The global COVID-19 pandemic, with its disruptive effects on manufacturers’ supply chains, has been a wake-up call for many businesses to examine their operations through a different lens.
The Institute for Supply Management (ISM) reported about 4,200 disruptions in the first nine months of 2020. More than half of these instances led to a “war room” situation in which businesses had to scramble to regain their footing.
Most manufacturers have experienced disruptions that created volatility in consumer demand, production downtime, raw material availability issues, and transportation bottlenecks. In reviewing what went wrong, many manufacturers have concluded that supply chain optimization for cost has made them less able to navigate disruptions.
With the frequency of supply chain disruptions increasing—a serious disruption lasting 1-2 months every 3.7 years can be expected according to McKinsey research—the time has come for manufacturers to optimize their supply chains for resilience. Study after study shows that resilience has become a significant competitive advantage in customer acquisition, satisfaction, and retention. Enterprise Resource Planning has a central role in accomplishing this objective.
In this recently published whitepaper, we present the factors that impact planning, sourcing, production, warehousing, distribution and sales, and the cutting edge strategies you need to use ERP to bring flexibility, agility, and resilience to your supply chain. Download the supply chain resiliency whitepaper or continue reading below.
Introduction
Enterprise resource planning (ERP) solutions help to coordinate, streamline and automate each function of the internal manufacturing supply chain, as well as the functions of partners and suppliers. From planning and sourcing to production, warehousing, distribution and sales, the right ERP solution can reduce overhead and operational costs, while helping you to optimize the supply chain for agility and resilience in times of disruption.
A robust and intuitive ERP solution can also dramatically reduce man-hours for supply chain functions, which is vital to the growth and expansion potential of small and midsize manufacturers. The vast majority of manufacturers struggle with freeing up employees from the time-consuming tasks involved in keeping production and distribution moving according to schedule. Ineffective management of these processes without the right ERP solution results in poor productivity, shipping delays, and unsustainable profit loss.
ERP offers improvements in production bottlenecks, internally and with external suppliers. It brings expediency and flexibility to procurement; accuracy to demand forecasting; and cost-efficient management of inventory, labor, and warehouse space.
In this whitepaper, we present the factors that impact planning, sourcing, production, warehousing, distribution and sales, and the cutting edge strategies you need to use ERP to bring flexibility, agility, and resilience to your supply chain.
An overview of disruptions in the supply chain
Manufacturers must understand their vulnerabilities in the supply chain to inform resilience planning and strategies. According to McKinsey research, companies can now expect supply chain disruptions lasting a month or longer to occur every 3.7 years on average. Cybercrime, terrorism, extreme weather, natural disasters, financial crises, and pandemics have all exerted extreme pressure on supply chains in recent years, and each of these disruptions are likely to occur with increasing regularity in the future.
Agile and innovative organizations are using enterprise resource planning (ERP) software solutions to overcome antiquated ideas around optimizing for cost OR resilience. Today, it is possible to achieve both objectives. Here, we look at how ERP can help to manage disruptions in each function of the supply chain.
Planning: Difficulties arise in supply planning due to lack of information on impacted suppliers. On the demand side, difficulties arise from a lack of data on fluctuations.
An ERP solution streamlines planning and forecasting through effective job scheduling that accounts for the use of all resources and materials in real-time. When suppliers are impacted by disruptions, these flexible systems are set up to automate ordering through suppliers that can meet demand. Similarly, as customer demand changes, having a diverse vendor pool that is ready to go in the system provides the needed agility.
Sourcing: Difficulties stem from shortages of critical raw materials and parts, as well as delayed shipments and longer lead times.
ERP manages, automates, and streamlines the procurement of materials and parts across the supply chain. It also automates communications with all involved vendors and suppliers, and keeps documentation on communications.
Production: Difficulties arise from rapidly scaling production up or down, and from having to reconfigure production lines.
ERP systems enable the creation of bill of material (BOM) for each item, and create records for labor and machine resources in real-time. ERP also enables streamlined work order modifications and last minute alterations so that production is completed on deadline, without errors and with strict quality control.
Warehousing and inventory management: Difficulties arise from having to balance cost-efficiency with agility and flexibility. Manufacturers must be able to maximize cash flow and minimize inventory carrying costs, while still being nimble enough to respond to supply and demand changes, and more severe supply chain disruptions.
Just-in-case planning is the solution to balancing the needs for efficiency in inventory, labor, warehouse space, and supply chain resilience.
Distribution: Difficulties arise from products being held up by affected parcel companies, or in ports and across borders.
ERP maintains a central repository for customer shipments and delivery details to ensure on-time delivery. System flexibility and integration with transportation management software and parcel software enables manufacturers to choose the most cost-effective and/or quickest providers. ERP also helps with setting packaging methods and criteria for quality checks for both receivables and deliverables.
