Impact of Covid-19 on the Supply Chain
Covid-19 is a profound event that will have a lasting effect on the way that manufacturers, suppliers and partners operate moving forward. It’s not the first unexpected event to impact the supply chain; OEMs and their supply chain partners successfully navigated their way through the 2018 materials shortage, as well as the Japanese tsunami and Thailand floods in 2011. The uniqueness of the pandemic is that it continues to emerge in different regions, creating a highly dynamic situation that impacts both business continuity and the health and safety of individual workers, wherever it arises.
When the virus first hit Asia at the end of 2019 and then Europe and North America in early February 2020, day-to-day supply chain activities were thrown into turmoil. Regional lockdowns and grounded flights stretched the delivery of materials from 5 to 15 calendar days in suppliers’ manufacturing lead times. For the first few months, freight capacity to deliver materials was literally cut in half. OEMs had to pay steep freight premiums to get materials and products delivered in time. EMS providers with strong supplier relationships found workarounds to get parts during the early months of the pandemic but were subsequently impacted by reduced customer demand as regional lockdowns unfolded.
Improving Supply Chain Resiliency
The pandemic has presented an opportunity to re-evaluate the old way of working – linear supply chain planning and forecasting, a sole focus on cost, ‘just in time’ inventory models and siloed business practices – to determine how the supply chain can work differently to most effectively meet sourcing challenges in the future. Aspects to consider that could improve the resiliency of supply chains include:
Closer collaboration. In the past, various organizations in the supply chain have worked in too much of a vacuum. OEMs that can work closely with partners, suppliers and their own customers will win in the future. These embedded relationships facilitate faster decision-making that take into account multiple factors during scenario planning exercises that can buffer the negative impact of unexpected events.
During the height of the pandemic, Sanmina had weekly calls with suppliers to reserve capacity for components, so that the parts could be shipped earlier in order to meet production requirements. Our suppliers understood our needs and the importance of delivering parts so that we could deliver what our customers required. Throughout the most critical times of the pandemic, they were able to meet our demand fluctuations.
Next: Supply chain lessons from Covid-19
Focus on total cost of ownership (TCO) versus product price. Instead of focusing on product price alone, it’s important to understand the entire product lifecycle – where it starts and ends and how it varies between customers to accurately understand volume expectations. Factors that must taken into account along with price include component lead times, manufacturing cycle times, how flexible a supplier is to deliver the parts within the lead time, lot size and transit time.
Flexible product designs – design for manufacturing (DFx). OEMs must look at the full picture and design products for all aspects of manufacturing, test and procurement. Supply chain constraints must be accounted for in the design of products. This requires input from suppliers and contract manufacturers on the availability of materials, costs and any regional factors that could impact operations. Considering more price effective options during the design phase of a product makes it easier to consider alternative components or materials and to qualify parts. Trying to make adjustments to a product down the road only allows for about 15 percent of the product price to be changed.
Security of supply. Everyone wants to have stock immediately and as a cheap as possible but there are tradeoffs when unforeseen events like a pandemic occurs. Because current forecasts lack visibility, changing from bearish one day to bullish the next, OEMs should consider sourcing for the long term, contrary to current JIT manufacturing models. One scenario is to set up a regional operation with strategic stores that are close to the customer base, combined with the appropriate multi-sourcing of parts that spreads business across multiple approved vendors, in order to reduce risk.
Multi-regional manufacturing. Moving or setting up operations in a new regions comes with significant cost, but history has shown that relying on a single location increases risk due to unexpected local developments or geo-political factors. OEMs should integrate midterm and long term priorities into their business models to develop the right multi-regional approach.
For OEMs with a large customer base in Europe, moving the majority of production to cost-effective areas of Europe may make sense to shorten the supply chain and provide a strong foundation that can withstand major events like Covid-19. Close proximity to suppliers and EMS providers allow OEMs to exert more flexibility and control during any fast changing situation that may arise. Certain product components may cost more than others, depending on local distributor partnerships for parts that might have previously been sourced from other regions, but the overall benefit balances out the TCO by greatly reducing risk.
Digital transformation. In situations like the pandemic where physical meetings have become impossible, leveraging digital platforms, unified communications and the cloud for improved visibility, transparency and real time data on supply chain interruptions is crucial. With just a few clicks, stakeholders can have access to entire supply chain information, all the way down to raw materials. Having one IT and quality management system connecting different regions provides a bird’s eye view into inventory and production, so as one region shuts down, production can be continued in another region.
Vital business practices such as factory tours and supplier selections can now move into the virtual realm, with live interaction and negotiations in real time to safely and efficiently conduct business. Implementing a cloud-based manufacturing execution system (MES) platform can be leveraged for collaborative product design and development with EMS providers, as well as to automate and monitor factory operations.
Pre-programmed production parameters communicated in real time between machines and the cloud automatically ensure quality and efficiency during production. Real time alerts are immediately sent to key personnel when errors or inconsistencies are identified for fast and data-based decision making. The history of every component, production step and worker activity for each product is automatically stored and easily accessible from the cloud, ensuring traceability for highly regulated products.
Adapting to Customer Needs
During unexpected events like the Covid-19 pandemic, the OEMs that are thriving are the ones that have taken into account all inputs from the supply chain and have access to suppliers that match their immediate requirements, in order to deliver products to their customers. Winners of market will be the ones that intimately understand what the customer wants and can continuously adapt their strategy to meet these needs – faster than the competition. It is no longer just about the technology or innovation of a product that provides a competitive advantage but also the speed and quality of service to the end customer.
Michael Ackers is Director of Business Development at Sanmina
- HOW THE INDUSTRY RESPONDED TO THE PANDEMIC
- PREPARING FOR RECOVERY AND SURVIVAL POST-PANDEMIC
- MANUFACTURING THE FUTURE IN EUROPE