All News & Insights

ML Journal April 2022

The Shift to 4.0 Supply Chains

By Bart Huthwaite, Chris Zheng

Is Just-In-Time now DOA? Many manufacturers are now questioning whether JIT approaches are still valid in an era of continuing supply chain disruption.   

The supply chain disruptions of the last two years have led many manufacturing companies to question whether the pendulum has swung too far toward Just-in-Time (JIT) production processes, leading some to explore regional strategies enabled by expanding digital capabilities to improve agility and resiliency.

As part of these efforts, companies are now urgently reviewing their manufacturing and distribution footprints, analogous to the skeleton of their supply chain system. Similarly, they are also examining their sourcing strategies and rethinking where to source critical components and raw materials to improve supply continuity without sacrificing too much efficiency. Companies are also working to improve their supply chain processes, or the muscle of their supply chain system. Finally, companies are looking to better enable their supply chain strategies by investing in data, analytics, and information technologies to help improve decision making, comparable to the nervous system of a company’s supply chain system, constantly sending signals based on the latest information.

And just as in the human body, the connectivity between the skeleton, muscles, and nervous system of the supply chain is crucial to a company’s overall health and wellbeing. Developing more regional supply chain networks with more robust digital capabilities is now becoming critical for many manufacturers that want to stay nimble and responsive to today’s disruptive environment.

New Challenges, New Strategies

For more than 20 years, many companies followed the Toyota Way, identifying and eliminating waste wherever they could and moving as close to just-in-time production as possible. The past two years, however, have painfully highlighted the fact that this focus on efficiency has come at the expense of resiliency.

Since 2020, manufactures have gone from trying to minimize inventories to trying to increase buffers and find alternative suppliers for key components, all in an effort to meet agreed-upon service levels. Prior to globalization and the proliferation of the just-in-time approach, many manufacturers already had more regionally focused supply chain strategies that incorporated buffers across the supply chain, enabling companies to continue producing even if one region had been disrupted. There is now a shift back to that kind of approach.

“Many manufacturing companies are questioning whether the pendulum has swung too far toward Just-in-Time (JIT) production processes.”

Manufacturers now need to strengthen the process of executing on these supply chain shifts and explore how their strategies can enable them to do so. Here are some options for companies to consider as they reevaluate their approaches:

  • Mapping the supply chain: First and foremost, companies need to identify the critical components in their supply chain. Too often, many kinds of parts are treated equally when, in reality, a single part can shut down a plant, as far too many companies have recently experienced with semiconductors. This was exactly what Toyota, the innovator of the JIT method, did after a tsunami led to the nuclear disaster in Fukushima Japan in 2011. Amid that disaster, Toyota carefully mapped its supply chain and identified semiconductors as a weak link. This exercise led to Toyota increasing its semiconductor inventory, and the company was able to continue producing while their competitors’ vehicles stacked up in empty lots around assembly plants. Similar to the analysis of design and process failure mode effects, leading companies are now mapping their supply chains to identify failure modes and develop mitigation strategies.
  • Inventory segmentation: Concurrent to mapping their supply chains, leading companies are also rethinking their inventory management strategies. Historically, companies have sought to minimize inventory, especially focusing on removing slow-moving and obsolescent inventory. Today, though, companies struggling to meet agreed-upon customer service levels are rethinking their segmentation strategies to help address these problems.
  • Honing a plan for every part: With more clearly defined inventory segmentation strategies in place, manufactures are also developing more detailed replenishment strategies. While this has been going on for years, the disruptions of the pandemic have forced many companies to reassess product and process system parameters to improve planning accuracy.
  • Realigning the production footprint: Given that relocating production is a very difficult and capital-intensive affair, companies will more likely need to rethink their sourcing strategy, moving away from sole sourcing and just-in-time systems to having more inventory buffers and more regional suppliers. That might mean, for instance, that in addition to having suppliers in China, a manufacturer might also seek out suppliers in Mexico or in the United States closer to its North American markets. For companies using contractors, moving production may be easier, but it would likely still benefit them to diversify their partners geographically to reduce risk.

Central to all these efforts will be manufacturers’ ability to move and adapt with their suppliers because it’s unlikely that companies will ever again exist in their own vacuum. If the digital infrastructure represents the nervous system of a business, tech-enabled solutions will be essential to companies that want to develop the agility and adaptability necessary to thrive in this new landscape.

Digital Solutions

Leveraging digital technologies to drive visibility into supply chains is critical for nimble operations. Imagine being able to detect a risk event long before it becomes an issue. New and innovative technologies such as predicative analytics, big data, and digital twins have opened up new possibilities on this front.

Most companies only have clear visibility into their tier-one suppliers—that’s one of the many factors that led to original equipment manufacturers (OEMs) being caught off guard by the current semiconductor chip supply crisis, and one of the endless recent examples of why it’s crucial for manufacturers to understand the critical components in their value chain even if those components exist at a lower tier. Before the pandemic, some automotive manufacturers had zero visibility into the demand and supply dynamics of semiconductors they purchased as part of a larger sub-assembly.

While there have been major advances in analytics to help monitor supply chain risk across tiers, the analytics still hinge on having a good understanding of all the nodes in your supply chain and how they interact with one another. Once a supply chain has been mapped, analytics, new risk management and planning solutions can help to predict and mitigate risk through better scenario planning and optimization. More companies have begun to monitor and evaluate their suppliers with real-time data to assess their quality, on-time delivery, financial health, production capacity, and impacts from relevant geopolitical issues.

“Most companies only have clear visibility into their tier-one suppliers—that’s one of the many factors that led to OEMs being caught off guard by the current semiconductor chip supply crisis.”

Along with analytics, businesses are increasing the use of Internet of Things technologies to build digital twins of their manufacturing processes. These digital simulations can improve visibility, allowing for better management of shop floor operations and better engineering and manufacturing processes.

Improved warehouse management and transportation management systems are also helping manufacturers to improve supply and distribution visibility, providing the data necessary to make more informed business decisions. These solutions are also helping to automate the implementation of the optimal scenario through improved communications and workflow management.

Finally, but perhaps most importantly, companies are investing to improve their demand planning capabilities through improved customer collaboration and forecasting. While recent historic data has made forecasting more challenging, manufacturers are increasing the use of econometric variables and demand planning solutions in their models to improve forecast accuracy. More businesses are leveraging external data to build out complex machine learning and artificial intelligence models to predict demand not just based on history, which would vary wildly looking at just the past two years, but also using econometric information. As such investments become more widespread, those businesses that fall behind in this area will face even tougher competition.

The Path Forward

Especially for middle market or smaller manufacturers, determining how and where to implement these technologies can seem overwhelming. Here are a few actions companies can take to start their journey to developing more digitally enabled supply chain networks:

  • Launch a strategic review to evaluate where the company is positioned on the risk continuum
  • Conduct a supply chain failure mode effects analysis, and use it to develop a plan for every part/component
  • Develop specific considerations and adaptive sourcing strategies for key materials

Breaking the approach up into these manageable projects can help give business leaders a clearer vision of how to ensure that the bones, nerves, and muscles of their supply chain operations are able to work cohesively together, and to work more effectively by leveraging new digital technologies.  M

Bart Huthwaite
is a Principal at RSM US LLP.

Chris Zheng
is a Principal at RSM US LLP.

View More