Supply Chain Resiliency – Part IV – – Make versus Buy

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Supply Chain Resiliency – A series of short articles
Part IV: Make
By Robert Benny & Missan Eido

Make or Buy in Supply ChainThe supply chain is made up of a series of highly inter related and dependent activities. The decision to manufacture is a complex area, especially due to the make vs. buy component of manufacturing. You can now take all the supply chain resiliency issues involved in our previous sourcing articles and add them to this discussion.

In this last part of our article series, we focus on specific “make” processes of process efficiency, inventory shortages / excesses, quality issues, and equipment issues along with transport issues that may affect manufacturing decisions such as carrier quality and visibility, and plant to plant capacity issues.
To begin:

1. Process efficiency

a. Process efficiency should be transparent across global organizations by means of process and equipment standardization. That being said, often times, location-specific factories make minor modifications based on presumed needs of the workforce and/or specific regulations that inadvertently modify the processes to a point where there are wide discrepencies between factories.

b. Although this has been seen between factories within the same country, it is even more prevalent between factories in different countries where laws and regulations can vary widely.

c. Even more complex for process variation is when some production is manufactured within your company and the rest is outsourced to a third party manufacturer.

d. What can be done? Design supply chain resiliency in this area includes education, training and measurement – both equipment and processes. Comparison and measurement between factories is an imperative, and any significant deviation needs to be addressed promptly.

2. Inventory shortages / excesses

a. This is a major concern due to its impact on cash and cash management along with potential impacts on revenue and margin.

b. Single-source issues of both your manufacturing plant along with any critical supplies for that manufacturing goes back to our discussion on sourcing and needs to be appropriately balanced with second-source capabilities, factoring in our last discussion on sourcing (political, economic and so on).

c. In addition, balancing the number of parts you are producing with the number of factories capable of producing those parts, the number of customer distribution points, your targeting turns metric, and several other considerations will help you target what needs to be done to manage your inventory levels.

3. Quality issues

a. Sourcing the equivalent parts from two different manufacturing locations can create quality issues unless the identical equipment, business and technical processes and specifications are used consistently.

b. Additionally, quality issues can arise when manufacturing locations are near to specific geographical locations. For example, parts that require either high or low humidity for manufacturing or the specific location have the opposite condition. Even when you plan for this, human factors as well as unforeseen events can cause this issue to arise and affect the manufacturing quality.

4. Equipment issues

a. Equipment can be extremely sensitive and disruptions like vibrations from earthquakes, dust and dirt from very volatile conditions, unfiltered water, unskilled labor, etc. can create not just equipment issues, but quality, inventory and supply issues as well.

b. If equipment breaks down, having suppliers near with the right inventory is critical. “One of a kind” manufacturing equipment poses many potential issues. Having equipment suppliers in one a geo-sensitive location (either political or environmental), can also be a major risk factor that needs to be considered. Take for example, a single source supplier located near the tsunami in Japan. Not only was there a possibility that the tsunami might have destroyed that plant but the radioactive fallout from the nuclear facility may have caused a major disruption for months if not years. The impact of having to retool for a new piece of equipment from another manufacturer may cost millions of dollars and impact revenue by far more than the retooling cost.

5. Transport issues

a. In Parts I – III of this series, we mentioned many areas that can impact transport issues like geopolitical and geo-economic concerns, but now we move on to other potential areas of design for resiliency.

b. Considerations:

i. Carrier reliability and the need to both competitively bid and adequately assess a carriers’ track record with redundancy plans in place.

ii. Carrier import and export controls – can the carrier adequately handle all issues so as to not impact your company’s reputation.

iii. Country-in and country-out customs processes and control.

iv. Regional theft and insurance issues. This is a high priority in today’s world. Take, for example, the ships hijacked by Somali pirates – what a cost!

v. Carrier and forwarder’s ability to deal effectively with unpredictable local bureaucracy.

6. Plant capacity issues

a. Interesting enough, a large part of this harkens back to our article on demand. The wrong demand statement can create massive corporate problems in plant capacity:  if projected demand exceeds actual demand, you purchase too much capacity, your manufacturing cost exceeds your target cost and your profit margin falls. If the opposite condition occurs, you are short on capacity, you risk losing potential customers, and subsequently impact the revenue of your company.

7. Plant structural and infrastructure issues

a. As the reliance on suppliers propagates, so does the supplier’s reliance on low cost subcontractors.  What may be financially beneficial, in reality, adds to the risk and decreases the overall reliability of the supply chain. Recent events in Bangladesh certainly caught Wal-Mart and other retailers by surprise when in the aftermath of catastrophic factory fires and building collapse, it turned out that suppliers used unauthorized subcontractors housed in substandard factories.

b. The risk could also be lurking underground as the result of overloading of the floor/roof or settlement of the foundation soils or a combination of both. 

8. Human issues

a. It is important to recognize that every crisis is a human crisis. Too often, the human factor is as much at the center of a crisis root cause as at the epicenter of response and recovery.

b. Crisis management plans without a robust emphasis on people as a key to a recovery seldom lead to effective situational control or durable recovery. Lessons learned from the Foxconn suicide tragedies and labor unrest underscores the impact of the human factor on the supply chain.

Many strategies exist for managing these issues, but they must all be taken into account when designing a resilient supply chain network in order to minimize risk to your company. Process discipline and efficiency, appropriate inventory tracking and metrics, geo concerns and risk analysis, second source capabilities, inventory postponement strategies, labor force quality, quality returns policies and so on are all measures that need to be “factored” in a manufacturing strategy to help reduce risk and create resiliency.

Review Parts I – III in this series:

Supply Chain Resiliency – A series of short articles – Part III: Source

July 12 2013 – The supply chain is made up of a series of highly interrelated and dependent activities. Sourcing is complex due to geo-economic and geopolitical risks, and climate challenges along with country specific rules, laws and regulations. Sourcing challenges also exist due to single supplier issues, poor vendor compliance and lead time issues.

Demand Planning – Part II of IV in Supply Chain Resiliency
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