De-risking supply chain: Why dependence on vendors with single manufacturing unit is not preferable
For the first time in living memory, the global economy has been shaken to its core. With progressive lockdowns being rolled out in various countries during the initial months of the Covid-19 spread, the movement of goods screeched to a virtual halt. More than six months into the Covid-19 pandemic, the fragility of conventional supply chains is exposed to the world. An almost abrupt drying up of demand coupled with the supply side freeze led to uncertainties in prices, and a cash flow crunch that no company, large or small, could’ve anticipated for. No industry, geography, or channel was unaffected by the supply chain disruption.
For EPC companies, the challenges have been even more complex. With dependence on multiple vendors, some of them are sole suppliers for specialized equipment and tools, deliveries have disrupted from these suppliers, triggering a cascading effect on ongoing and planned EPC projects around the world. The manufacturing sector has been hit particularly hard due to the nature of work involved that doesn’t lend itself to remote working. Even with the easing of lockdowns across geographies, the twin challenges brought about by a shortage of skilled labour and the need for workplace safety have meant lower production. This has impacted the EPC business, which depends on a network of specialised vendors. Continued throughput of essential equipment and components is vital for meeting project deadlines.
A major lesson from this crisis has been in how companies need to rethink their supply chains to factor in unexpected contingencies of the kind we are currently faced with. To be better prepared for such unprecedented crises going forward, companies must revisit their risk mitigation strategies based on their current experience. To begin with, safeguards will have to be built in during the contract finalisation stage, based on decisions such as single or multiple vendor-based strategy and scope of conflict areas, among other supply chain risks. As the current situation has shown dependence on vendors and suppliers with single-location manufacturing is evidently not a good idea.
Where feasible, companies could look at sourcing capital goods from large suppliers with globally distributed manufacturing operations, so that shipments can be arranged from the most appropriate location, when the need arises. The same holds for a single vendor or sub-vendor contract. While there is no doubt that it helps cultivate long-term relationships, and leads to better pricing, lower administrative costs and smoother integration with a company’s supply chain, single-vendor strategy could backfire during unforeseen global contingencies. A more pragmatic approach, therefore, would be to engage with two or three sub-vendors in different geographical locations to minimise the impact in case of any unexpected disruption in supply.
The journey towards creating a robust SCM model will also mean updating existing inventory policies, planning parameters, and building robust digital supply networks instead of the traditional linear models. As the business environment evolves and adapts to the new realities of the pandemic, risk analysis and business continuity plans will emerge as key elements in the finalisation of supply chain contracts. Companies will increasingly need to develop new and more scientific approaches to re-assess customer demand, improve forecasts, and align operations. This will help to prepare the groundwork for a return to business-as-usual operations over the course of the next year or more.
Technology has been at the forefront of supply chain transformations for some time now. Smart SCM models are enabling a new breed of supply chains in a new digitally connected world. Linear supply chains are giving way to digital supply networks (DSNs) where functional silos within organisations are being broken down to bring in better connectivity and transparency. These networks are helping shape the new-age business ecosystem by enabling end-to-end visibility across the value chain and allowing deeper levels of collaboration between stakeholders. Importantly, DSNs are armed with artificial intelligence (AI) and machine learning capabilities to anticipate disruptions and respond accordingly in real-time.
New digital tools such as the Internet of Things (IoT) are bringing in greater agility, transparency, responsiveness, consistency, speed, and efficiency into legacy supply chains, while helping build new ones for competitive advantage in the future. The promise of such smart SCM models extend into weeding out inefficiencies in the system, streamlining operations, and improving resilience in the supply chain. That is the eventual, and desirable goal for any business organisation.
Rajendra Khandalkar is Group SCM Head at Sterling and Wilson Pvt Ltd. Views expressed are the author’s personal.