Stop guessing. Figuring out whether your company’s manufacturing supply chain is agile isn’t that difficult. That is, if you are willing to face the brutal truth that it probably isn’t as flexible as you think – just like the supply chains in operations at many other enterprises. That’s the assessment of a group of researchers at Mckinsey & Co. who polled operations executives at some 250 manufacturing companies globally and concluded only a few of them can be accurately described as “agile leaders”.
The positive part of their findings is that by taking a few critical steps, companies can improve the agility of their supply chains and reap substantial measurable benefits, including higher sales, better margins and increased customer satisfaction. First, though, let’s quickly determine how your company would have rated had it been included in the group of manufacturers surveyed by the McKinsey researchers. They used two basic metrics to determine agility: these are the “proportion of orders delivered on time and as promised,” and “days of inventory held.”
“Companies with more agile supply-chain practices (as described by executive-survey respondents) had service levels that were seven percentage points higher and inventory levels that were 23 days lower than their less agile peers did,” said McKinsey in the report co-authored by Raoul Dubeauclard, Kerstin Kubik and Venu Nagali.
The researchers concluded that companies with “specific agile practices … do well in areas such as demand forecasting, labor flexibility and the optimal placement of inventory across distribution networks.” However, even companies in the top-quartile of the most agile enterprises “struggled to shape demand, a practice that relies on variable pricing – increasingly grounded in advanced analytics – to regulate the flow of products through supply networks and to optimize margins.”
Many of the points emphasized by the researchers strike me as being pertinent to manufacturers and suppliers in the electronics industry. The achievement of system and product agility has become essential to success and may determine whether or not a company even survives in today’s intensely competitive market. Inventory equilibrium in the supply chain isn’t any longer something to be left to middle level managers; too much or too little inventory in the value chain could financially hurt a manufacturer, frustrate customers and throw a wrench in relationships with suppliers.
What this implies is that manufacturers must continually generate and act upon information about demand and supply conditions from their own internal operations as well as the customers’. They must also put in place a tighter working relationship with suppliers, contract manufacturers and distributors to assure visibility throughout the supply chain. Failure to link all segments of a manufacturer’s operation can lead to hidden inventory pockets that can easily push up costs, according to industry observers.
While some manufacturers avoid a build-up of inventory like the plague, others in the electronics supply chain acquire as much as their cash flow could handle. For these companies, the availability of inventories is critical to operational success. Many distributors are in this category. They thrive on providing whatever components a customer orders within 24 to 72 hours and can’t avoid to have deliveries pushed out farther than this. In order to be in this position, though, they must have supplies on the shelves even without knowing exactly what the customer might want and when.
It’s not an excuse for complete ignorance about customers’ likely component requirements, though. Forecast accuracy should be as important to distributors as it is to suppliers and OEM/contract manufacturing customers. The best distributors don’t just pile up parts like hoarders; they are quite strategic about which components they keep, how many (or how much), where the parts are stored and who gets these first in an environment of shortage.
In this industry, inventory churn and supply chain agility are two sides of the same coin, for both manufacturers and other players in their supply chain.