November 17, 2020
Source: Grant Thornton
Four moves that mid-market companies can make
Mid-market technology companies need to be creative about supply chain cost management. Unlike large technology companies, they might not have a full chessboard of proprietary facilities that they can move to reconfigure for the best cost model.
Instead, mid-market companies might feel like their choices are limited. But there are some very important moves that can help them build cost-effective supply chain agility. Each move is part of building an adaptive supply chain that can flex and respond to meet the stresses of current and emerging markets, as well as environmental and political changes.
To build cost-effective supply chain agility, technology companies should focus on diversifying suppliers and technologies, while also improving how they monitor supplier quality and manage supply chain risks.
1. Diversify suppliers
A growing number of companies have recently suffered because of their hard-wired supply chains. As market and political changes unfolded, procurement teams across industries were suddenly pushed to find alternative suppliers. Whether your supply chain felt these shifts or stayed stable, there is a growing risk that ongoing changes will continue to impact technology supply chains.
Business Insider reported that Japan has earmarked about 300 billion yen to diversify its supply chains, moving production from China to Japan or Southeast Asia. Japan recognized that diversification will require funding – it’s a change from simply buying everything from the cheapest supplier, to investing in a diverse, risk-mitigating, responsive supply chain that enables companies to quickly adapt to changing conditions or circumstances. Supply chain diversity often requires an investment up front. So, how do you weigh the investments and returns?
- Realistically assess risk to your current supply chain. Identify risks and threats to your current supply chain, and quantify the potential impacts and costs should such events occur. Assess political (national instability or suppression, threat of war or violence, corruption, weak or non-existent legal institutions, etc.); environmental (drought, food shortages, pandemics, natural disasters, etc.); and market place threats (spikes in material or labor costs, loss of suppliers, technology advancements, competitors’ control over markets, production errors or accidents, etc.). Assess, rank, and quantify these risks and the likely actions needed to address the potential impacts to the business, the company’s reputation, reconstruction or remediation costs, fines, loss of business, etc. An objective assessment of risks and the potential impacts to the business can lead businesses to identify supply chain vulnerabilities and steps to be taken to proactively address and invest in supply chain improvements.
- The devil is in the details – analyze your costs. Carefully assess and understand the costs of your current supply chain and compare two or three alternatives that would diversify your supply chain. Weigh the costs of each and determine if establishing one or two of these alternate supply chains is warranted as “insurance” against the failure of the current supply chain.
- Weigh leveraging a new, diversified supply chain to grow business where the suppliers are located. Assess making a supply chain investment that would open doors to a new market, while improving supply chain diversity and reliability. Leveraging a supply chain investment that opens new business opportunities could result in a large return on investment from expanding business, while also helping ensure production stability.
2. Diversify technologies
Technology companies worldwide took notice when the US banned its chip technology from being shipped to the world’s largest smartphone and telecom equipment manufacturer, Huawei Technologies. The move has forced many to consider the potential availability and cost risks for technologies in their own products.
It’s common for technology companies to build their products around one tried and true technology platform; however, that leaves the companies vulnerable to unavailability that can arise from privacy concerns, legal battles, supplier shutdowns and a range of other factors. As with diversifying suppliers, diversifying technologies often requires an investment – so how do you weigh the investments and returns?
- Mitigate technology sharing issues by identifying where there is a risk of potential inbound or outbound prohibitions on sharing technology or data.
- Address supplier security threats by analyzing possible threats of cyber theft or intrusions from your suppliers, especially when developing new technologies. Consider diversifying if there are security risks or connections outside of your company that could create a conflict of interest or competitive alliance threat.
- Weigh the research and development investment and return for designing your product set to use an alternate technology. An investment in developing alternatives can open up options for lower-cost solutions.
- Consider where you could adopt other technologies within your supply chain or production process to enhance your agility and resilience:
- Blockchain – streamline transactions and enhance security to reduce manual work
- Robotic process automation – the more that your systems are automated, the more you can estimate and plan for reconfiguration and re-tooling if needed
- Data analytics – with analytics for your supply chain, inventory and market demands, you can get a clearer picture of a range of emerging risks and possible impacts to fuel more accurate cost planning and supply chain modeling
3. Ensure supplier quality and consistency
Automation, analytics and other technologies can help streamline and stabilize your internal supply management, but they can also help strengthen external points in your supply chain. By working with your suppliers, you can implement technologies that give you control and visibility to better prepare for or avoid evolving cost risks.
As you develop better modeling for your supply chain, inventory and market demands, you can design systems that take advantage of input fed from key suppliers. So, what can you ask your suppliers to provide?
- Automated source inspection can help you ensure more consistent quality assurances. As you think of diversifying your suppliers, consider which partners can provide the data to help improve product quality and the reliability of deliveries. Both can reduce the cost of poor quality or missed customer shipment dates.
- Digitized design tools can help you implement new products with less expense, while feeding into better quality control processes.
- Production and logistics updates can save many hours of manual follow-up or lost production time. This realized savings can be another benefit that helps justify supplier diversification, versus suppliers who offer a lower price up front, but with less transparency or consistency in delivery.
4. Refine supply chain risk management
Diversifying suppliers and technologies, and ensuring supplier quality and consistency, are all part of reducing your supply chain risks. They also feed essential information into effective and ongoing supply chain risk management processes.
Recent pandemic market changes have forced manufacturers across a range of industries to take a closer look at building risk resilience. Supply chain risks are costly and are a key factor in determining why building supply chain resilience is important – so how can you better manage your supply chain risks?
- Prioritize the most important and profitable customer segments.
- Streamline supply chain and operating models to reduce complexity.
- Recalibrate labor, assets, capacity and working capital investments.
- Shore up supplier and third-party relationships to mitigate further disruption.
- Evaluate supplier solvency and manage any other risk factors.
“You have to know your risk profile, and your risk appetite,” said Grant Thornton RISK-GPS Advisory Services Director David Bates. “You need to identify the weakest links in your supply chain and plan your adaption strategy.”
Find the right alignment
Every technology company will have a different range of moves that are open to them. While there are some key options that companies should always consider, the most cost-effective choice will depend on the unique aspects of each technology, supply chain, market, and environment.
If the events of the past year have illustrated anything, it is that the ability to respond to people’s needs quickly, insufficient scale, and with a high level of quality and reliability is of utmost importance to customers and businesses. Resilience and agility to adapt to ever-changing business, political, and environmental conditions benefit not only companies, but nations and entire populations.
David Bates, Director, Risk Advisory Services, Grant Thornton