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Very early in my supply chain career, I had a boss who had an expression: “When certain news about parts shortages becomes public, you know that the crap has hit the fan.” That was way before the existence of Sales and Operations Planning processes.
In a span of just a few days, two major financial media publications, The Financial Times and The Wall Street Journal, featured articles reporting on how select parts shortages are affecting major manufacturing companies, and in some cases, their financial results.
The FT article, Supply chain woes threaten global recovery, (free preview account may be required) expresses a concern that big manufacturers could be held back in their financial performance by their inability to secure vital components from weakened supply chains. The article cites a recent survey by MFG.com noting that: “Some 51 per cent of big US manufacturers said they experienced “significant supply chain disruptions” in the second quarter, while 42 per cent of small and medium-sized suppliers said they had received queries or work from larger companies in need of urgent assistance because of supply chain problems…” Shortages appear to be particularly affecting electronic components across multiple industries. Companies such as Boeing, Caterpillar, General Electric and Volkswagen were each cited as having challenges. In our Supply Chain Matters Q2 Global Supply Chain Snapshot of global manufacturers, we also picked-up on GE’s and others’ messages of select parts shortages potentially impacting this quarter’s results.
The WSJ article, From Snowmobiles to Cellphones, a Scramble for Parts, (paid subscription or preview sign-up may be required) further notes that companies have had to reconfigure offered products due to persistent supply shortages. It notes that shortages of transistors, capacitors and integrated circuits became pronounced in the first quarter, and persist in the second quarter. Telefon AB L.M. Ericsson indicated that shortages cost the company $400-$550 million in sales and delayed shipments, and Royal Phillips Electronics, Polaris Industries Inc. Motorola and Whirlpool are also mentioned as being impacted. Motorola CEO Sanjay Jha summed it best noting that his company is scambling in a “constrained environment”. Companies utilizing current hard-to-find components are seeking their own fixes which include offering customers different features or alternative components and/or technologies.
This news of critical parts shortages is not a surprise to the supply chain community. Our community deals with these very problems every day. The fact that they have now reached global visibility, however, is an important sign that now, more than ever, is a critical time for education of senior management on the importance that an integrated Sales, Operations and Inventory management process can have in the ongoing managing of this constrained environment. I would hasten to add that it also reinforces the need for active participation from Finance, with integration to the company’s financial planning process, or active participation from Product Design and Management to provide alternatives to other components.
As a community, we sometimes get accused of placing too much emphasis on the importance of the S&OP process. Some may wrongfully argue that it may be merely a process to drive consensus around “bad news”. To the contrary, in the current supply and capacity constrained environment, particularly concerning the impact to the ability of smaller suppliers to scale, the S&OP process is critical towards addressing cross-functional plans and strategies to support a sales plan. The other take-away message is that change will be a constant through at least the remainder of this year, and the term “agility in the supply chain” has even more criticality.
Senior management does not relish news stories about how parts shortages impacted results. They instead favor stories on how the supply chain overcame difficult challenges. Now more than ever, fill-in the white space for your senior management team.
Too much S&OP? or not enough S&OP? or not enough visibility to the entire supply chain? or cutting back too far on forecasts or…..?
As you point out shortages in the supply chain are not new, but the current level appears unusual. There is rarely a simple answer or solution. I believe S&OP is a critical piece of the solution but it must have top management participation and commitment as well as a full set of tools. You can give us the brand by brand rundown of the systems required, but I think you need (in addition to basic S&OP):
Global visibility to supply chain from customer to raw materials (which may be 3 or 4 “steps” or suppliers’ suppliers to get there)
Inventory optimization capablility
Forecasts that are well reviewed for upside
Industry analysis for all components – this is more than just visibility as it looks at trends, capital investment, other users of your components, etc. – for example if iPod uses the same components as your game or medical unit you could be in for trouble or excesses
In addition you need all the usual DFSS, flexibility in all suppliers and production lines, preferred parts controls, etc.
As you say – Easy to discuss, not easy to do!