Let The Dysfunctional Supply Chain Return To Normal.

All Manufacturer As we all know, a smooth supply chain ensures that products flow smoothly into the hands of customers from the initial stage of production. However, the unbalanced supply chain will lead to higher cost, inferior quality and poor customer service. If the company can understand its suppliers' capabilities and their own needs, and strive to improve their overall supply chain efficiency by using the information they have grasped, it will greatly enhance the business and win the competitive edge.

For example, an American manufacturer is faced with the challenge of demand fluctuation. Currently, it is trying to get the key production components through its supply chain. However, the manufacturer has repeatedly encountered such problems as delivery delay, quality problems and high cost of incoming logistics. The introduction of new products, increasing competition, promotion, marketing activities and changes in consumer expectations will disrupt the normal operation of the supply chain. Although the company has successfully adapted to the volatility of demand, its suppliers are not so lucky the main suppliers are trying to solve the unexpected increase in component procurement needs. Because manufacturers often make or cancel orders at the last minute, they may inadvertently affect the quality and cost of their suppliers. How can supply chain pressure cause significant problems, and then bring waste and high costs? And how the improvement of production planning and new capacity investment will contribute to the improvement of supply chain.

Coordinated Supply chain Four benefits

A coordinated supply chain will help reduce costs, reduce investment, improve quality and improve services.

Cost reduction. Once the efficiency of production planning and schedule is improved, all costs will be reduced, and overtime and production line replacement costs will be the largest. If we define supply chain costs as all costs associated with transportation, warehousing, inventory holding costs and manufacturing differences, we can still expect to achieve a 20% cost reduction target.

Reduce investment. When we make decisions on the basis of future demand, we need to adopt incentive methods as far as possible in order to get more accurate forecast of capacity investment. The optimized utilization of equipment helps to minimize the related investment in the supply chain, while the more accurate production forecasting can avoid the overload of the system and the high cost of outsourcing demand. In addition, strengthening the attention to demand is also conducive to reducing the inventory level of the whole system.

Improve quality. A unified and coordinated supply chain helps to avoid system overload and last minute production changes, as well as to reduce system variability. For a system, if the system can operate at the best level and at a constant speed, the error rate of the system will be relatively low. If we can not avoid the occurrence of system errors, we can easily identify and manage the errors.

Improve service. The coordinated supply chain can bring a more stable system, and this more stable system can help us identify the demand changes more easily, respond to them, improve the operation efficiency of the company, and ultimately better respond to customer needs.

Supply chain imbalance and its causes

Demand instability. Usually the producers respond to the continuous adjustment of the production plan. Demand fluctuation In order to promote the adjustment of supply demand. Even if there is no more impact on the demand volatility than the manufacturer, the supplier has a deep understanding of the so-called Bullwhip Effect. Suppliers are forced to constantly adjust their production plans to meet the procurement needs of manufacturers, but in the end, they always have to work overtime and hold excess inventory to solve the problem.

Capacity investment is insufficient. If the supplier has already invested in a special capacity facility without the explicit purchasing needs of the manufacturer, it may face significant risks. Once the product is not sold, the expensive production facility will become idle. Therefore, the supplier's capacity investment is always lower than the expected demand. Such underinvestment usually occurs in the form of overloading, resulting in delayed product delivery, delayed delivery, quality problems and poor quality of service. Suppliers often do not take responsibility for insufficient investment in production capacity (they are also hard to justify), so manufacturers usually identify the symptoms of underinvestment and respond quickly.

Supplier overcapacity. Manufacturers often exaggerate demand forecasts and induce suppliers to invest in adequate capacity. Exaggerating demand may lead to overcapacity of suppliers, otherwise it will push up the cost of every link in supply chain. This seems to be a common problem in high value component industries, such as automotive and aviation industries, which are usually expensive. Supplier overcapacity is also a common problem in labor-intensive manufacturing enterprises. When actual demand is lower than expected demand, suppliers often lack flexibility in labor and can not properly reduce staffing.

Perfect supply chain?

In a perfect world, only one decision-maker can get all the necessary information in a truly harmonized supply chain. The decision maker also has the corresponding incentive mechanism and decision-making power to minimize the cost of the supply chain. We can adopt several main methods to properly adjust the supply chain.

Know the real demand information. Supply chain managers with comprehensive demand information are often able to make better planning and avoid waste. Supply chain managers and supply chain partners frequently carry out accurate information communication, help to understand the real demand, and collaborative planning and forecasting tools can improve information sharing. In the past few years, the development of new technology has made a significant contribution to supply chain collaboration. But if we want to achieve real synergy, we must abandon the past practice to exaggerate demand in order to avoid supply shortages.

Improve the transparency of the total cost of the supply chain. To make decisions to maintain a lower supply chain cost, we first need to understand the cost of all partners in the upstream and downstream of the supply chain. But in order to protect their core knowledge, competitive advantage and bargaining power, most suppliers try to "hide" their true costs, making it difficult for them to get their cost information easily. Nevertheless, we still have a way to better understand the cost structure of supply chain partners. For example, some original equipment manufacturers built similar production operations departments within their factories to reasonably estimate the cost of suppliers.

Unified reward mechanism. In the best operation of supply chain, if supply chain managers can accurately predict demand, they can get certain rewards. In fact, even if supply chain managers have acquired all the necessary information, they are still not willing to help supply chain partners to reduce costs unless they are rewarded accordingly. Moreover, executives do not ask their managers to help supply chain partners reduce costs unless companies can share benefits. We often advise the supply chain manager to sign a shared savings agreement and get a bonus (discount) after achieving the operational objectives. The best reward is often linked to reducing the total cost of the supply chain.

Decision coordination and compliance tracking. Without the concerted action and absolute compliance of all companies in the supply chain, the hope of reducing supply chain waste will be slim. Generally speaking, a strong supply chain participant will play a leading role in ensuring synergy and compliance. But without such a strong participant, we can establish an inter company organization to fill this role vacancy, be responsible for supply chain collaboration and compliance, and give decision-making power to achieve cost savings goals.

By focusing on the above four areas, supply chain managers will get the necessary information, reward mechanism and power to adjust the supply chain.