Long, lean supply chains fell short during 2020 and ongoing market volatility means that’s unlikely to change soon. Could procurement leaders gain greater control and security of their supply chains by hedging their bets on more flexible sourcing models?
Supply chains thrive on equilibrium, like most things in life. Anyone who has overdone it in the gym or, worse, overdone it at the bar, has felt the effects of being out of kilter the following day. For the wise, it’s an opportunity to learn; two fewer sets or two fewer drinks next time and the following 24 hours may not be a write off – repeat, reflect and readjust until optimised. Doing otherwise means learning the hard way, or perhaps not at all.
Alas, for supply chains it isn’t quite so simple. The growing complexity of demands makes achieving equilibrium a fine balancing act between cost, value, quality and strategy – the latter of which encompasses all manner of challenges, from corporate drivers to CSR, sustainability and beyond. A straw may not break this camel’s back but the mother of all black swans could, as we have seen over the past 18 months.
Indeed, the Covid pandemic mercilessly exposed weak points in global supply chains and drummed up the perfect storm we now find ourselves in. Rising consumer demand, restrictions on movement and container delays continue to exert pressure on global supply, leaving manufacturers to work with dwindling stocks and delayed orders. There are few industries left unscathed, and multiple vaccine roll-outs offer hope of a global recovery, it marks the optimum time to reset and restructure supply chains for recovery.
The model business
In a year when supply chains came under intense scrutiny, it was over-reliance on the just-in-time (JIT) model that was met with the highest degree of concern. In principle, the model makes sense; acquire the precise quantity of components or goods to fulfil your requirement just before you need them. In an ideal scenario, costs are minimised by eradicating excess stock, the need for storage and eliminating waste from the supply chain, while also preventing pile-ups of finished but unsold products.
JIT works brilliantly under the right circumstances, and as such has been the cornerstone of cost-effective, lean sourcing methods for decades. But under exceptional circumstances, the risks increase and this model is often found wanting.
One of the problems is that whether you’re facing a boom or crash, even a perfect JIT operation doesn’t provide enough agility for businesses to scale up or down in response to sudden changes in demand. As such, it had little chance of coping with a long-term global crisis, such as the pandemic.
McKinsey reported in April that over a 10-year period, the average company can expect pandemic disruption to cause losses equivalent to 45% of a year’s profits, with aerospace (66.8%) and automotive (55%) scoring far above average. On the other hand, e-commerce made 10 years’ growth in three months but also struggled to meet this challenge.
The tip of the current JIT iceberg is the semiconductor crisis, which Cisco predicts will last until the end of 2021, while IBM estimates closer to 2023. This severe sourcing problem has prompted technology companies including Apple to either take production in-house or bring it closer to home.
And it’s not limited to technology, as the UK and US post-pandemic construction boom is being restricted by shortages in timber and general construction supply materials. Distinctly separate from products and components, experts predict rising inflation will increase pressure further in the months to come, which is also likely to affect availability of raw materials.
Inventory managers are working to optimise stock levels for cost and resilience.
The bullwhip effect writ large
Any procurement person worth their salt should be assessing and managing risk within their supply chains to mitigate the effects accordingly. Currently, Japan is in the epicentre of yet another sourcing problem as exemplified by the fact that Shimano – manufacturer of bicycle gear and break parts – is struggling to meet the demands of the industry. 65% of global bicycle manufacturers use Shimano products and, with supplies pinched, retailers are facing delayed shipments, lack of inventory and very long waiting periods for fulfilment.
Often that risk comes from high volatility as a front-end demand, as we saw with PPE in the healthcare sector at the height of the pandemic. Massive spikes caused by situations that are extremely hard or impossible to foresee create demand distortion that travels upstream and causes dramatic variances. It’s a phenomenon known as the bullwhip effect. But isn’t managing that simply good, old-fashioned supply chain resilience?
“I think that’s what we aspire to,” says Jim Goodhead, procurement consultant at Vendigital. “At the moment we don’t know what the future looks like, so doing supply chain resilience is hard. There are so many factors creating the perfect storm – pent-up demand, shortage and the natural suspicion and fear you’d expect in a crisis.
