6 Key Supply Chain Strategies
Build your business the right way
Over the past few years, there have been some significant challenges (and for those forward thinkers, opportunities) in the supply chain. Between COVID and war in Europe and the latest round of sanctions on Russia, supply chain professionals are more than earning their salaries, and that doesn’t even account for the regular struggles in demand management, sourcing, relationship management, and many other issues that supply chain folks face on a daily basis. But with the right focus and tools, supply chain management can be a great opportunity to help drive a business and even an industry forward. For this next “chapter” of my manufacturing operations playbook, we’ll extend out of the factory into the supply chain and look at some of the critical tools for building a successful product-focused supply chain.
- Make or Buy
One of the first decisions to be made (and to be revisited as the business strategy evolves) is the make versus buy strategy; it’s the process of understanding the costs and risks of manufacturing in-house or outsourcing the work to another company. Early in my career, I wanted to make everything in-house. I thought that if we made all the small parts in-house, we’d have much better control of… well everything. Over time, I came to learn that this isn’t a great operating model, because not only was my team not experts in many of the particulars of part manufacturing, there are a lot of potential hidden disruption costs, particularly if you don't staff it correctly.
A better make versus buy strategy is to set up a great supply chain (and procurement and logistics) team, with the support of others, and systematically go through the pros and cons of whether to make or buy each component. During these assessments, use both quantitative measures like quality levels, capacity, volume, cost (both direct and indirect support) and qualitative measures like level and availability of expertise, indirect management time, and longer-term strategy fit.
2. Sourcing Strategy
Once you’ve decided what to procure, it’s time to decide where to procure it from. For direct or product procurement, there are a number of options available, depending on the type of business. If it’s a high mix of production tools and low IP requirements, a manufacturing officer or contract manufacturer may be a great way to go. The use of contract manufacturers is on the rise in the US as the total landed cost of shipping around the world continues to rise. Another added benefit is many of these CMs also have in-house design capabilities who can help you with your design for manufacturing (DfM) and design to cost (DtC) goals.
Another option is to go with a highly specialized supplier who brings expertise in a particular manufacturing skill set and can also provide economies of scale (both in their in-house manufacturing and sub-tier sourcing capabilities). This is the option that many traditional manufacturing businesses go with for the bulk of their procured items; ie. need a mirror, go to a mirror manufacturer; need a brake, go to a brake manufacturer. A subset of these manufacturers make off-the-shelf (OTS) items that can be procured if you don’t want to design every part of your product. The OTS is often an economical way to reduce the cost of the end product too.
3. Build the relationship
Start with a great, mutually beneficial contract, and then build an amazing partnership with your supply base. There are so many reasons for doing this. One of the main reasons is there will be hiccups in your manufacturing; something will break, something will get lost, and that’s when it’s great to be able to “phone a friend.” I’m pretty sure it’d be impossible for me to count the number of times I’ve reached out to a supplier and asked them to increase their next batch by a few parts, or to do a special run, or to tweak the tolerances on their product. Another reason for building a good partnership is improved communication. The better your relationship with the suppliers, the more likely they are to highlight risks early; you want your supplier to call you if a machine goes down and tell you their plan to recover it.
4. Demand planning and inventory management
This goes for internal production too. Good forecasting and inventory management saves a lot of aggravation on both sides of the relationship. When planning, think about historical data, sales projections, seasonality, promotions, and competition status. Having too much on order can choke your supply chain and build inventory, making it difficult if you have to evolve your product and expensive if you have to obsolete a bunch of products. Having too little means you won’t meet customer expectations and that has a host of business implications. I mentioned in my previous post that plans don’t survive getting punched in the face, but I can’t stress the importance of demand planning and preparation (and communication) enough.
5. Supplier Management
In line with building a good relationship with your suppliers, work with them as often as possible. Supplier management is both a formal process (set up regular capacity and quality reviews) and an informal process (talk to them about challenges that are ongoing like tolerance issues or commodity sourcing challenges and ask them what they are seeing in their supply chain and any risks on the horizon). Having a good supplier management process is great for addressing short-term issues like shortages or quality defects and is also great for long-term strategy discussions. Your business is going to grow and evolve (I hope), and you’re going to need suppliers that can grow along with you.
6. Build a good team
Supply chain management is a tough business and having the right people, who’ve been there and done it, who can read the tea leaves and eliminate the risks and issues before they cripple your business, are worth the time and effort to hire and retain. Don’t skimp on good supply chain management.
For many businesses, much, if not most, of the cost and risk is associated with the supply chain, and having a fantastic supply chain will help those businesses flourish.
I’d love to hear your thoughts and stories on supply chain excellence.
Prime Movers Lab invests in breakthrough scientific startups founded by Prime Movers, the inventors who transform billions of lives. We invest in companies reinventing energy, transportation, infrastructure, manufacturing, human augmentation, and agriculture.
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