Sales and marketing: Channels are often affected by changes in activity and by disruptions. Sales can also be lost due to stockouts.
ERP sales and marketing functions enable manufacturers to switch more easily to online channels, or to increase/decrease prioritization of certain channels as market conditions warrant. These systems also automate material and product re-ordering to avoid stockouts.
Consumer behavioral changes require manufacturing agility
A number of changes in the behaviors of consumers have required manufacturers to rethink how they can successfully compete in a rapidly changing environment. Here are a few of the most significant changes:
- The “Amazon effect” has raised consumer expectations for cheap and quick shipping, while also impacting the labor market with higher wages, particularly during the holidays.
- A sharp uptick focus on health and self-care has consumer dollars shifting from restaurants and clothing to cosmetic, health, and self-care products.
- Online shopping continues to account for a greater percentage of consumer and business spending, as the pandemic accelerated a trend toward selling more complex products online, partly due to fewer trade shows. B2B buyers now use online tools more frequently to research available solutions.
- Consumers’ growing love for locally-sourced goods is pushing businesses to look at the supply chain for ways to keep local economies strong while ensuring supply chain resistance to disruption. More companies are looking for domestic suppliers because consumers want products that are made in America. Trade wars and lack of medical supplies during the pandemic have made it clear that America needs more manufacturing self-reliance.
Increasing disruptions must be accounted for in supply chain strategies
Companies can now expect supply chain disruptions lasting a month or longer to occur every 3.7 years on average, according to McKinsey research.
- Natural disasters: 40 weather disasters in 2019 exceeded 1 billion in damages. Climate change projects to continue driving these numbers up.
- Geopolitical uncertainty: The conflict between Ukraine and Russia, trade tariff disagreements between the U.S. and China, and Brexit are examples of recent economic shifts that have caused major supply chain disruptions.
- Cyberattacks: Businesses suffered 50% more cyberattack attempts per week in 2021 and manufacturing was among the hardest hit industries, according to DarkReading. According to Accenture’s Cost of Cybercrime Study, 43% of attacks are aimed at small businesses, but only 14% are prepared to defend themselves.
ERP solutions have built-in mitigation measures for each of these disruptions, from cloud-based, off-site architecture to avoid natural disaster and cyberattack impacts to switching between suppliers to avoid geopolitical impacts.
You’re not alone in needing to rethink your supply chain
Business leaders in manufacturing, distribution, and retail are committing themselves to supply chain innovation for increased resilience.
- 88% of leaders are concerned that their supply chains are not very well-positioned to handle the challenges of the next two years. – Gartner
- 75% of global companies urgently require additional measures to build resilience and protect against future disruptions in supply chains and operations. – Kearney
Evaluate your supply chain and priorities
One recommendation is to conduct the following Resilient Supply Chain Scorecard SWOT analysis. Evaluate these factors and consider these questions with your leadership team:
Visibility across the network: Are you using EDI to communicate between vendors and suppliers? An ERP solution can give you a quick, automated feedback loop with real-time data from vendors and customers. The ability to react with agility determines who will survive disruptions, to the business, to vendors, and to customer demand.
Priorities:
- Upstream and downstream supply network
- Data sharing with partnersAdoption of EDI
- Accounting for costs across the end-to-end supply chain to build a clear picture of the risks associated with low-cost strategies
Agility: How quick are you to react and change once you determine that there is a problem within your supply chain? How well-prepared are you to respond to shifts including scaling production up and down with product demand? Are you able to pivot to new product lines in case of a sudden demand change? How quickly can your sales force and sales and marketing channels pivot, and can you open new channels if a channel is not effective (such as when salespeople can’t travel during a pandemic). Are you able to reconfigure plants and logistics networks?
Priorities:
- Flexibility in reconfiguring production lines
- Switching between make-or-buy decisions
- Shifting to new business models
Diversification: Do you have enough flexibility in production and backup vendors with geographic diversity? How about multiple shipping vendors to handle pricing and volume restrictions? Do you have access to data on which parcel companies can ship most quickly and cost-effectively? Are your raw material sources geographically diverse and can you pull from multiple locations? Can you move machines around and pivot in production? Is your transportation network flexible enough to handle labor shortages, and do you need additional transporters on call?
Priorities:
- Diversification of the supplier base, manufacturing footprint, and transportation options to reduce risk
- Prioritizing localization and regionalization of the supplier base, including Made in America branding
- Multiple vendor options for each raw material and part
- Need for frequent evaluations of vendor prices and locations
- Evaluation of vendor scorecards
Contingency planning: Are you able to anticipate and respond to disruptions? What are your plans and do you have a crisis team to implement it, with assigned roles? Do you run fire drills to prepare for each type of disruption?