“What we’re seeing now is a lot of panic, which leads to a short-term mentality. Companies are hoovering up stock. It’s a case of get what you can if you can, and if we need more, we’ll find more. Procurement at the moment is less about supply chain optimisation and more about getting what you can. And until the market stabilises, we’ll be in the middle of this bullwhip effect.”
To an extent, the writing was on the wall, and in more ways than is obvious. In its 2021 CPO survey, Deloitte found that 70% of respondents were confident with their level of visibility over their tier one suppliers at that time but, alarmingly, only 26% felt the same of their tier twos. That only 15% believe they have sufficient visibility into tier two and beyond suggests that, while risk is always high on the agenda, mitigating it is another story altogether. Also, the outdated prioritisation of cost and lean are fast being rebooted to the value chain.
“Years ago, the guiding phrase in procurement was cash is king,” explains David Holmes, a procurement consultant who works at Deutsche Bank. “Cash is not king now. Data and risk are king – risk because of the pandemic and data because that enables you to avert and reduce the risk. Without data and without risk mitigation, cash is irrelevant.”
Adapt and improve
In January, software company GEP proffered a solution of sorts when it asked whether just-in-case (JIC) models – those that hold safety stock – would be effective at shielding against the shortcomings that make JIT ineffective in a crisis. It quickly came to the conclusion there is no real one-size-fits-all answer, and it’s conceivable that procurement managers would have legitimate concerns over both holding stock and supply disruptions. Which leads to the inevitable question, is JIC a feasible solution?
A key proponent is Toyota, of course. During the current microchip shortage some car manufacturers have had to forego luxury extras, like high-tech navigation systems, but many chips are essential for basic functions such as braking systems and steering, so if you cannot acquire them your cars cannot function.Unlike most carmakers, Toyota has reported an increase in output and healthy revenues, which are forecast to be up by 54%.
The company famously pioneered the JIT model and led the charge in lean manufacturing. But while businesses the world over replicated this model – and by the 1990s if you weren’t running lean you were missing a trick – the carmaker was quietly, successfully readjusting its model.
In 2011, the earthquake and tsunami that hit Japan, killing 22,000 and cracking the Fukushima nuclear plant, also caused the shutdown of chip-making factories in the region. Toyota was cut off from components it needed and its JIT model meant it faced very long lead times and no supply alternatives. Rather than rebuild the same system, it set in motion a JIC model to ensure agility in the event of a similar disruption – but this didn’t mean reverting to mass stockpiling; the company defined 500 items as critical components it would need to stock, including a range of microchips.
Not wanting to hold inventories itself, Toyota made new continuity arrangements with key suppliers so the suppliers would hold between four to six months’ of critical stock at their facilities, and Toyota would remain a priority customer in the event of a problem. To increase continuity even further, the carmaker set up these deals with additional companies, including Renesas in Japan and TSMC in Taiwan, to diversify its supplier base. This service and relationship comes at a price, but the financial reports prove it works.
On a smaller scale, JIC sourcing has also been a saviour for UK toy model manufacturer Hornby. After nine years on the doldrums, it turned a profit in 2021 as a direct result of the global lockdowns prompting a resurgence in hobby crafts. It was a dramatic turnaround for the company, which had been struggling over the past few years after having outsourced manufacturing to China, ending in poor quality products and extended lead times. As a result, Hornby was unable to ramp up production when demand required it and couldn’t take advantage of consumer interest.
However, the change in fortunes came about partly due to the decision to restructure the supply chain model, which has seen the organisation start to hold more inventory, according to chief executive Lyndon Davies. The ability to meet demand at its peak point makes a strong case for holding a strategic level of stock. By implementing a JIC approach, the company was no longer dependent on long lead times and had the agility to scale up or down in line with market demand – a model Cranfield University Emeritus professor of marketing and logistics, Martin Christopher, thinks will become more common.
“There will be a much-changed supply chain architecture based on putting together relatively short-term relationships to reconfigure the supply chain as and when required,” Christopher says. “This structural flexibility is about being able to reconfigure the supply chain at relatively short notice to be able to cope with interruptions. We want to do things in the leanest possible way but at the same time recognise that we can’t have extended supply chains or lead times because they don’t work.”
Chip shortages result in loss of luxury extras in new models and basic functions.
