How to use collaborative solutions to keep your supply chain moving in times of uncertainty and low safety stock
After most countries survived the first COVID-19 wave, it’s now all about ramping up production again. Typically, a ramp up happens after a planned shutdown period like Christmas, where safety stock is put in place and the supply chain is very much in sync.
Companies are used to this process as such, but not necessarily with ramping up all their products at the same time, in all locations and certainly not with a supply chain which is very much out of sync. And lastly, not at very low safety stock
Also, the demand itself might be unclear, depending on where one sits in the supply chain.
And to add to the complexity, customers contribute to the confusion by playing shortage poker: Assuming the supplier is on allocation, customers might keep their forecast high as it was prior the crisis to ensure they get a higher share of the supply even though their midterm demand dropped significantly. Only when the actual order is posted, the demand shows the right number.
You can stop reading if:
Your organization has financial power to (A) buy everything you can get and store it, without the need to synchronize with your suppliers, (B) are willing to pay high freight cost to shorten lead time and (C) have many firefighters or expensive resources sitting in war rooms, managing the suppliers via the phone, you can stop reading. Otherwise – read on to learn about some better strategies:
What are the core challenges?
The companies I talk to can manage their internal processes, but what keeps them awake at night is
- visibility into their suppliers, contract manufacturers and logistic service providers and customers priority and
- synchronization of all those trading partners.
On the visibility side, my interlocutors claim
- little to no safety stock,
- poor to no visibility into:
- when the supplier will ramp up their capacities
- how much is my share / commit?
- any flexibility
- when shipments will arrive
- poor trust into whether the supplier can keep the level of quality pre-COVID-19
- high expedite cost due to shut down of passenger flights, which represents up to 45% of the freight flights (on transatlantic routes, it’s 80%)
- and finally, is there a continued risk that the production at the supplier will be shut down again, depending of the dynamics of local infections.
All this influences the synchronization of trading partners. If a product requires two components A and B and one can get only 70% of component A, they would need also only 70% of component B, even though the supplier of B would be able to deliver 100% to you as a top priority customer. While many companies potentially can afford to buy 100%, they might not have space to store the goods. And in addition, consequently the 30% which are not needed could go to another customer of the supplier, which might help the supplier strengthen his business after the shutdown.
Here are a couple of practical recommendations of how the visibility issue can be addressed through better collaboration processes (for more recommendations, read our white paper about 9 practical tips for supply chain collaboration)
Better together – replace safety buffers with better collaboration
Get most of your suppliers into a collaborative motion. Not only A suppliers, but B and C suppliers as well. Do not anticipate – be active and tell them what you need and ask them how you as their customer can help them stabilizing. Ask what information they need, how often, at which granularity, which region to serve first, which of the supplier component is more important, which level of quality do you require at least.
Ask your suppliers for their bandwidth and flexibility
The current situation means you need to run synchronization simulations and risk scenarios frequently, but you cannot go back to your supplier with every iteration. You want to avoid buying raw material you don’t need or allocating cash to unnecessary stock – nor do you want to block capacity at the supplier, which they need to serve other customers to fuel their survival.
Work towards establishing a cadence in which the supplier shares:
- their commitment to your real demand
- the production upside flexibility so you can agree on a first-in, first-out consumption in case you need the additional material
What does this look like in practice? In the simulation below, the customer is asking for ten units (demand). The supplier confirms they can deliver ten, with the bandwidth to deliver an additional fifteen (upside commit/flexibility). Because the customer has the opportunity to sell more, they order the fifteen surplus units, on top of the ten already ordered.
Use your supplier collaboration tools to share real-time demand and gain insights into your suppliers’ commitment and production flexibility.
Figure 1: Simulation of Demand/Commits/Orders in Weekly Time Phases
Help your suppliers manage demand risks
Suppliers should ask their customers to provide their demand priorities, so they can better allocate capacities. In case customers are not willing to share their real demand priorities, the supplier may want to establish their own priorities. For example, suppliers should prioritize the portion of the forecast which can be considered stable over the portion of the forecast, which switches up and down and does not relate to the actual PO quantity (always in consideration with other criteria such as customer importance, sales price). This will avoid the shortage poker game to some extend and get out the noise in the supply chain.
Other recommendations focus on short-term execution or how to ensure an elevated level of quality of the product. Find out more about how improved supply chain collaboration can help you synchronize with your trading partners while you ramp-up production.