Priorities:
- Regular simulations and scenario planning exercises to improve crisis response
- Strong cross-functional crisis team to prepare to implement response
All of these action items must be undertaken with an eye toward sustainable practices. How can you implement permanent changes that will make your business more resilient to environmental and regulatory disruptions, while making you more agile and capable of evolving to meet changing customer expectations?
Take these actions to drive organizational supply chain resilience
The following sequence of actions will help to reinvigorate your supply chain and prepare your organization to deal effectively with disruptions:
- Begin an Electronic Data Interchange (EDI) initiative: EDI is the computer-to-computer exchange of business documents between trading partners. For many manufacturers and distributors EDI is no longer a choice – it has become a requirement for doing business with their customers. By moving to this method of conducting business, many benefits can be realized including lower operational costs, higher efficiency, better supply chain visibility, and improved accuracy. The right ERP solution will support your EDI push.
- Consider a transition from just-in-time to just-in-case production and inventory management: Just-in-time means that parts arrive as close to the production requirements as possible. Just-in-case builds in resiliency to meet production requirements in case of supply chain issues. It’s an agile, cost-efficient way to manage changing market conditions, inventory, labor, and warehouse space. More than 55% of manufacturers have adopted this strategy over the past decade. It’s great for the bottom line because it limits overproduction. It also factors in the risk of materials and product not being available in the manufacturing process. A just-in-case strategy requires evaluating minimum and maximum stock levels and MRP properties and enables your business to keep up with every level of demand.
Potential downside considerations include slow reaction times with surges in demand, increased carrying costs of excess inventory, parts may be in transit while demand changes occur, vulnerability to supply shocks, and inability to capitalize on bulk savings.
- Diversify vendors and transportation: Re-examine sourcing strategies to reduce your risk of supply availability. Our research shows that 65% of organizations are investing in localizing the vendor base and 86% are re-evaluating transportation strategy. Evaluate vendor part cross-references based on price, pricing method, geography, order mins and maxes, and on-time deliveries. Ensure you have a geographically diverse group of backup vendors for your highest turn raw materials.
- Create a supply chain resilience scorecard for vendors: Evaluate over time how each vendor performs when there are no disruptions, and when disruptions occur. Track late shipments and communicate your criteria to your vendors to incentivize performance.
- Integrate a transportation management system (TMS) with your ERP solution: The right ERP solution can support this via EDI and API usage, passing information to the TMS software, which then does rate and availability shopping to different carriers and schedules each of your shipments. This enables you to pivot, as needed.
- Conduct a cost/pricing analysis: Develop likely what-if scenarios and push toward the solutions that can be deployed most readily. These scenarios allow you to evaluate costs and pricing in a simulated real-time environment. Typically companies see a delayed margin analysis in month-end financial reports. Instead, look to sub-ledgers for real-time pricing and cost analysis so that you can react quickly to cost changes affecting margins. You won’t know the impact of fluctuations or be able to minimize damage if you’re looking at financials up to 30 days later.
- Run pricing fire drills: Run future costs up through your bills of material (BOM) to learn what a single raw material pricing change might do to your finished goods pricing. Also look at sales commission strategies and make sure you can make quick changes so that reps are selling at profitable margins. ERP tools can help you do this.
- Have a robust ecommerce website: The pandemic was a catalyst for manufacturers to shift to online sales both in B2B and B2C segments. B2B customers now want to buy online since they are often working from home, and because sales representatives may not visit on site as they once did. Having this channel will protect sales in the event of disruption to your other channels, and it will also provide 24/7 accessibility to support customers and provide access to product details and transaction histories. ERP systems for your industry often have turnkey Ecommerce solutions, enabling you to lower your cost-to-serve by decreasing in-person marketing and selling.
Things to consider as you ramp up your online presence include mapping out the customer journey, creating a real-time flow of item prices and availability from ERP, syncing order information to ERP, building flexible pricing options for various shopping methods, making reordering simple, and developing new picking strategies for small orders. Once your new website is live, evaluate your digital marketing and customer service strategies to support “Research Online, Purchase Offline” (Ro/Po). In B2B ecommerce, 65% of buyers prefer this method and 86% prefer to reorder online instead of speaking with a sales representative.
Conclusion
The events that have transpired over the course of the global COVID-19 pandemic have triggered the need for manufactures to re-evaluate their own supply chains. These organizations who realize this was not a ‘once in a lifetime event’, but rather a wakeup call for them begin to look at their business through a different lens will be ahead of the curve. Taking a comprehensive approach to re-envisioning your supply chain resilience strategies, your business will not only be able to handle the next disruptions that inevitably occur, but you will also be able to capitalize on competitors’ weaknesses to capture greater market share.
