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.
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.
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.
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.
Reducing Coronavirus Led Supply Chain Disruptions Now and Building Resilience for the Future
Credit ratings agency Fitch that had earlier pegged India’s real GDP growth rate for FY 2020-21 at 5.6% has now projected that the disruption caused by the contagion of the Novel Coronavirus throughout an integrated global economy could slow India’s real GDP growth rate by 0.5-1%. This projection notwithstanding, visibility into the impact on the global economy has been hard to come by. Josef Oehmen, associate professor at the Technical University of Denmark (DTU), Engineering Systems Design Group asserts that the Covid19 pandemic has no precedence that businesses can point to, no personal experience that corporate leaders can count on, no historical data for consultants to call on and therefore: there is no risk-adjusted value for businesses to act upon.
In fact, not since the end of the Second World War have countries and corporations experienced a supply chain disruption of such global scale and magnitude coupled with loss of lives of such tragic proportions.Prof. Patrick Hanohan from Trinity College Dublin asserts that even if the death rate is as low as in the case of flu deaths due to effective containment, there shall be repercussions: supply chain challenges in the short term and weakening of demand and spending cuts in the intermediate-term.
Wading Through Troubled Waters Now: Mitigating the Supply Chain Disruptions Due to Covid19
Given the spread of the pandemic across the globe, several industry verticals in the manufacturing sector are faced with immediate supply chain challenges.
First, is the dependence of some of the world’s largest companies or their suppliers that either has supply chain and procurement exposure to quarantined areas across three major economies: China, Italy, and South Korea. A study published in the Harvard Business Review asserts that 1000 such companies or their suppliers own more than 12000 facilities in such quarantined areas. Industry verticals with the highest supply chain and procurement exposure to quarantined areas in China, Italy, and South Korea include automotive, industrial engineering and heavy machinery (2,730), high tech and consumer electronics (3,238), healthcare (1,562) and consumer goods(1,139).
Second, in the context of the lockdowns announced by several regimes across the globe to suppress the spread of the contagion, enterprises in industry verticals like life sciences, healthcare, pharmaceuticals, and medical devices that need to produce “essential goods” urgently have been affected adversely. Major categories of supplies of these enterprises procured from quarantined areas include packaging, personal protection, medical dispensers, sterilized dressing pads, cables, and active ingredients.
What Needs to Be Done Immediately to Minimize Supply Chain Risks?
Given the supply chain disruptions facing enterprises in the manufacturing sector, the following contingency measures may be deployed on a war footing to save the lives of people and ensure the availability of goods:
First, enterprises need to create a contingency organizational structure to respond to the situation with a central leadership team at the corporate level showing the way. The central leadership team may be supported by a customer response team and most importantly a supply chain planning and operations team.
Second, the central leadership team shall have to ensure visibility into layered supply chains. They can do so by creating a database of components that are “critical to the mission”, trace the origin and flow of procurement and explore substitute suppliers.
Third, the customer response team may be entrusted to objectively assess the available inventory, calculate quantities of spare parts and after-sales-stock to keep manufacturing up and running and ensure downstream supply chain mobility and distribution to customers.
Fourth, the supply chain planning and operations team may be tasked with ensuring the first ring of personal safety for people by providing personal protective equipment (PPE) and collaborating with people on the production floor shop, warehouses, and nodal points in the supply chain to regularly monitor infection-risk levels. Further, the supply chain planning and operations team can do well to engage in logistics planning, identify points of risk, ensure the safety of goods during transit through effective sanitization and packaging and push for faster delivery of goods.
Recovering from the Economic Impacts on Covid 19 in the Intermediate-Term
Coming out of the Coronavirus crisis, business engagements will likely to be transformed forever.
First, enterprises that sail through the crisis shall like to adopt some of the major elements of their contingency measures to create a supply-chain risk function team. Such supply chain risk teams may be entrusted with the responsibility to map supply chain risks continuously and provide objective assessments to aid decision making in the domain of supply chain management and oversee risk governance.
Second, moving forward it shall be imperative for enterprises to strengthen supplier collaboration and work with entire supplier ecosystems that can provide a de-risked, geographically spread out and diverse model for global procurement.
Third, in the aftermath of the Coronavirus crisis, as enterprises shall stagger back to a new normal, they should ideally invest in the digitization of their supply chains to augment efforts of the supply chain risk team to anticipate the road ahead. Given the impact that the pandemic has had on supplier collaborations and contract compliance and obligation management of the manufacturing sector, it shall make enormous good sense for enterprises to invest in early warning systems, forecasting tools and comprehensive contract automation software suites that leverage artificial intelligence and machine learning capabilities. Returns from such investments in supply chain digitization assets shall manifest in the form of predictability of supplier capacity, turnaround times and rational expectations of risk factors and thus enable them to adjust their position in the market with time at hand.
Parting Comments and Epilogue: A Window into Supply Chains Post Coronavirus
Even as enterprises across the global economy continue to grapple with the challenges of the Coronavirus pandemic it is still unclear what the supply chain of the future would look like. However, amidst all uncertainties, one thing is clear: business won’t be business as usual and those that survive shall have to look at the supply chain function through a completely different lens that shall resemble the challenges and solutions of the future.
As Prof. Hua Lee, from the Department of Information and Technology at Stanford Graduate School of Business has observed, it shall not be enough to know what’s happening in your supply chain. Enterprises would need visibility outside their supply chain, know the capacity of other suppliers and modes to deploy them immediately when needed. Operational hedging shall be a necessity in the supply chains of the future with global suppliers being managed by inclusive procurement ecosystems driven by vendor consolidation. Parallely there shall be a greater need to increase logistical flexibility, design alternate transit routes and expand the geographical spread of warehousing facilities.