive supply optimization.
6. Looking at the big picture can help you build resiliency into your business.
Taking all these obstacles and opportunities into account, addressing current supply chain challenges means taking deliberate, creative steps now to build more resiliency into every physical, technical, and human system. From closer attention to pricing fundamentals, to broader supply portfolios, to workforce planning and development, to more integrated technology application, there are many opportunities to not only mitigate supply chain issues, but also to rise above them as an industry leader with a new competitive edge.
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Clayton & McKervey’s manufacturing & distribution group advises businesses in key areas such as financial optimization, data capture and application, tax strategy, and executive succession planning. We would be delighted to talk with you about your current supply chain concerns and help recommend a path forward. Contact us today to learn more.