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Next generation supply chain - Perspective from innovators (Part-I)

In recent times disruptions are all around! Global enterprises are changing at frantic pace. New business models, new ways to interact with customers, renewed service operations, newer employee engagement models, and even new performance management practices! But how about supply chain? Is this traditional, age-old business function also undergoing disruptive change? To get a perspective, let's look at supply chains of automotive and industrial manufacturers. After all, these two core sectors have been in the forefront of supply chain innovations. Lean, JIT, LCCS, Postponement, PPAP - all new-age supply chain innovations have stemmed from these two sectors. And, supply chain still remains critical to their competitive position in marketplace. 

Global automotive and industrial manufacturers are reviving investment cycles towards growth plans for 2020 and beyond. As supply chain enthusiasts, we wanted to understand what that means for automotive and industrial supply chains of the next decade. While there are definite hues of transformation, I noted a clear theme on their outlook towards supply chain capability development initiatives:

1. Selective investments: Unless a new capability is comprehensive and fully suited to meet emerging needs to business models, investments decisions won't come easily.

2. Back to core: They are not going down the path of big-bang, grandiose transformation programs but more to the core and on-the-ground.

Our clients are clearly referring that future supply chains of the global automotive and industrial manufacturers will have new set of capabilities to "manage complexity", "be more nimble" and "be resilient" besides driving "cost efficiency", which remained in focus during the past decade. I wanted to share some of our findings on this renewed outlook by supply chain leaders of these two sectors. In this first part of my two-part blog, I wanted to share highlights on key drivers, in an effort to answer - "why such theme". In the next blog, I would delve into those emerging supply chain capabilities and how these leaders are going about to embrace them.

Two key macro factors that are reshaping design considerations of future supply chains

1. Development of distinct and prospective markets:

The last decade has seen prominence of distinct markets of considerable size (and fast growing) in emerging countries like - Brazil, Russia, India and South Africa. From automotive or industrial manufacturers' perspective, each of these markets has their unique demand characteristics and supply chain needs. For example, hatchbacks have a significant market share in Brazil and India, which is very different from China, Russia or the developed markets. Automakers in Brazil have adapted to flex fuel (Ethanol), hybrids are growing in China, whereas deregulation of fuel prices (petrol) in India have resulted in increased sales of diesel car models. Markets like Brazil force local sourcing due to strong currency and trade barriers, whereas, high labor and material costs in Russia favor import of automotive or industrial products. China and India have emerged as local manufacturing hubs as well as low cost component manufacturing hubs for global needs. In the same way, multiple distinct micro markets exist within Europe also.


Source: https://parts.olathetoyota.com/2011-car-sales-statistics.html   | 2011 World Car Sales Statistics Infographic

The implication to manufacturers has been - "one supply chain architecture will not fit all". The local supply chain architecture that would cater a distinct market must be built as per local needs but should remain integrated with global supply chain, so that economies-of-scale benefits are not compromised. Now that's one great challenge for automotive and industrial manufacturers to overcome!

2. Global economic volatility: 

Volatile macro-economic conditions have been the order since 2007. While there are signals of growth with varied magnitudes, uncertainty is the norm across economies. That makes volatility as the new normal. Supply chain executives of automotive and industrial firms have indicated "demand volatility" and "poor forecast accuracy" as their key operational challenge of recent times.

                

Source: Federal Reserve Economic data [Link: http://research.stlouisfed.org/fred2]

Estimating "demand" has become complicated with product preferences and product proliferations within each market. With widely spread supply chains, volatility makes capacity management at nodes perplexing, resulting in either higher costs (component inventories) or lost revenues (component shortage). None of these scenarios are desirable. The takeaway for automotive and industrial manufacturers is to renew and develop capabilities for "agility" and "flexibility" within their supply chain networks. To put in simpler terms, these firms needs new capabilities to adjust capacities at nodes in sync with the volume and cadence of market demand changes. You would agree that is easier said than achieving!

Three grand industry challenges are driving investments for next generation supply chains

1. Expanding global supply chain network: 

Global market outreach, low-cost country sourcing and localization strategies have compelled global automotive and industrial companies to expand their supply network. While operating a global supply chain has advantages, expanded supply networks have increased management costs and reduced visibility.

Lack of visibility within n-tier supply network has direct impact while they aim to serve diverse customer segments with varied needs. These multi-national manufacturers need new set of supply chain capabilities to orchestrate and integrate local, regional and global supply chain networks that can deliver cost-to-serve requirements of distinct market models.

2. Growing supply chain costs and cost of quality: 

Volatility in commodity prices and currency fluctuations have impacted sourcing and supply chain costs. Steep rise in wages in China is another factor. There are costs that can be attributed to quality issues and returns, when suppliers are located far away. The need to set-up new supply chains at lower costs while maintaining a fast pace is growing. The new product introduction timelines are shrinking and more new products are launched every year.

Demand for sustainable products, needs of distinct markets has put-up stress on new platforms, new components. Management of material costs, quality costs factors and efficient new product (component) sourcing needs mandate advanced capabilities in direct material sourcing and supplier quality.

3. Increasing exposure to supply chain risks: 

A Zurich Financial Services sponsored supply chain resilience study conducted by the Business Continuity Institute showed 75% of companies reported at least one supply chain disruption in 2013 and this is consistent with their findings in each of past four years. Sole sourcing, just-in-time, lean - few prominent supply chain strategies of the last decade have increased risks within supply chains.

Like all, automotive and industrial companies have no other option but to develop abilities to sense supply disruption indicators (components, suppliers, places) and have in place robust business continuity capabilities that can reduce or avoid the impact.

In Summary

While they may not be as disruptive as today's digital technologies, supply chains of automotive and industrial companies are indeed up for change! I see this as natural  evolution. While earlier initiatives (e.g. procurement outsourcing, best country sourcing, planning automation, etc.) will prevail, new focus and investments will flow towards building fresh set of supply chain capabilities - but "selective ones". That's the key takeaway for me. I would delve into those in my next blog.


Have you noticed shades of such outlook from firms within these two sectors? How do you see the factors that contributed? I look forward to your opinions. Please share your experiences.


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