How to advance digital transformation to build supply chain resilience

Intel CEO Patrick Gelsinger recently said, “Chip shortages cost the US economy $240 billion last year, and we expect the industry to continue to face challenges into at least 2024.”

Ford, GM, and Nissan are among the automakers still struggling with the damage from the chip shortage, including billions in lost sales, lost production, and stagnant operating profits. AlixPartners reported that global automakers could face $210 billion in lost sales in 2021 due to chip shortages, and AutoForecast Solutions said the industry would be missing more than 2.2 million cars worldwide by mid-2022.

Chip shortages and volatility have caused some medtech companies to miss their first-quarter revenue forecasts, according to analysts at William Blair. And a “double-digit de-commitment” from a semiconductor supplier left medtech company ResMed facing “an enormous shortage of equipment.”

The chip shortage kept several potential CES exhibitors away from January’s massive consumer electronics show in Las Vegas. Gary Shapiro, President and CEO of the Consumer Technology Association, stated, “We’ve heard from exhibitors who don’t attend because they just can’t get their product, they can’t put their prototypes together.”

So, the economic impact of challenges in the electronics supply chain is well documented.

Look at the healthy demand

The procurement lead times show that the procurement markets are still restricted and will continue to struggle with restrictions into next year. Supplyframe Commodity IQ says more than 70% of lead times will increase by Q1 2023. Despite recession fears, the outlook for new global design cycles, growth and demand remains positive.

The Creating Helpful Incentives to Produce Semiconductors (CHIPS) bill, which the President’s top economic advisors are pushing for and Congress is working to provide funding for, could provide a remedy to meet this growing demand. But it could take a long time to work out the details, get new chip manufacturing facilities up and running, and get the chips to market.

Meanwhile, many companies are still struggling to build the business case and achieve the right level of investment internally to respond to chip shortages and overall volatility.

Increase your thinking

Today’s challenges require business leaders to expand their thinking about supply chain issues and business resilience. To do this, they must consider how the day-to-day challenges of overburdened teams and immature business processes that keep employees in firefighter mode looking for the electronic components they need affect their business. Then they should analyze how to achieve a higher level of understanding to get resilience right, from product design through manufacturing and supply chain, as product volumes increase.

It’s not just about looking at how long it takes to develop a new product or what the ramp-to-volume assumptions are once a product hits the market. Organizations also need to know the full process cycle time across all business functions to identify new supply chain risk.

And they should figure out how to make internal compromises faster so they have the best possible response to identified risks. Speed ​​and agility allow a company to face the same supply and demand uncertainty and volatility as its peers, but to react faster than the competition.

However, departmental silos are a significant obstacle to getting there.

Look beyond the cost cap

Silos lead teams to focus only on their departmental goals. Engineering may focus on the efficiency of new product throughput, but not on the overall profitability and success of products after their introduction. Procurement manufacturing may be too focused on cost cutting and may not get credit for investments in resilience that translate into capture of new revenue or market share. And most commercial business unit teams are not fully responsible for the cost of delivery lead time, expedited freight and related considerations as they have been instructed to sell based on a standard product margin assumption.

Achieving incremental cost reduction goals and improving production throughput efficiency through Kaizen events is great. But companies have to break away from this pure cost orientation.

Come together to work together

CEOs, Chief Operating Officers and Chief Financial Officers are best placed to provide the end-to-end coordination within an organization to bring about this change. But these senior leaders need leaders across engineering, procurement and other teams to advocate for change.

However, because there are so many competing priorities, the individual initiatives identified within these different groups or functions may not receive funding. However, it is easy to prioritize digital transformation efforts to enable supply chain resilience when you take a collective approach.

Engineering, procurement, and supply chain teams all need to sit around the same table if companies hope to make meaningful progress toward their supply chain resilience goals. Commercial business leaders may offer additional perspectives. Together they can help to formulate and implement strategies for building resilience.

Align yourself with goals and incentives

Together, they should work with top leaders to ask and answer the following questions: What does the organization see as a positive outcome? What metrics and incentives will encourage sourcing and procurement teams to achieve these results? What is the right level of investment to onboard and qualify multiple suppliers instead of just one for each component? How can the business move from annual sourcing events where teams are only judged on cost cutting to more frequent engagement as market conditions change?

Having multiple sources of supply and alternative suppliers means higher average costs. But the investment is worth it. Of course, the cost of lost revenue if you don’t get this right is significant.

Make the switch and move on

Study by Siemens Lifecycle Insight says investments in digital transformation pay off. This study states that the most progressive companies see a 10% increase in projects that meet or exceed revenue targets and a 9% increase in projects that meet or exceed margin targets.

One digital transformation initiative progressive organizations are pursuing is looking inside from the outside so they can better respond to the rapidly changing world. To that end, companies need new forms of intelligence to enable better supply chain visibility and collaboration. According to McKinsey & Co., more than 90% of companies say they want to improve their supply chain resilience, but only 2% of companies say they have the visibility they need.

Companies that don’t invest in building supply chain resilience now will lag behind the competition when things start to stabilize in 2023 and 2024. And it will be extremely difficult for them to build these skills if they are chasing after everyone else in the market.

It’s time to face the reality that lengthy, linear, siled approaches to product development and sourcing no longer work. In today’s world, you need to build supply chain resilience, and that’s a company-wide initiative. This allows you to act faster to make the right trade-offs on inventory, demand prioritization, and other factors. When your competitors are chasing components due to external supply fluctuations, you can accelerate your design cycles by using available components to produce equivalent products and meet demand.

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Richard Barnett is Chief Marketing Officer and SaaS Sales Manager at Supplyframe Inc., a leading provider of design-to-source information for the global electronics value chain.

https://supplyframe.com