Shorter leads and pipelines
A wholly reconfigurable supply chain may not be realistic for some sectors – and Christopher isn’t advocating a knee-jerk lurch into JIC methods – but he strongly believes buffer stock is necessary as a conduit to greater resilience. “The source of resilience to me, primarily the key source, is going to come from that flexibility focused around ever-shorter lead times and timeframes. The only way we can survive in this volatile world is by getting faster.”
It’s a convincing argument, if we assume that by resilient, we mean the speed to adapt when situations change. It’s a common theme in procurement, also relevant in the GEP survey, which found 97% of CPOs said importance on the speed of sourcing had changed, and a further 73% aimed to be quicker. So how is that to be achieved?
As Christopher hinted, it comes from rethinking how we source, and by challenging traditional approaches that have their basis in minimising cost. For instance, offshore sourcing was driven by the need to find a country where the cost of labour was cheap. That in itself is a decision taken on a very narrow definition of cost and though it factored in transport costs, it did not factor in time.
“What we’re doing here is we’re extending the time significantly for many industries,” Christopher says. “And that’s not really just-in-time because you have significantly extended supply chains. If we have learnt anything from the recent past, it is that the need for a much more local approach is high. It’s not a case of reshoring, rather it is that where we can, we should be seeking to move supply closer to demand. It’s about creating the shortest possible pipeline and looking for arrangements in the supply chain that give you the greatest amount of flexibility, so you’re no longer committed to having to use a particular factory.”
One example, Christopher adds, is when Procter & Gamble owned Pringles. The company manufactured snacks at just two factories – one in North America and the other in Belgium – to deliver to the entire world. Such an approach to global distribution indicates a mindset and logic based on confidence in economies of scale. One which works well in times of relative stability, but quickly increases risks and delays when the market encounters volatility.
Now, Christopher explains, companies are seeking out flexibility, not only of production and distribution, but of all aspects of their business: “The level of flexibility I am looking for now is one where I have access to assets, though without necessarily wanting to own them. I need access to capacity, but I don’t necessarily want it over time. It’s much more about what some would call the sharing economy.”
The case for a hybrid approach
The climate of caution hanging over certain sectors is palpable. For those most heavily scarred by the pandemic, it has, naturally, led to a more risk-averse buying approach and a switch to sourcing models that offer greater flexibility. Generally speaking, few of the world’s public health services were unscathed by the sudden and jarring shortage of PPE which began last March. Even global superpowers with established infrastructures, big budgets and expensive systems faltered in the Wild West of PPE procurement.
Without governmental heft, many fought for supplies as, although hospitals rightly gained priority access to PPE stocks, this still left millions of essential workers in care, education and manufacturing with few options.
PPE supply problems make a particularly potent example of the weaknesses of JIT sourcing, but it also led to rapid overhauls towards agile sourcing and indirect categories in general, according to Paul Keenan, head of client services at I-Tel: “People are very used to working in a certain way under certain conditions. When something like the pandemic comes along, it hits everyone for six. And now they’re forced to rethink what’s important when they set up supplier relationships and risk mitigation strategies and processes. Contingency has become a priority.”
Indeed, at the height of the pandemic I-Tel found itself at the sharp end of sourcing PPE. The organisation is an indirect procurement specialist with numerous clients in the care sector; two of those clients, United Response and Real Life Operations, found themselves with a perilous shortage of PPE last June.
“At the time, sourcing nitrile gloves was a major issue for the care sector,” says Melvin Gauci, I-Tel’s managing director. “But with some creative thinking, we found a solution. Through our contacts in the automotive industry, we were able to source large volumes of medical-grade nitrile gloves from Renault. The carmaker had a vast surplus because it wasn’t open or operational, so we secured all their available stock from around the UK and diverted it to the care sector.”
This problem-solving highlights not only the value of agility and flexibility in sourcing, but the opportunities for resilience and optimisation that lie in the use of data. I-Tel sets its stall out on using industry-disrupting technology and powerful data sets to monitor and track price fluctuations and stock demands around the world.
In essence, it leads to a hybrid model that takes the best of JIT and JIC. “You can use the power of data to predict your demand, to look for opportunities, for forecasting global stock demands or identifying where sourcing opportunities exist,” Gauci explains. “These can far outweigh the opportunities of just-in-time. For example, by forecasting and bulk buying ahead of market spikes, you can avoid unnecessary shortages and, more importantly, disruptions to service.”
