COVID lessons: 5 ways to protect your manufacturing business from supplier risks

The COVID-19 recovery phase for businesses sits on the horizon as vaccines become available, meaning that manufacturers next year won’t have the crisis as an excuse if they fall behind in key areas like supplier risk that competitors already addressed or are upgrading soon.

During the lockdowns when supplier risk was highest, production and profits suffered because of miscommunications with suppliers and sluggish manual processes that caused manufacturing delays, a glut of inventory and costly shipping workarounds.

The coronavirus disruption has been a wakeup call for businesses to have resilient supply chains and digitally transformed procurement departments. CEOs now understand the need for agility across the whole business, and many have expedited plans to add technology that increases insights and improves communication with suppliers.

But the bottom line is that next year, businesses cannot lose time or money to inefficient processes and supplier risk. Other businesses are digitally transforming to prepare for future risks.

What did manufacturers learn? 5 areas of focus

Communication between suppliers and manufacturers has been key to surviving the coronavirus’ supply chain disruption, and SourceDay, a provider of ERP-to-supplier collaboration technology for direct materials, has shared some insights that it is seeing with its clients.

Let’s take a look at five tactical areas that businesses learned from the crisis, minimizing the risks associated with suppliers and the supply chain:

◾  Require Order Acknowledgements — One client noted that all late orders were ones that were unacknowledged by the supplier. Suppliers didn’t call or email or have another way to notify the manufacturer that the order could be filled on time or not.

The manufacturer said, “Not every unacknowledged order was late, but 100% of late orders were unacknowledged.”

Since being late costs money and affects production schedules, the business now requires suppliers to give an acknowledgment within 48 hours using the solution that connects their ERP to their supplier. It’s done with a click of a button, and the manufacturer can set a rule for any timeline it wants.

◾  Monitor Late Orders by Supplier — Keeping track of late orders is another cumbersome supplier risk matter. When dates change, it’s hard to manually keep track of the original promised date and to quantify how often suppliers miss. But it’s vital because some clients have found a correlation between late orders and manufacturing efficiency.

One manufacturer found that its manufacturing efficiency and on-time orders from suppliers hovered in the 80% range. With a goal of reaching 93% manufacturing efficiency by the end of the year, they focused heavily on preventing late supplier parts and watched manufacturing efficiency improve as a result.

So supplier communication here can have a material effect on your operations.

◾  Reduce WIP Inventory — This is work-in-progress inventory, and it can be a physical and a fiscal reminder that your process isn’t running smoothly with suppliers. If you have no way to easily communicate when a part will be late or when a partial order can go out, then you’re stuck holding costly materials and aren’t getting paid.

The technology solution is knowing when a part would be late so you could reorganize or change lead times and shipping plans. If you have better insights, you can focus on the exceptions, and you would know the estimated dollar value of savings vs the costs of holding excess stock. On top of that, if you know something is late, then you have time to adjust for it.

Chatsworth Products, which addresses IT needs with products and services, said it reduced WIP inventory 66% by having transparent communication with suppliers.

Chatsworth’s Spike McBride, Senior Director of Materials and Logistics, said: “We had eight to nine days of WIP in any given time. So, you can have damages, you can have parts that could be used for a quarter that could ship sooner. So, by cleaning that up and having two to three days of WIP on the floor, we could get more efficiencies. And quite honestly, you’re not stumbling over sub-assemblies on the floor. So just so many other benefits from that one metric alone.”

◾  Document Shipping Costs by Delivery Speed — This refers to a curious situation that some businesses found themselves in. The coronavirus crisis disrupted supply and demand — as well as shipping. In some instances, no space was available on cargo ships that could deliver their parts in time to meet deadlines, so businesses would ship just enough supplies by air until the boat could get there.

This costly workaround has been used for years, but the COVID crisis made it even more frequent and more expensive. And shipping capacity will be tight again next year — making delivery costs a problem that needs your attention in 2021.

Since there are more costs to track and more complexity in your logistics, businesses should do a post-mortem on the year and examine the average shipping costs by delivery method.

The cosmetics company Winky Lux found itself facing higher-than-forecasted demand and had to do the air/sea combo several times this year. They mentioned it might cost three times as much to ship something from China by air than by sea.

Nathan Newmann, COO & co-Founder of Winky Lux, said: “Just to give a context for anybody that doesn’t do this, it might be a couple of thousand dollars to ship by boat. And that same shipment might be $15,000 to go by air. So that is a huge, tangible cost that definitely comes up.”

Having technology tracking this can save time and money when assessing year-end costs.

◾  Automate the AP Invoice Matching Process — This is a key technology function that saves manual work and increases the chances for big savings. Our previous article focused on how manufacturers need a specific technology for automating AP processes for direct materials. That’s needed to drill down to the line level and reconcile invoices with multiple POs that contain an array of part numbers and partial orders. But the payoff comes in giving businesses the confidence that they aren’t overspending on supplier invoices. And it saves money by helping to get all of the early-payment discounts that are offered.

Next steps on supplier risk

Manufacturers must assess how their individual businesses can deploy these five tactical ways to prepare for supplier risk.

While we won’t face the same costly lockdown conditions next year, businesses that don’t learn from the pandemic’s harsh lessons will lose money if they don’t shore up their operations.

Time is money, and businesses don’t have a second to spare.

This Brand Studio post was written with SourceDay.