Dilemma: How can the Supply Chain deal with stretched lead times?

A common enemy to the flow of the supply chain is stretching lead-times which are often not anticipated. Typically within the electronics industry which I am familiar with there is warning signs that component lead times may stretch out for particular components. These anticipated stretches in lead times usually will have only a minor impact to supply chain deliveries as actions are taken. The most likely action is to increase the inventory within your supply chain starting maybe with the supplier and VMI inventories and then leading to the ODM and CM to minimize the impact to customer deliveries. The impact to the supply chain will be the cost impact in holding the additional inventory to support customer orders. For the supply chain this becomes a challenge considering the push today to reduce inventories to make cash available.

Now the most difficult challenge to the supply chain flow is on those times infrequent and unexpected when there is an unexpected worldwide commodity shortage. For the supply chain, these are times is where you only wished you had anticipated the shortage and your company stockpiled these components at almost any cost.

In my experience SRAM, DRAM, CPU’s are some of the culprits to these phenomena over the years. Today in Q2, supply chains are being challenged with stretched out lead times due to higher than expected demands coupled with slower than expected suppliers ramping of production capacity. Of course, the logistics of transportation now becomes a matter of air lifting all of your deliveries depending on the geography of the factory to the supplier location which again will inevitably increase the supply chain costs.

Here are the some other options that may be able to offset the delivery delays:

Inventory Positions-the supply chain will check all inventory within your entire supply chain including; ODM’s, CM’s, 3PL’s, Vendors and VMI Hubs.

Secondary Market/ Spot Buying – having been through these experiences in the past, the procurement team in an electronics company will usually have established relationships with solid reputable brokers who have sources for commodities throughout the world with various distributors, OEM’s and manufacturer’s. Excess stock may be available to buy in the secondary market. Again, pricing on product earmarked on the world wide shortages list can command some high premiums. Also, a supply chain must respond quickly to the secondary market as commodities can become scarce very quickly.

Product Selection- the supply chain may have the opportunity to overcome worldwide component shortage when one version of a commodity can be substituted with another version. In this example, possibly a commodity with higher or lower spec’s can be substituted for the originally requested commodity. Working with the sales teams, the customer impact can be minimized be “steering” the customer to higher or lower specified product.

Minimizing Inventory Levels = Maximizing Cash

Working in the supply chain discipline of a business no matter of the size there is always a concern about inventory levels, inventory turns, inventory accuracy and inventory obsolescence. The challenge for the supply chain is how to achieve the lowest levels and maintain accuracy with minimum obsolescence within your company’s business model. Inventory is an opportunity in any business today to generate cash; the lower the inventory the more cash a business will have to invest in other areas of the company including capital goods, infrastructure investments and human resources. As a supply leader, here are several considerations in minimizing raw, in-process and finished goods inventory that will maximize a company’s cash to cash position.

1. Raw Inventory relates to how a company orders components and assemblies from the supplier base.
a. Forecasts – sharing forecasts with a rationalized supply base for high value, critical parts can assist in maintaining inventory levels at lead time or within lead time levels. Some buffer stock should be modeled into the demand plan to accommodate for order swings during higher demand periods.
b. Vendor Managed Inventory- a supply chain strategy that is being used widely with large high tech companies with a supply base from Asia which requires longer transit times for U.S. companies. Using a VMI model allows your company to have only days or could be hours of inventory that is your company is financially responsible for. The supplier will be responsible for holding inventory per agreed inventory levels per the company’s contract with the financial responsibility with a strategic supplier. While a company gains tremendous inventory improvements this will undoubtedly translate into higher commodity costs. The company will then need to weigh the benefits of a VMI cost model for your supply chain.

2. In- Process Inventory – the quantity of inventory is being utilized through the manufacturing process.
a. JIT Manufacturing – in today’s supply chain, most of manufacturing is set up to process orders from start to finish without the any need for having an in process inventory. However, the faster orders are processed through the factory the lower the level of in process inventory. One additional consideration is to be sure that any fallout and rework is repaired as quickly as possible to catch up with the rest of the order. Rework and fallout can increase inventory levels as well as impact delivery times.
b. Order Release Process – the company’s ERP system should only allow scheduling and releasing order to the factory if all the material has been received and available to build the entire order. Attempting to build product without all the product available only results in increasing inventory levels and missing and lost components in completing orders.

3. Finished Goods Inventory-the quantity of inventory that is available built and ready to be sold.
a. The most difficult challenge for the supply chain to influence however there should be agreements and rules that are agreed upon. All Build to Stock orders should only be released to the factory and authorized when approved by Sales, Finance and executive management depending on the financial investment of the build to stock order. The supply chain team in this case needs to provide is the impact of using these components on other Build to Order prior to authorizing Build to Stock orders.

