As known to all, it is difficult for a single OEM (original equipment manufacturer) to possess the complete capabilities of producing all the components/aggregates in-house for their complex end-product. Therefore, the need for suppliers becomes important. Technology specialization, core competency, cost-effectiveness, focus on critical to quality areas, span of control, process confidentiality and many more factors trigger outsourcing. They continue to be the extended business arm to OEMs. COVID-19 pandemic and the geopolitics of the world have compelled the OEMs to revisit the vendor-related supply chains closely to de-risk the material supply flow and facilitate sustainability in the foreseeable future. The article attempts to highlight a few critical areas to focus on with recommended actions:
Spread your sourcing
The adverse impact of the supply chain during COVID-19 has compelled OEMs to develop multiple sources for their bought-outs. A geographic spread from supplier diversification is bound to increase the effort and cost in qualifying multiple alternative suppliers and sustained managerial attention. However, the benefit from the resultant improved resilience and flexibility are far-reaching in the current and futuristic VUCA environment. The COVID-19 pandemic has displayed this truth very distinctly. The risks generated from the geopolitical and geo-economic events in the past has had a significant impact on businesses. The financial meltdown, tsunami crisis in Asia, COVID-19 pandemic, US-China trade war and the recent Russian-Ukraine conflict have all sent deep tremors to the manufacturing world during their occurrence. It is predicted that the impact severity will be growing further in the current VUCA business world. Therefore, de-risking from suppliers that are in potential geopolitical / geo-economic prone countries will have to be done with a time-bound implementation plan. It could lead to embracing nearshoring, onshoring or even in-house manufacturing decisions. Suppliers from China and Taiwan may also have to be studied more closely in terms of risks. China-Taiwan plus one supplier could be a viable solution for many OEMs. For Indian OEMs this could also be an opportunity to develop suppliers in non-Chinese countries. However, during this mathan what needs to be kept in mind- manufacture in the vicinity of the market and source from where you manufacture.
Transformation to digitization
Tomorrow’s IT enabled smart factories (I4.0 era) of OEM demand a digital transformation at the supplier-end and its seamless integration to all stakeholders. Scalability, speed, flexibility, first-time right and always right quality, autonomous operation, near perfect OEE (Overall Equipment Efficiency) of high investment assets and many more performance expectations have made the adoption of and adaption to I4.0 imperative. The transition journey is expected to be long but a well-defined I4.0 implementation blue-print with investment in people talent, technology know-how, IT expertise, mentoring by expert teams and a strong leadership plan is needed. A comprehensive I4.0 strategic framework in the organization’s radar would assure staying relevant and attractive for OEMs.
Identify supply vulnerabilities
The supply chain experience during the pandemic period has compelled the OEMs to dig out the potential sources of vulnerabilities in the material flow. For this a deep understanding of the suppliers and their business dynamics has become critical. A comprehensive value flow map of the entire supply chain, including material and information flow through tier I and II, is bound to throw a lot of new challenges to address. It will spring many surprises in areas like – inventory and flexibility levels, technical capabilities, asset bottlenecks, OEE of bottlenecks, operational leanness, value-add content, transportation hubs, revenues & margins and many more. Such an analysis would help in assessing how long the OEM would take to come out of the shock, if faced with, without shutting down, and also in assessing how quickly the disrupted supplier take to come out of the crisis. This could serve as a strategic trigger point of outsourcing or insourcing. This would call for investment with sustained effort but is worth to minimize/prevent a supply halt in future.
Bridge IT talent-gap
In-house IT talent induction in the pandemic times has increased significantly. The two key reasons attributed to this trend have been: forced remote operation during pandemic and the growing transition to smart factories. The digital technology-enabled industry 4.0 projects have to be accelerated to keep pace with their business partners and competition. Therefore, the speed to bridge the IT gap is critical for tomorrow.
Elevate process visibility
As per a survey by HBR, 28% of respondents have highlighted that the visibility into the risks, compliance to process standards, ethical conformance and performance of suppliers has been a weak area needing focus. For enhanced visibility, improvement through technology intervention in end-to-end processes and systems is a necessity. The OEMs have to nudge the suppliers for this early need. An integrated information system encompassing all business sub-systems to a common platform would elevate visibility.
Innovation-led transformation
The impact of disruption led to far-reaching economic, technical and people related implications on suppliers, especially on the not-so-big ones. It has led to mergers & acquisitions, relocations, the need to scale up, demand for high volume-variety flexibility, a high degree of automation, lean systems and many more radical changes. Therefore, this post-pandemic period is the right opportunity to induct technological processes and robust system innovations. OEMs will not only demand but also partner with such innovations in the supplier’s business to facilitate suppliers to get a bigger pie in business through this. The OEM will also have to strengthen the supplier ecosystem for internationalization to enable sustainable growth.
Simulate supply-chain disruptions
Envisaging disruption scenarios and playing simulation games to test the resilience of the outsourcing related supply chain is likely to provide deep insights which could be incorporated into the supply chain design. Software like STELLA in the domain of System Dynamics can facilitate studying behavioural trend scenarios to throw up some useful thoughts for policymakers to work on. In conclusion, in the current business world with disruptive events occurring, the sourcing managers have to deep dive into understanding the dynamics in the fast-changing supply-chain network comprehensively to develop better and more robust outsourcing strategies. The disruptions have challenged the earlier understanding of Globalization, Single source-least price focus, Just-in-time supplies, Risk management emanating from new geopolitical & geo-economic trends and many more. The new outsourcing vision should be the right mix of inclusive and exclusive strategies – leverage the capabilities of the external world but ensure a robust supply chain in terms of resilience, flexibility and agility. End-to-end technology intervention in the process for flexibility and transparency, collaborative working for innovation, Talented retention and early signal assessment of changes will enable this goal.