The game has changed for industrial manufacturing companies. Though industry dynamics have always made for a complex and evolving business environment, they pale in comparison to the disruptions that first emerged in 2020 (and will most likely continue well into 2022). Looking ahead, industrial manufacturing’s new challenges will not be solved using yesterday’s solutions.
The automotive industry, for example, will experience more change over the next ten years than in the prior 100 years combined. In particular, CASE (connectivity, autonomous, sharing, electrification), trading volatility, ever-changing ESG (environment, social, and governance) standards, and general macro trends amplify existing problems and create new ones.
Already one of the most complex industries on earth, the shortage of semiconductors exemplifies these challenges and also acts as a warning of similar situations to come (e.g., EV batteries) for both automakers and broader industrial companies alike. Combine that with industrial bills of materials (BOM) that can contain thousands of parts and what results in a dizzying array of supply and demand complexity with interconnected dependencies. A single missing part can derail the entire process.
This complexity is one of the reasons the chip shortage has been so challenging to manage. Original equipment manufacturers (OEM) across industries struggle with tracing semiconductors from their source (often three to four tiers deep into the supply chain) through the end-to-end value chain. This lack of visibility leaves OEM’s unable to understand the true impact on finished goods demand, and they fail to plan for alternate scenarios effectively.
This dynamic extends beyond OEMs, too. Tier-1 and -2 suppliers face similar issues, both in managing their supply chains and attempting to forecast OEM demand amidst a never-before-seen level of uncertainty. Many suppliers supply many OEMs; typically, uncertainty from one OEM can be offset by the stability within another (Risk pooling 101). However, when uncertainty affects every OEM, the inverse occurs, and the individual risks amplify one another, putting suppliers in a tough spot. Of course, limited collaboration and strained relationships between OEMs and suppliers only serve to make things worse.
The post-COVID disruptions of the past two years have revealed cracks in the foundation related to effectively collaborating with partners along the supply chain. These cracks have exposed the weaknesses of industrial manufacturing supply chains and the extended value chain.
“For the first time, dynamic collaboration with external partners is no longer a nice-to-have. Instead, it is a source of significant competitive advantage, and those who embrace the current dynamics and collaborate effectively with partners will be the winners.”
Unfortunately, collaboration is easy to talk about for many industrial companies but much harder to execute. Effective multi-tier partner collaboration involves not only getting buy-in from key stakeholders at each tier; technology, processes, and capabilities must be augmented and optimized across tiers to align with this vision, and partners must adjust incentives accordingly.
Why it matters
This alignment is no small task, but the rewards for doing so are clear (both quantitatively and qualitatively), making this a worthwhile investment. The quantitative benefits include less inventory, reduced lead times, reduced supply chain costs, and service improvement. There’s also an intangible benefit that comes with having an entire supply chain moving to the same sheet of music. In the place of finger-pointing and the “blame game” will be collaborative problem-solving and action-oriented accountability. Transparency replaces secrecy, and issues will be brought up in the spirit of proactive resolution rather than withheld in hopes of the problem disappearing before resolving it at the last second (due to fear of penalty).
The path to realizing this impact is less clear. It presents a Catch-22 of sorts: implementing such a collaborative network requires transparency and real-time connected data for fast and accurate decision making. Unfortunately, the complexity of large industrial companies and their legacy systems make it impossible to react quickly using existing tools and capabilities, leading to poor forecasts and unrealistic expectations of suppliers, further straining relationships.
Getting to the end-state requires solving three critical elements: technology, process, and people. The technology component is vital, as suppliers and OEMs must be able to connect to collaborate seamlessly while having the ability to sense issues in real-time and dynamically re-plan. At the same time, supply chains must optimize their operating model, both from an organizational cadence perspective (who does what and when) and from a decision-making perspective (what issues do we solve manually and what do we automate). Finally, and perhaps most importantly, supply chains must upskill their people so that they are properly prepared to problem-solve across tiers. Planners and partners must engage with one another in the spirit of collaboration and align on incentives to maximize the impact of a connected multi-tier supply chain.