August 4, 2020

5 Priorities for CXOs to Unlock the Manufacturing Supply Chain

5 Priorities for CXOs to Unlock the Manufacturing Supply Chain

Is a turnaround just around the corner for the manufacturing supply chain in India? Insights from various manufacturing indices suggest that while aggregate performance continues to be sub-optimal, the upward plateauing of some verticals suggest that distant signs of recovery may not be too far away after all despite the weak sentiments prevailing now. The dip in the Nomura Business Resumption Index from 70 to 66 over the first fortnight of July, suggests the manufacturing engine cooling down. Despite the Markit PMI rising from 31 in May to 47 in June 2020, industry verticals have continued to grapple with challenges of constrained capacity, weak demand, contraction of the workforce and lack of alternate supplier sites for import substitution. Moglix Business is partnering with manufacturing enterprises to make sense of these emerging patterns and identify the priorities that CXOs need to address to unlock the manufacturing supply chain. Explore these top 5 priorities here.

Read:COVID19: The Three Phases of Recovery in Manufacturing

Map Supplier Clusters, Demand Centers and Labor CorridorsThrough the Pandemic

In India, manufacturing supply chains are highly intertwined and consist of a complex matrix of supplier clusters, demand centers, and highly concentrated labor corridors. CXOs in manufacturing enterprises need to map the exposure of their respective supplier clusters, demand corridors, and labor corridors to the contagion to identify their supplier downtime, time to recovery (TTR), and the spikes in logistics and supply chain management costs. One hundred thirty districts in the country account for 38% of manufacturing output, 50% of final private consumption, and 40% non-farm employment. Many of these districts are still in the red zones. These insights explain the contraction of output and the sub-optimal capacity utilization in the range of 28-63%. Moreover, 50% of truckers in the logistics and construction sectors come from just 15 of these districts. It explains why workforce deployment has continued to be 33-57% and why consumer demand is yet to pick up. 

Read: How to Reduce Coronavirus-led Supply Chain Disruptions

Track and Trace Opex Regularly Amidst Shrinking Revenue and Output

Keeping track of the OPEX and managing indirect and direct expenses is imperative to create new avenues of efficiency. The rise in direct and indirect costs facing manufacturing enterprises is due to higher overhead costs of safety protocols, loss of economies of scale due to a drastic reduction in volumes, high freight charges, and other logistic expenses, increased costs of raw materials, power cost and high costs of debt financing. CXOs in Indian manufacturing enterprises need to pivot their management of indirect costs on line items like MRO inventory, packaging materials, packaging design, maintenance, and interest payments on suppliers spend analytics through digital procurement platforms. Digital platforms that run on artificial intelligence and machine learning can enable CXOs to stay informed on evolving developments in the supply chain,  exercise higher control on strategic sourcing, and regularly track and trace OPEX from anywhere and at any time. 

Realign Supplier Networks to Facilitate Import Substitution

Manufacturing enterprises have continued to witness a decline in exports for four consecutive months during the pandemic. Trade wars and geopolitics have already weakened the global trading environment. The pandemic has caused further supply chain disruptions for several verticals like automotive, textiles machinery, leather goods, footwear, electronics, and electrical equipment. Consequently, these verticals have continued to register abysmal manufacturing output thus far. The erosion of trust in supplier networks with high exposure to one country calls for CXOs to explore import substitution opportunities for their strategic sourcing. While import substitution and realignment of global supply chains are strategic actions, Indian manufacturing enterprises need to avoid further procurement risks. CXOs need to explore strategic partnerships with local industrial suppliers through digital supplier collaboration models to achieve agility at scale in their import substitution efforts and hit the ground running.

Digitize Procurement Processes to Reduce Fixed Costs and De-Leverage

One of the significant challenges facing CXOs in Indian manufacturing enterprises is the resilience of their balance sheets and cost structures. Research suggests that fixed costs account for 20-35% of the total costs for Indian manufacturers due to a high CAPEX on investments in land, plant, equipment, and machinery.CXOs of Indian manufacturing enterprises need to rationalize costs in the short term while creating opportunities to move towards leaner fixed cost models in the long run. Leveraging digital models for the automation of cost centers like procurement organization, supplier collaboration, and quality control can enable supply chain leaders in manufacturing to transform fixed costs incurred on these functions into variable costs and achieve the targeted balance sheet impacts. At Moglix Business, we have seen enterprises that have migrated towards e-procurement models save up to 5% on direct and indirect costs. 

Read: What Does Procurement Transformation for the Next Decade Looks Like

Digitize Sales and Distribution Processes to Open New Revenue Streams 

The unlocking of the economy has shifted from a cold turkey and holistic approach to a more decentralized and localized one. The uneven spread of the contagion across regions in the country makes it difficult for Indian manufacturers to operate their sales and distribution functions. Technology penetration in Indian manufacturing enterprises is below 5%. One of the significant opportunities for CXOs in Indian manufacturing is to leverage digital B2B commerce models to restart the engines of revenue enablement while ensuring that sales and distribution people, distributors, and customers continue to collaborate from the protected environments of their homes. Research shows that OEMs and authorized distributors of industrial supplies that have leveraged digital B2B commerce models are likely to stay ahead of their contemporaries as the economy continues to move towards recovery gradually.