Why End-to-End Integration May Save Your Supply Chain
Too many organisations are focusing on the short-term when it comes to their supply chain. But those who don’t look to end-to-end integration may be dealing with issues for months to come.
It’s not an exaggeration to say that global supply chains are in crisis. It’s probably still not an exaggeration to say that there are multiple crises besetting global supply chains all at once. Whatever the root causes, organisations are facing unprecedented challenges at a time where not only is the public spotlight firmly on supply chains, but there is also an expectation that these issues can and will be resolved soon.
Procurement and Supply Chain professionals have spent much of the past year, and certainly the early part of 2022, fighting fires and aiming to keep their customers, both internal and external, happy. However, this is a very short-term view of the situation, as this is one of procurement’s key objectives on an ongoing basis.
Procurement cannot get stuck in a short-term loop, where order fulfilment and customer satisfaction are the only goals. The whole profession needs to take a step back, review the situation, and start to look out over the long-term horizon.
Backlogs, Peaks and Inventory
It might be an anathema to procurement, but it may be that it needs to disappoint its customers to get things back on track. Shortages in electrical components, increasing demand and fluctuating raw material prices are causing lead times to increase. Parts that have, in the past, consistently had lead times of up to 12 weeks have, in some cases, increased by two or three times that.
We have spoken to a number of organisations on both the procurement and the supply side facing lead times for critical components of over a year. In an attempt to satisfy customer orders and clear backlogs, procurement is placing large orders on their suppliers, which are, in turn, causing manufacturers to up their orders.
This rising demand, powered by the ‘Bullwhip Effect’, is actually artificial as people are ordering far more than they need to clear backlog and hold stock to mitigate lead time risks in the future. Without properly planning backlog clearance in the supply chain and matching orders between different suppliers, all that is being created are peaks in demand and a situation where organisations are holding a significant volume of inventory, which is tying up much needed capital.
Don’t Rest on Your Laurels
While this demand and lead time situation is unlikely to remain in the long-term, it’s nearly impossible to predict when these trends might decrease. And that’s why procurement needs to turn their attention to the long-term, with the assistance of their supply chain.
The pressure is on the beginning of the supply chain right now and organisations are turning their spotlight on the supply base as a consequence of product availability. Strategic sourcing has served procurement well, but many organisations have become complacent, resting on their laurels when they have a good first source for key materials and commodities.
However, these same organisations have been let down when they have come to source an alternative, or additional, supplier or suppliers to mitigate their risks. These suppliers are frequently swamped with demand from existing customers and either do not have the capacity for, or choose not to prioritise, new customers. What has been shown to be a key success factor in the past two years is having good supplier relationships, but ensuring that you are not inadvertently ending up in a single source position.
Credible Plans, Good Information
How, then, do procurement shift their focus from the short to the long-term, while still meeting the needs and wants of their customers? The key is integration of end-to-end supply chains and ensuring that there are credible plans in place with demonstrated capabilities.
Without these plans, matching orders between suppliers is not going to be possible and backlogs in orders will not be cleared effectively. Organisations will be stuck with too much inventory and raw materials and not enough cash flow, and will be dealing with the current issues for months to come.
For this to become a reality, procurement needs to implement an Integrated Business Planning (IBP) process, where the whole organisation and the supply chain work in a collaborative environment to make key decisions and plan and execute strategies in an effective and efficient manner. There is technology available to assist with integration and data collection and analysis and this will ultimately help deliver a better solution for both procurement and the wider organisation.
As part of our series on Procurious, we will look to provide an update on the developing supply chain situation as the year progresses, as well as continuing to show how IBP can help organisations.
If you would like to chat to us in more detail about what IBP could do for your organisation, you can get in touch with us on the Oliver Wight website.