Over the last decade, supply chains have become more extended and complex. Enterprises continue to source a significant portion of raw materials and parts from Asia and other regions of the world. The consequences? When a global pandemic occurs, causing long-term production delays overseas and port congestion at home, it leaves organizations exposed and unable to fulfill demand. Supply assurance is our second macro-level challenge that chief procurement officers must address as they enter 2023.
Supply Assurance: Global Impact
Global supply chain disruption and volatility are now the new normal for most CPOs and their enterprises. The COVID-19 pandemic exasperated already present supply chain issues, such as relying on overseas suppliers for many raw materials and lacking alternate sources of supply. In the blink of an eye, a worldwide pandemic brought closures to production facilities and logistics networks on a global scale, leading to significant materials and parts shortages.
Nearly three years later, industries are still struggling with supply availability despite heavy customer demand. The continuing effects of the pandemic, coupled with the Ukraine-Russia War, trade tensions with China, and logistical constraints at home are only adding to supply assurance issues. Forbes estimates that 374,000 businesses worldwide rely on suppliers in Russia for such commodities as metals, grain, and energy, with 90% of those businesses based in the U.S.
Consider the impact of overseas production delays for semiconductors. Both the automotive and electronics sectors are still reeling from chip shortages, leading to fewer upgrades in automobiles and low inventory levels in electronics. Those supply constraints are expected to continue into the first half of 2023.
According to Steve Flagg, CEO and founder of Supplyframe, “Global supply and demand imbalance persists in the electronics value chain, with specific end markets such as automotive still facing long lead times and constrained supply. Availability and prices are improving for many component categories, but shortages and increasing prices remain,” Flagg says.
“Recessionary fears and worldwide inflation have dampened consumer electronics demand, led to skyrocketing inventories of certain passive components, and are driving memory and other prices significantly downward. And yet, parts like microcontrollers and analog components remain troublesome to secure and highly priced,” he added.
Impact on CPOs
Supply assurance is about confidence in meeting demand. And much of that confidence comes from having supply chain transparency. Yet less than 10% of enterprises have full supply chain visibility. This presents several issues for CPOs when supply disruptions dominate the market landscape.
Procurement is looked upon to mitigate supply shortages and manage inventory levels to meet demand — the core of supply assurance. Regardless of market conditions, CPOs are put squarely in the crosshairs with the expectation that multi-tier supplier visibility exists. In reality, that transparency often doesn’t extend beyond first-tier suppliers. What does this mean for organizations that rely on a just-in-time inventory strategy for supply assurance? Any disruption can lead to implications for supply availability, demand fulfillment, revenue expectations, and customer relationships — a complete supply chain imbalance.
Today, that imbalance appears on several fronts (extended lead times, shipping delays, transportation bottlenecks, and talent shortages) that CPOs must address. The necessity for supply chain flexibility, agility, and resiliency cannot be understated. It is the cornerstone of competitive survival. The current landscape presents several obstacles to a successful assurance of supply program.
However, CPOs are resilient in their approach to disruptive supply chain events and environments. It is how they’ve earned a seat at the table.
Procurement Must Focus on Agility and Resiliency
How critical is supply chain resiliency to supply assurance in today’s world? Speaking from a manufacturing perspective, Frank Mckay, senior vice president, chief supply chain and procurement officer at Jabil, shared, “Beyond such arrangements as producing custom chips with partners for future supply assurance in the automotive space, manufacturers across industries must address the daily as well as the strategic challenges of component availability, lead times, and pricing dynamics to build resilience into their supply chains,” McKay says.
“It’s clear that they require objective market-in analytics and analysis to augment their enterprise information and move from fragmented data culled from multiple, often inconsistent and stale data sources.”
As CPOs enter 2023, what strategies can they employ to strengthen supply assurance and build enterprise agility and resiliency?
- Shift from Just-in-Time to Just-In-Case inventory model. After experiencing months of stockouts and shipment delays, organizations now value maintaining a level of safety stock inventory for potential disruptions.
- Strengthen supplier relationships. The importance of supplier relationships, especially as it pertains to contingency planning, is critical. With strong trust, communication, and collaboration, enterprises can take a proactive rather than reactive approach to supply assurance.
- Invest in technology to increase supply chain transparency. There are many tools and solutions to gain greater visibility into supplier output to maintain supply assurance levels. Work closely with suppliers on demand forecasting and integrate tools that utilize real-time market data.
- Diversify the supply base with secondary sources of supply. While single sourcing has always been a risky proposition, enterprises experienced the consequences during the pandemic. Production and shipping delays amounted to tens of millions in revenue losses. The clearest message was the need to implement an onshore or nearshore secondary source of supply.
- Gain supply intelligence through cross-functional collaboration. Procurement is not the sole function that determines product success. Communicate with and rely on all stakeholders for supply intelligence. Is a component change required? Is demand peaking in one customer segment but rising in another? Insights from other business units into those market dynamics are essential to achieving supply assurance metrics.
CPOs have faced unprecedented supply chain events within the last three years. While difficult to maintain with the best strategies in place, supply assurance is now an imperative as procurement emerges from the pandemic and settles into a new normal of supply volatility and disruption. However, it is also procurement that can take the reins and forge a path to greater enterprise prosperity.
