Many manufacturers have faced significant supply chain disruption over the past year. By focusing on improving supply chain resilience there is an opportunity for OEMs to position themselves for growth and profits.
Nick Harrison is a partner and industrial sector specialist at Vendigital. He recently shared his insights with Supply Management.
Few businesses could have foreseen a scenario such as the Covid-19 pandemic and the disruption it has caused around the world and across industry sectors.
But with the prospect of a vaccine in the pipeline, are supply chain and procurement managers preparing to press the reset button, or have global supply chain strategies changed for good?
When the rapid spread of the virus led to the introduction of international travel bans and regional shutdowns, some manufacturers experienced breaks in supply or were left with stock they were unable to sell. Those worst affected were forced to consider diversifying to meet demand for items in short supply, such as PPE and hand sanitisers. Others that were unable to make such changes had to shut down production lines altogether and wait for supply chains to reopen.
In the aerospace industry, a fragmented supply chain meant many suppliers were heavily reliant on orders from aircraft manufacturers or top-tier OEMs. When demand dropped to zero, they had little choice but to halt production and take drastic action to reduce costs and offload inventory where possible. With global demand unlikely to recover before 2024, aircraft manufacturers may need to lend some commercial support to protect their supply base and the production capacity it affords them.
Instead of sourcing commodity products from low-cost countries, manufacturers in other sectors may need to rethink their supply chain strategies. For example, it may be possible to onshore the production of low-value items by investing in automation or other efficiency-driving technologies. In other instances, where businesses have found alternative sources of supply within the domestic market, there could be an opportunity to invest in the development of an emerging local ecosystem, de-risking production as they do so. Multiple sourcing strategies could also help some businesses to improve supply chain resilience, although this would need to be balanced against any increase in cost.
Faced the prospect of an end to tariff-free trade with the EU from the start of the year, some manufacturers have already opted to put slack in the system in the form of buffer stock, to allow them to meet any increase in demand in early 2021. While cash is cheap, this strategy could be cost-effective for some manufacturers, but it is unlikely to be viable in the longer term.
In fast-growth sectors where demand has soared during the pandemic, such as battery tech production for use in electric vehicles and other modes of transport, supply chain strategies are evolving quickly and there is an opportunity to develop solutions that are resilient and full of promise for the national economy. For example, the UK’s inherent knowledge in the field of propulsion technology makes it an ideal breeding ground for an emerging battery tech ecosystem, which is capable of scaling to meet the increasing demands of the global EV industry.
Significantly, Tesla has recently announced plans to start mining lithium in the US and invest in a new refinery to serve its factory in Texas. The move is an attempt to ringfence its own source of supply and ensure there is sufficient capacity to meet demand as production scales in the future.
Such vertical integration is designed to increase autonomy and control over the value chain, ensuring end-to-end visibility. While few manufacturers could justify investing in this way, those that have access to real-time supply chain data to inform their decisions will be better placed to de-risk the movement and supply of product, prevent surpluses, and importantly, predict potential disruption before it happens.
The rollout of vaccines is likely to have an impact on business confidence in the coming months. For multinationals and corporates with global reach, this could lead to more footprint optimisation and rationalisation projects as they strive to adapt to the new normal and take steps to improve their supply chain resilience.
Having expanded significantly over time, typically through a process of acquisition, such organisations often find there is plenty of scope to improve efficiency and ensure supply chains are better aligned to meet customer demands. For example, global supply chains are typically configured based on the flow of key products, however there could now be an opportunity to redesign them based on a core-competency or centre-of-excellence model.
There is always the possibility that once confidence and trading conditions begin to improve, some supply chains could simply snap back into place. However, this would be a missed opportunity. While there is no one-size-fits-all solution, by taking a step back and reviewing supply chain strategies now, businesses can improve efficiency, increase resilience and position themselves for growth.
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A shortage of semiconductors resulting from the Covid-19 pandemic could be a watershed moment for automotive OEMs who are willing to adapt to the situation.