These are some of the critical considerations on how to minimize inventory levels while maximizing cash. The key in inventory measurement analysis is how your company bench marks against other locations or divisions within your company as well as other companies in your industry.

Minimize Your Supply Chain Risks: Another Idea

Now that we have explored risks utilizing an Asian Supply Chain can your company support a conservative supply chain strategy which would provide most protection to risks in your supply chain? Let’s explore if a regional or near shore supply chain strategy can be utilized as a model in your supply chain.

Regional Domestic Supply Chain would be defined as having your key components, sub assemblies or assemblies manufactured or supplied in the same region as your factory or distribution points to support your customer base. For example, if your business was located in the United States, the majority of your critical supply base would also be located in the United States. As an example, you could have a blended approach with key manufacturing operations that contain “intellectual property” within your company’s factory network while other key components and assemblies which support the factory provided by a network of regional supply chain suppliers.

The key driver in a regional supply chain would be the ability to provide a much shorter recovery period to a disrupted supply chain typically in days vs. weeks based on deliveries anywhere in the region with minimal transportation uplift costs. However, a determining factor in all likelihood is can your company financially support a regional supply chain model to offset the minimized risks?

Near Shore Supply Chain would be defined as having your key components, sub assemblies or assemblies manufactured or supplied in same continent as your factory or distribution points to support your customer base. For example, if your business was located in the United States, the majority of your supply base, factory or suppliers could be located in Mexico. Mexico is certainly a “low” cost supply chain solution maybe not quite as financially attractive as an Asian supply chain however a near shore supply chain would be able offer better recovery times for a disrupted supply chain. Again recovery for a disrupted supply chain flow could be days vs. weeks. A near shore supply chain strategy used in combination of a regional supply chain strategy could offer an attractive cost benefit while minimizing your supply chain risks. In any case, a Near Shore or Regional Supply Chain or a combination of the two should be a key consideration in designing a supply chain for your company.

Minimize Your Supply Chain Risks: Just One Idea

Has your company recently outsourced its manufacturing or the company is sourcing its major components or subassemblies to an Asian or Chinese based supplier? What risks are incurring by sourcing 6,000 miles away from either your customers or factories and stretching your lead times. What steps have you taken to minimize the risk of shutting down your factories or not delivering to your customers?

Certainly the attraction to source in the Asia or China is the cost benefit. How much are those cost benefits worth if you cannot build your products or deliver your products to your customer for some time? Here are some options that should be considered when designing your supply chain that includes an Asian supply base.

How predictable are your suppliers can they provide product 100% on time 52 weeks a year,7 days a week without any quality or delivery issues? Consider if there are no contingency plans in place you could be faced with some daunting decisions; ocean freight with a five week delivery, airfreight with a three to four day delivery at 2 to 4X the cost of ocean freight, or chartering an aircraft in extreme cases which could cost $500K. Here is one of several options that could be implemented with your Asian supplier base.

Vendor Managed Hub (VMI Hub) – Wouldn’t you consider reducing your inventory exposure and risks to your supply chain by having your supplier take on the burden? Using a Vendor Managed Hub would be an excellent way to accommodate your needs. You should discuss this concept with your suppliers with the expectation of having your key components, sub assemblies or assemblies stocked in your local geography close to your factory or distribution point. The inventory levels will depend on a lead time risk and needs assessment in conjunction with your supplier’s inventory replenishment models. A Vendor Managed Hub can either be managed by an outside logistics company or managed by the supplier. A VMI Hub provides a couple of key benefits. First, the VMI Hub reduces your company’s raw inventory costs by removing the financial burden of carrying weeks of inventory and any additional safety stock. Your raw inventory exposure is limited to the material that you order and per your master schedule or customer orders. Second there is higher probability that your suppliers will have higher levels of inventory and provide material when there is a break in your Asian supply chain. This will help insulates your company from stock outs or other supply or quality issues in your supply chain. In either case, the VMI Hub or Supplier Managed Warehouse must be strategically located close to your assembly or distribution point to ensure that either finished product or materials can be delivered in hours vs. days. If your company cannot support the VMI model due to business volumes, consider partnering with other companies in your industry or other suppliers in your supply chain to form a multi company or supplier Vendor Managed Inventory Hub?

In my opinion when your supply chain is a critical part or considered a competitive advantage of your business a Vendor Managed Hub is a critical part of your supply chain strategy.