For most of us, we’re experiencing unprecedented economic challenges. The implications to the supply chain management profession are profound. We’ve gathered some of the industry’s brightest minds to discuss these challenges and seek innovative solutions. We hope you enjoy the Kinaxis Supply Chain Expert Series as we challenge these experts on these issues.

Clarence Chen
Principal
PRTM

Clarence is a Principal with PRTM Semiconductor and Electronics practice based out of Silicon Valley.  Clarence has over 19 years in supply chain management and operations across high tech and industrial manufacturing companies. His practice focuses on supply chain innovation and use of systems to enable strategic change.   Clarence is APICS  CPIM certified, and obtained his MBA from the University of California, Berkeley and a BSME from the University of Notre Dame.

Kinaxis: Most governments in the developed and developing world have announced stimulus packages, some more ambitious than other.

• Will this prevent the failure of certain manufacturing sectors, such as the automotive sector in the US?
• Are there some existing manufacturing sectors that will not require stimulus?
• Will the stimulus packages spawn new industry sectors, and how soon will these have an effect on the economy?

Clarence: The topic of stimulus packages is having a very real impact to the way global supply chains are operated.   In some countries such as China, the stimulus packages have been directed at spurring consumer purchases for white goods.    More often stimulus packages come in the shape of regulatory and compliance issues.   For example Country of Origin (COO) and Trade Agreements Act (TAA) represent real opportunities to enhance revenue streams.

TAA for examples limits federal purchases to US and other designated countries (DC) such as US Trade Free Agreement countries, or WTO Government Procurement Agreement countries.  For this to take into effect goods must be “substantially transformed” within these countries.  Often a key driver is country of origin.

What this means to the supply chain is a complex series of decisions of whether to locate local manufacturing in key countries to take advantage of these regulatory opportunities and capture revenue that would otherwise be lost.    Those companies with a global customer and manufacturing base are today analyzing the potential revenue enhancement opportunities, and the often higher cost of servicing this revenue.

Our clients at PRTM are now making capital investments to establish local manufacturing presence in key global markets.  In a regulatory environment that both seeks to promote trade and regulate, the impact to the supply chain will be additional complexity.  Making the right decisions at the right time will be key.

Kinaxis: Outsourcing has been widely adopted in the developed world over the past two decades.

• Will brand owners, in particular, continue to adopt contract manufacturing as a way to reduce overheads?
• Will the trend of using off-shore contract manufacturing continue, or will near-shoring and even local sourcing become more dominant?

Clarence: Outsourcing has matured in some industries more than others.   In electronics, outsourcing is the preferred model as it provides flexibility and removes the burden of capital investment and depreciation burdens.  The issue off-shore or near-shoring is becoming more nuanced as the economics of customer value chains converge.  When you couple several factors such as decreasing manufacturing conversion costs advantages in China, transportation costs, long lead times, against emerging trade stimulus drivers, the case for near-sourcing becomes more compelling.   Strategically located near-shoring can provide flexibility, tax advantages, and improved customer responsiveness which in turn enables revenue growth.

The question is not whether this is a trend or not.  The decision is very much dependent on which markets you serve, what product segments, manufacturing volume, and a careful analysis on the impact to margins.  The reality of today’s physical manufacturing footprint is that most of today’s supply chain still resides in Asia, at least in the electronics and high tech sector.    To near-shore such operations, there must be a compelling case for product postponement, in-region sourcing, couple with revenue capture opportunities you would otherwise not be able to capture.  If the margin equation does not deteriorate the overall company’s profitability performance, the case to near-shore must be investigated.

Kinaxis: As companies have outsourced, much to their consternation, their direct control of the supply chain has decreased.  They now need to participate in multi-enterprise supply networks.

• How do companies need to change their supply chain planning paradigm to compensate?
• With so little under the direct control of a company, of what relevance is a sales & operations planning ( S&OP) process?
• Are the advanced planning & scheduling (APS) and enterprise resource planning (ERP) solutions developed in the 1990’s still relevant?

Clarence: Operating multi-enterprise supply networks requires discipline in three key areas to ensure that the end-end supply chain performs.  The first is a focus by the brand owner or orchestrator of the supply chain to ensure the best demand signal quality possible.  Think of this as seeking to be a little less wrong with the forecast each cycle, and to understand the true nature of signal changes and inflection points.  To achieve this, the brand owner must assess multiple independent demand streams to develop its own opinion of the signal in order to effectively engage with those customers or channels that are providing the forecast.    Often a big mistake is for companies to be focused on a forecast sell-in signal versus the sell-through, which provides the better indicator of true consumption.

The second discipline is propagate that signal quickly and clearly across the supply chain and partners.  The signal quality often deteriorates as it passes from node to node, which each player in the supply chain adding or destroying value to the signal with their own interpretations.  The same collaboration with the customer is required with the supplier to ensure that right signals are transmitted quickly and that they are understood.  Companies can either generate an MPS signal across the supply chain, or have each node propagate the signal to the next.   In more innovative environments, we have helped clients with deep multi-enterprise supply chains develop pull signal mechanisms (Kanbans) to achieve Large-Scale Lean™.  This process removes signal noise, and maintains integrity towards true consumption.

The third discipline embodied in the earlier ones is to establish a collaborative relationship with all players across the supply chain, and put in place a set of performance metrics consistent with the brand owner’s objective and service level requirements.

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