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How coronavirus changes manufacturing supply chain spend and inventory management

Every manufacturer feels pressure from the business to drive cost out from current product portfolios.

By Mark Zetter

As manufacturers emerge from an unprecedented global lockdown, vendor inventory management systems are facing scrutiny in the face of the coronavirus pandemic. Promises of lean manufacturing are leaving electronics OEM equipment manufacturers with massive write-downs.

Talking with our OEM clients and an influx of OEM inquiries the past few weeks reveals innovation for these companies has stopped targeting Industry 4.0 plans, which were originally projected looking out four and five years.

Covid-19 is causing a hard reboot of how manufacturing supply chains are being managed.

Companies, for the first time, are learning to truly rely on remote technologies and human nature. Even some of the top manufacturing executives who fought day in and day out to maintain order and control find themselves succumbing to native traits and unable to drive, or focus, on what to solve.

Meanwhile, this will be the focal point for others who see it as their time to shine, take the spotlight and rise to the occasion and locate future or new means to tackle program risk in a time when no one seems to have a roadmap.

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This is playing out directly across the supply chain as discussions with suppliers and contract EMS providers like Jabil, Foxconn, Pegatron, New Kinpo, Flex…are no different. They’re also siting on billions of dollars of inventory because their supply chain procurement systems don’t have the transparency they needed (and were promised) while their OEM customers are circling their wagons in defense. (Read: How EMS manufacturers raise OEM quote prices by incorrectly calculating labor and process fees)

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In the non-traditional markets, tier-3 auto suppliers are the ones freaking out most because they typically always overbuy.

And, while inventory write-downs will be the career downfall of some professionals, all of this bad inventory planning and the excesses should bring about a heightened focus on better supply chain planning moving forward.

Top-down thematic focus on spend

One underlying theme is consistent with every discussion these past few weeks; boardrooms in manufacturing companies are carefully trying to revise and formulate strategies focused on containing material spend with unit cost reductions (savings) and, faster initiatives toward more reliable just-in-time (JIT) inventory management.

Of noteworthy importance – amidst this tighter spend mentality – some questions and comments from manufacturers now second-guessing their enterprise SaaS projects: “Where are we exposed the most with our plans still in place for the time being? Will [insert vendor name] support the new way of working after we get to a new normal? Meanwhile, many companies are revealing; We are no longer going forward with programs with [insert vendor name].”

Manufacturing budgets are being re-adjusted,
needing to justify costs.

 

To underline this manufacturing executive mindset, most manufacturers I talked with are rolling back two to three years, any progress they previously achieved toward Industry 4.0, because the risks they took to move forward with their programs has been thrown out the window.

Rethinking ERP’s failure of JIT

Traditional enterprise resources planning (ERP) is broken. It is only a means to collect data and now proven its not yet able to help solve problems of this day and age. Lets all agree, we are in a new era of supply chain management and we need new tools to truly solve Industry 4.0 challenges ahead.

In the ERP systems world of manufacturing, vendors SAP and QAD can typically be mentioned in the same discussions for consideration where, SAP is the industry goliath, and QAD is the last home-spun manufacturing ERP system, focused primarily on automotive. But even so, these vendors are still only just collecting the data which the customer provides them and then perform only some minimal value added capabilities.

Unfortunately, executives are confirming to me the virus has left manufacturing customers in every market sector, for both vendors (and customers of many lesser competing vendors), scratching their heads while customer exposure and losses are still being sorted out.

Large manufacturers can have 250,000 to 300,000+ vendors and suppliers in their SAP systems. What’s scary is manufacturers are now facing the realization their corporate resources planning initiatives were designed around SAP zombie screens with no real visibility into advance warnings for subtle disruptions in their supply chains.

Costly SAP and QAD enterprise projects, which can take 24 to 36+ months for deployment, are now being heavily reconsidered as manufacturers reassess their needs, asking themselves; Which projects do we shutter or pause? How much will it cost to finish implementing SAP vs moving forward with alternatives? Which programs do we green light once our new path forward becomes clear?

The question manufacturers should really be asking themselves; How does this ERP investment solve current business challenges? Does this solution support any cognition or only courier data from one role to another?

When I peer into their future I do not see serious consideration beyond meaningless zombie screen data capture systems and ideas.

Establishing baselines and moving forward

For some manufacturers, the fallout has left them focusing on $50 million in payroll costs that was previously ear-marked on SaaS project plans.

The reality for nearly every manufacturer I’ve talked with includes establishing new baseline expenses to be determined over the next six to nine months amidst program shrinkage and tighter cash control.

OEM manufacturers are focusing more on managing spend with increased analysis to increase program accuracies using whichever program monitoring systems manufacturers eventually choose to move forward with.

Manufacturers are now pressured to figure out how to save money from a profitability perspective, so they can begin to climb out of the hole. Manufacturing budgets are being re-adjusted, needing to justify costs.

In contract electronics, some EMS manufacturers are evaluating what is the likelihood of some current customers staying in business. OEM customers with single-market solutions might not be able to defend themselves adequately.

Every manufacturer is motivated to drive cost out from current product portfolios.

Electronics manufacturing supply chains are complex, with 1000s of variables. Yet there is currently little supply chain telemetry coming out and, little, reliable lead-time data coming out.

Even so, every supply chain executive is tasked with placing proper tent poles to better establish supply chain security and improve sourcing governance if they are to achieve real JIT and move toward Industry 4.0 objectives.

With supply chains re-setting, this is an amazing free-for-all for great procurement and category managers who know what they’re doing/need in the next six months to one year. Imagine how much aluminum Apple has already purchased.

Assertive decision makers armed with the proper tools are setting new initiatives comprised of three key steps over one year period, max.

For other manufacturers, they will continue with minimum programs as part of their ‘solution’ to help mitigate supply chain risk while leaving money on the table in vendor negotiations because they didn’t know any better.

Regardless of a more competitive environment brought on by a global pandemic, nearly every manufacturer faces risks of being overtaken in the market place.

Each day some other company (a competitor?) is asking; how are we adjusting to our revenue goals? Are we adjusting or rebooting properly? Is procurement and category management constantly identifying ways of driving MCOGs down with our EMS and ODM sourcing partners? How can we drive down our quoted pricing to get our strike price closer to EMS internal costs?




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