How to advance digital transformation to build supply chain resilience

Intel CEO Patrick Gelsinger recently said that “the chip shortage cost the U.S. economy $240-billion last year, and we expect the industry will continue to see challenges until at least 2024.”

Ford, GM, and Nissan are among the automotive companies that are still dealing with the chip shortage damage – in the form of multi-billion-dollar revenue losses, production stoppages, and flat operating profits, among other problems. AlixPartners reported that global automakers could expect to lose $210 billion in 2021 revenue due to the chip shortage, and AutoForecast Solutions said that as of mid-2022, the industry was short more than 2.2 million cars worldwide.

Chip shortages and volatility have led some medical device companies to miss first quarter revenue forecasts, according to analysts at William Blair. And a ‘double-digit de-commit’ by a semiconductor supplier led medtech company ResMed to face “a huge shortage of devices.”

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The chip shortage kept several would-be CES exhibitors away from the giant consumer electronics show this January in Las Vegas. Gary Shapiro, president and CEO of the Consumer Technology Association, explained: “We’ve heard from exhibitors that are not participating because they just can’t get their product, they can’t get their prototypes together.”

So, the economic impacts of electronics supply chain challenges have been well documented.

Consider the healthy demand

Sourcing lead times show that supply markets remain constrained and will continue to grapple with constraints into next year. Supplyframe Commodity IQ indicates that through the first quarter of 2023, more than 70% of lead times will increase. Despite that and fears of a recession, the outlook remains positive for new global design cycles, growth, and demand.

The CHIPS (Creating Helpful Incentives to Produce Semiconductors) Act, which the U.S. President’s top economic advisers are pushing and for which Congress is working to allocate funding, could provide some relief to help address this growing demand. But it could take a long while to work out the details, get new chip fabrication facilities up and running, and bring the chips to market.

Meanwhile, many companies are still struggling with how to make the business case and get the right level of investment internally to respond to the chip shortage and broader volatility.

Elevate your thinking

Today’s challenges call for business leaders to expand how they think about supply chain concerns and business resilience. To do this, they must consider how the day-to-day challenges of overloaded teams and immature business processes, which keep employees in firefighting mode chasing needed electronics components, are impacting their business. Then they should analyze how to achieve a higher level of understanding to get resilience right, from product design all the way through to manufacturing and supply chain as products ramp in volume.

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 is released. Companies also need to know the overall process cycle time across all business functions in order to detect a new supply chain risk.

And they should figure out how to make faster internal trade-offs so they have the best possible response to identified risk. Speed and agility enable a company to face the same supply and demand uncertainty and volatility as its peers, but respond faster than the competition.

However, departmental silos are a key barrier to getting there.

Look beyond cost containment

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 once they are introduced. Procurement manufacturing might be overly focused on cost reduction, and it might not get credit for investing in resilience that translates into capturing new revenues or market share. And most commercial business unit teams are not fully accountable for the cost of supply lead time, expedited freight, and related considerations because they have been instructed to sell based on a standard product margin assumption.

Meeting incremental cost reduction goals and improving manufacturing throughput efficiencies through Kaizen events is great. But businesses need to break away from this cost-only focus.

Come together to collaborate

CEOs, chief operating officers, and chief financial officers are in the best position to do the end-to-end coordination within an enterprise to make that shift happen. But these top-tier leaders need leaders within engineering, procurement, and other teams to make the case for change.

Yet because there are so many competing priorities, the individual initiatives identified in those different groups or functions may not get funding. However it’s easy to make digital transformation efforts to enable supply chain resilience a priority when you take a collective approach.

Engineering, procurement, and supply chain teams must all have a seat at the table if organizations hope to make meaningful progress with their supply chain resilience objectives. Commercial business unit leaders can offer added perspective. Together, they can help formulate and execute strategies to build resilience.

Align on goals and incentives

Together, they should work with top leaders to ask and answer the following questions: What does the business consider a positive outcome? What metrics and incentives will encourage sourcing and procurement teams to achieve those outcomes? What is the right level of investment to onboard and qualify multiple suppliers, rather than just one vendor, for each component? How can the business shift from annual sourcing events in which teams are judged solely on cost reduction to engaging more frequently as market conditions change?

Having multiple sources of supply and alternate suppliers comes at a higher average cost. But it is worth the investment. Clearly, the cost of lost revenue by not getting this right is significant.

Make the shift and move ahead

Siemens Lifecycle Insight study says that digital transformation investments pay off. This research says most progressive companies show a 10% increase in projects that meet or exceed revenue targets and realize a 9% increase in projects that meet or exceed margin targets.

One digital transformation initiative that progressive businesses are pursuing is taking an outside-in view so they can better respond to the quickly changing world. For this, enterprises need new forms of intelligence to provide greater supply chain visibility and collaboration. More than 90% of companies say they want to improve their supply chain resilience, McKinsey & Co. reports, but only 2% of companies say that they have the visibility they need.

Businesses that don’t invest in building supply chain resilience now will find themselves behind the competition when things begin to stabilize in 2023 and 2024. And it will be exceedingly difficult for them to build those capabilities when they’re chasing everyone else in the market.

It’s time to face the reality that lengthy, linear, siloed 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 will allow you to move more quickly to make the right trade-offs related to inventory, prioritization of demand, and other factors. When your competitors are chasing component parts due to external supply variability, you can accelerate your design cycles by using available components to manufacture equivalent products and meet demand.

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Richard Barnett is the chief marketing officer and SaaS sales leader at Supplyframe Inc., a leading provider of design-to-source intelligence for the global electronics value chain.

https://supplyframe.com