As COVID-19 continues to spread across the globe, chief procurement officers (CPOs) of manufacturing industries, automotive original equipment manufacturers (OEMs), and suppliers are under relentless pressure to identify cash out opportunities. Re-balancing the supply chain and risk management strategies are crucial to managing the COVID-19-induced economic disruption. Listed below are five tactical strategies to help organizations manage their supply chains during the ongoing pandemic:
Identifying cash flow opportunities
Typically, a large organization has contract and purchase orders with multiple legal business entities of a supplier organization spread across multiple IT systems such as SAP, or even legacy ones. Using multiple systems limit cash out opportunities like vendor consolidation, payment terms rationalization, duplicate invoice payments, disputed invoices, as well as early and advanced payments. Organizations can find such opportunities using analytics, artificial intelligence, and machine learning tools. For instance, a manufacturing company that has capacity to spend $1 billion deployed automation to classify items in a six-level taxonomy and enabled multi-dimensional analysis, resulting in up to 17% hard savings.
Managing supply chain risks with absolute cost to company
To tackle and identify supply chain risks, organizations must go beyond total landed costs and focus on the absolute cost to company. The reason: absolute cost takes into account the supply chain risks that are unique to source (from where parts are sourced), destination (where parts are finally fitted into), and the nature of the parts, rather than just focusing on total landed costs. For instance, if sourcing is done based on total landed costs from China for a plant in Michigan, a disruption such as engineering changes or a natural or a health calamity can erode all savings. So, how can an organization identify such risks and plan during the sourcing process? They must develop their own costing model in the context of the risks they face. For example, an auto OEM defines supply chain risks as expedited shipments (premium freights), cost of obsolescence, and cost of disruption in manufacturing plants. An analytical hierarchy process model can allow the OEM to assign costs from historical data. In addition, organizations can also invest in simulation models to arrive at the absolute cost to company.
Ensuring flow of materials with less inventory
Today, most auto OEMs are looking to match their production rate to the true market demand. Organizations can implement demand driven material requirements planning (DDMRP) to measure the steady consumption of standard commodities such as fasteners, closures, oil, or greases. DDMRP helps organizations utilize actual customer demand and replenish daily usage of products to create accurate inventory buffers. This helps firms to rapidly respond to real customer demands through product availability at the right time and at the right place. To illustrate, a tier-1 North American auto company reduced its inventory by 25% by deploying DDRMP-based planning and execution.
Maximizing returns from excess inventory and scrap
Most organizations have manual and ambiguous processes with regard to scrap, excess inventories, and obsolete materials. Even returning excess or unused commodities or selling it back to the original supplier results in 10-20% loss in value to the OEM. Organizations can consider e-marketplaces such as mjunction to dispose of certain commodities such as steel while extracting maximum value from scrap and excess inventories.
Reusing tools or containers for new product releases
Vendor tooling is one of the high value capex items owned by OEMs but is typically used in suppliers’ factories. OEMs, therefore, don’t have visibility in the tooling lifecycle such as determining the residual life of the tool, which can hinder re-use of the tool for new product programs and result in additional capex spend. CPOs can influence product engineering to reuse tooling by providing visibility in the tool lifecycle. Investing in an internet of things-based tooling management system, with appropriate sensors, can provide relevant data points to the cloud, enabling firms to gain visibility on tooling and supplier footprint.
Disruptions are bound to happen in global supply chains. Organizations that leverage the right cash flow strategies to minimize the impact of such disruptions can increase rigor in their operations, resulting in enhanced customer experience and increased revenues.