The cacophony always gets louder when supplies are disrupted: Supply chain partners must collaborate! Yet the “importance” (i.e., order volume) of a supplier or customer often dictates the allocation of constrained resources.
Still, necessity is pushing the supply chain toward better collaboration, said Alex Saric, CMO of Ivalua, developer of spend-management platforms. The call for responsible corporate environment, social and governance (ESG) practices necessitates in-depth communication among supply partners. Apple Inc., for example, audits suppliers for ESG compliance. Hundreds of Apple partners have committed to clean-energy goals.
“We are seeing this as a focus of many industries – the chip industry and distribution, for example – and two-thirds of ESG innovation comes from suppliers,” said Saric. “Close collaboration is needed to ensure supply continuity, as well as reduce [the industry’s] carbon footprint.”
The disruptions of the past two years – Covid-19; stranded cargo ships; materials contamination; factory fires and the global chip shortage – are convincing end customers they need visibility beyond their tier-1 suppliers. Materials supplies, in particular, have been problematic. Constraints have contributed to a semiconductor shortage which will only worsen as Russia’s invasion of Ukraine threatens the global supply of neon, which is used in chip making.
Automated, multi-partner communication enables collaboration. “Systems that used to work fine when you were just sending an order don’t work when there are supply chain disruptions,” explained Saric. “You need constant communication that happens without e-mail, phone calls or contacting a bunch of people. There’s a move to gain more visibility in the actual [supply] process.”
Manufacturers are often unaware of dependence on second- and third-tier suppliers, Saric added. “You need to bring your various vendors together and evaluate the risks attached certain suppliers.” Sole sourcing can be a problem. A few years ago, the leading supplier of packaging substrates to the chip industry was damaged by a fire. That halted a significant amount of chip production.
Supply chain mapping can identify such risks. Gathering information about suppliers, their suppliers, and the people who work in the supply chain creates a global map of a supply network and identifies the relationships among partners. Geographic vulnerabilities can be pinpointed.
Partners should also have visibility into planned orders, said Saric. “Materials shortages have changed the forecasting dynamic,” said Saric. So has the chip shortage. Car makers, which have lost $210 billion in production, illustrate why the stakes are so high. Over the past year, leading car makers have announced alliances with semiconductor companies.
“Let’s say customers share their revenue forecasts and their inventory levels,” Saric explained. Suppliers can communicate when they are able to sell finished units. If a customer needs 10,000 of x in May, and more of x in June, tier-1 suppliers can share those forecasts with their suppliers. If there’s a problem, suppliers can communicate with the end-customer in time to find an alternate source. End-customers also have the opportunity to amend their revenue forecast.”
When sharing is bad
Customers in the electronics industry historically hesitate to share too much with suppliers and distributors and consider their order levels and bills of material as proprietary. If that information became available to competitors it could be used for price negotiation, reverse-engineering or other nefarious purposes. Still, when a supplier expects inventory and it’s stuck within the sub-tier, end-customers should be alerted.
Saric’s seen examples of one company reporting record quarters while competitors’ shelves stand empty. “The difference is successful companies were willing to build collaborative relationships,” he said. “We are seeing, out of necessity, businesses building backup plans for existing relationships. For supply chains there is a ‘right’ level of transparency. But there is also a lack of trust. I know of companies that require a minimum order commitment and that’s not ultimately the ideal approach. “
In fact, many procurement processes contribute to excesses or shortages in the electronics supply chain. Customers may place duplicate orders with suppliers and distributors to increase their chance of delivery. To save on per-unit prices, companies order more components than they need. Companies hoard inventory or resell it on the open market. Deeper visibility into supply chains could discourage such activities.
Collaborative networks allow flexibility for supply partners. “There’s no ‘one size fits all,’” said Saric. “No one industry gets the right balance of 80/20 – focusing on the 20 percent of your suppliers regarded as critical. Automation is readily available. Partners may need to shift spending or approvals and should be able to access a platform to make those changes. Better workflow enables business agility.”
Recent research shows investments that enable agility can increase revenue by as much as $3 million.
“These days I think it’s easier to get partners to buy in to sharing forecasts,” Saric added. “It really benefits the end customer who is driving demand. There can be on-hand inventory to the extent possible. For some, this enables better management of working capital.”
Saric noted the current regulatory environment and sanctions against Russia have increased global supply risks. “The more time you have to plan manufacturing, there’s less of a chance you’ll run afoul of a regulation.”
Ivalua recommends four steps toward better collaboration:
- Implement a customer of choice program to incentivize suppliers to collaborate
- Gain control of enterprise supplier data for 360 degree visibility
- Map your sub-tier supplier dependencies
- Enable ongoing collaboration w/ technology that supports efficient, secure sharing of info, including forecasts and planned orders