The notion of holding stock divides opinion, especially among advocates of JIT, but in this instance, the level of stock can be set specifically and the result is hard to argue with. The approach – a sort of JIC 2.0 – achieved the best for all concerned, from end-user right through to the supplier of raw materials. It’s better value, less risky and wasteful, and ultimately more sustainable.
“It makes businesses more frugal, far more self-sufficient and more competitive in what is going to be a very challenging market over the next 18 months,” Keenan adds. “It’s vital for procurement to have that visibility, especially from a risk mitigation perspective.”
Taiwan Semiconductor Manufacturing Company is investing $100bn in chip capacity.
Is sharing caring?
Collaborative procurement hasn’t traditionally been a popular model for a variety of reasons. In the private sector, syndicates or consortia, for instance, have been considered by some as anti-competitive or inefficient, and at the extreme end, they could open up the risk of collusion. Yet, there are numerous examples, including I-Tel, that demonstrate how a well-executed collaboration can be highly effective.
“It’s a growing trend for us,” says Keenan of the consortium model. “Where we’ve forecasted and held stock for a particular company and have demonstrated accuracies in demand, we’ve been able to do the same for clients in the same industry. So, from that point, it becomes useful to go into a consortium because you can order in larger volumes and drive better prices.”
The approach optimises resilience and speed. Critical lines are held centrally and delivered on a next-day service JIT style, while a lot of the indirect categories are delivered from distribution ad-hoc. It’s a model that is especially well-suited to the public sector.
“You only have to look at how vaccines have been distributed to see how well collaboration works,” says Goodhead of the UK roll-out. “The programme has had its ups and downs, but it’s been handled centrally, coordinated centrally and has delivered what it set out to achieve. The vaccines have, by and large, been in the right place at the right time and in the right volumes.”
In the private sector, the benefits of consortia are less clear, however. Few items that an organisation requires are standard issue, so getting a large group of different companies to agree on a specification that suits each is a tall order – and if such an agreement were to be found, it removes a lot of advantages procurement can provide.
“In most organisations, procurement can be a differentiator,” says Paul Joesbury, co-founder of The Procurement Doctor. “With a consortium you lose some of that in favour of a better ticket price. In essence, you waste a lot of time and assets, and you don’t see the real benefit that’s offered through extra buying power. There are other ways of optimising value – specification, optimisation and demands management for example – and you lose some of that with a consortium approach.”
Positive change and growth mindset
Disruption has been the defining characteristic for supply chains of late and until Covid-19 is under control globally, markets won’t return to a state of equilibrium and nor will the supply chains that underpin them. The notion of agility is prescient, and it’s important not to lurch from one operating model to another, introducing self-made disruption, but to be iterative and in-tune with what is and isn’t working.
For instance, a few decades ago much manual labour was shifted to countries like China to take advantage of low worker costs, which contributed to China’s industrial dominance and resulted in rising prices. In response, labour was moved to countries offering even cheaper rates, including India and East Africa.
This pursuit of bargain basement labour can increase the risk of worker exploitation but also, in criss-crossing the world, makes for very high carbon consumption. It denotes a cost-driven and high-risk approach to sourcing. Is it likely that many companies will start using multiple suppliers in several regions to mitigate risks and hold more inventories?
As Toyota’s example highlights, the root of JIC is about establishing a growth mindset because achieving resilience is a feat of constant refinement. Whether that be in the face of geopolitical tension, global pandemics or recessions, whether it be forced or organic, supply chains must keep evolving to stay healthy and aligned with the changing needs of the business and the sector.
JIC and other strategic models give procurement more tools than only sourcing, they also offer methods of ramping up resilience and supply security while tackling sustainability and ethical practices.
“It’s not feasible to set up a plant or factory in every country you operate. So, while you might have more of your supply chain localised – a finishing supply chain, for example – you are still going to need to source the parts from other areas of the world,” says Goodhead. “That’s the aspect that needs to be managed correctly. JIT has worked for 60 years and isn’t suddenly going to stop. But modifications need to be made to the weak links in every supply chain and will be made when those links are found. That’s how we’ll move on.”