Economic Uncertainty? Double Down on Innovation to Drive Cost Savings, Efficiency, and Resilience in Supply Chains
Pending recessions and economic uncertainty often restrain investments in “disruptive” innovation, as corporations tighten purse strings in a brace against potential setbacks. However, maintaining a mindset and commitment to “incremental” innovation is key to unlocking supply chain cost savings and efficiencies, especially during times of uncertainty. Innovation – even incremental innovation – can help companies optimize supply chains, save operational costs, and enable resilience, all while accelerating digital transformation.
We are living in uncertain times. Geopolitical conflicts and instability have overtaken the COVID-19 pandemic as leading risks to economic growth. Supply chain disruptions now round out the top three global risks, followed by volatile energy prices and rising interest rates.
Earlier this year, the International Monetary Fund cited supply chain woes as it downgraded its forecast for global economic growth for 2022 to 4.4% from 5.9%. More recently, the Federal Reserve has moved to tighten credit, while the Bank of England and other central banks have already lifted interest rates, sounding an alarm to stock markets from New York to Tokyo. Despite government efforts, businesses still face struggles in manufacturing and distribution.
Supply chain disruption doesn’t appear to be ending soon.
Disruption and uncertainty have become synonymous with the supply chain landscape over the last few years. According to QIMA’s Q3 2022 poll of 400+ businesses with international supply chains, 95% of companies have been impacted by various supply chain disruptions in 2022, where at least two-thirds expect these disruptions to continue or even worsen by the end of the year. To help address these issues, major retailers have added more capacity. For example, Amazon spent more than $164 million to construct new warehouse space last year, while Lowe’s, the home improvement retailer, spent more than $17 million, reported The New York Times. But it’s going to take more than just additional warehouses. Companies must look at end-to-end innovation to address supply chain disruption.
A new mentality is emerging in which productivity and profitability play a more prominent role. Companies look for ways to innovate toward growth and economic value during economic uncertainty. Confronted with the risk that profits will become harder to achieve in a weakening economy, companies are focusing on minimizing costly delays. To do so, many are looking to technology to strengthen visibility, resiliency and flexibility to minimize disruptions when outside events leave their supply chains vulnerable to risk. These technological solutions run the gamut from long-term planning to using automation and artificial intelligence (AI) to minimize supply-chain bottlenecks.
When uncertainty is the new norm: proactive vs. reactive?
Is your supply chain reactive, always fire fighting and dealing with new problems every hour and every day? Or is your supply chain proactive, having defined and implemented the strategies needed to be less vulnerable to surprises? The proper setup makes all the difference when your supply chain encounters a roadblock.
Reactive Supply Chain Strategies:
The reactive supply chain is often considered an unavoidable strategy. Late deliveries, supplier quality problems, equipment downtime, resource shortages, defective materials, missing inventory, manufacturing capacity and quality issues, demand fluctuations, natural or man-made disasters, etc., can all cause production and shipment issues. When this happens, typically, all hands are on deck to identify a quick solution.
What was once a more sporadic activity, the pandemic made reactive strategies center stage – demanding reactionary measures for companies everywhere. Every action focused on dealing with hour-to-hour and day-to-day fires and putting them out as quickly as possible before moving on to the next problem.
Types of reactive (or buffering) strategies include:
- Safety stock is one of the most common approaches to increase flexibility during demand and supply uncertainty is when an additional quantity of an item is held in inventory to reduce the risk that the item will be out of stock. It’s a reactive strategy because this approach responds to the current level of uncertainty without any attempt to reduce it proactively.
- Capacity buffer, sometimes used as a substitute for or a complement to safety stock, a capacity buffer is when a company sets capacity higher than average demand (or a lead time buffer) that allows them to avoid mass shortages during busy periods. It enables variability in planning and flexibility during uncertainty.
- Supplier backups are used because working with a single supplier is risky, therefore, companies often maintain multiple suppliers to help guarantee product availability. However, in most cases, this approach can also increases costs.
- Safety lead times are buffers companies add to the time it takes from when a purchase order is created until the goods are delivered to the customer. These times help companies mitigate against changes resulting from accidental errors and delays. They also allow companies to increase material availability and be more flexible in demand response.
With uncertainty being the only constant, reactive strategies alone will become too stressful, inefficient, and costly to maintain over time. As a result, many companies that have relied on this method are now asking a critical question: how much of this reactivity could have been, or can be, avoided through more robust supply chain strategies?
Let’s dive in……
Proactive & Redesign supply chain strategies.
Often, I hear clients say that they are too busy fighting fires to do the work to improve processes so that they can spend less time fighting fires. In the end, they continue to spend all their time fighting fires.
When done right, proactive and redesign strategies can increase supply chain flexibility by proactively redesigning products, processes, and the supply chain network and negotiating more effective relationships with trading partners.
Types of proactive and redesign strategies include:
- Component commonality is when the same components are used for multiple products. While the end goal is to improve efficiency, flexibility, and responsiveness when uncertainty arises, increasing commonality can have positive and negative cost effects, so identifying an optimal commonality level is required.
- Postponement is considered a redesign strategy. It is the deliberate action to delay the final manufacturing or distribution of a product until receipt of a customer order. Products are rapidly customized from stocks of almost complete products, often close to customers. A strategy for rapid response to changing market conditions, it reduces lead times, cuts working capital, and minimizes waste.
- Risk pooling involves using centralized inventory instead of decentralized inventory to balance times when demand is higher than average at some retailers vs. others. If each retailer maintains separate inventory and safety stock, a higher inventory level is needed than if the inventory and safety stock are pooled. Risk pooling requires less overall inventory, making it cheaper to operate with the same service level.
- Subcontracting/outsourcing is the use of external capacities to create flexibility in dealing with uncertainty because it can reduce the risks of capacity utilization and amortization, especially when demand is uncertain, irregular, low, and/or temporary.
- Flexible supply contracts are proactively negotiated flexible procurement contracts that can provide supply flexibility, ensure stability for suppliers, and help buyers better respond to demand fluctuations.
- Lead time reduction involves removing unnecessary tasks, waste, and waiting time from different processes. With shorter lead times, companies can better respond to demand uncertainty. Proactively reducing lead time may be done by redesigning procurement processes, changing supplier selection focus from cost to speed, or better lead time management.
- Setup time reduction is the period required to prepare a machine for its next run after it has finished producing the last part of the previous run. This strategy helps reduce a company’s manufacturing costs while increasing flexibility to meet customer demands.
- Alternative routing/mode is a company’s ability to use different transportation routes or modes to create flexibility when unexpected problems occur.
Companies handle uncertainty and potential risks using different strategies to increase supply chain flexibility. However, it’s important to note that flexibility needs are not equally important for every supply chain, and flexibility doesn’t always add up to more cost savings. When deciding which strategy to take, reactive or proactive, companies should determine the right degree of supply chain flexibility for them. There is no one size fits all model.
Incremental innovation is still key, regardless of the strategy taken.
Regardless of the strategy (proactive or reactive), the ability to optimally execute requires continual investment in innovation to accelerate digital transformations while driving cost savings, optimization, and resilience. Innovation doesn’t have to mean disruptive innovation; it can be incremental or a series of minor improvements or upgrades to existing products, services, processes, or methods.
For example, a global CPG manufacturer partnered with Pilot44 to optimize warehouse cleaning operations by reducing manual touchpoints. We led a co-innovation engagement with a robotics startup to design and prototype an autonomous warehouse cleaning robot, resulting in a cost savings of $1.3M. In another example, apparel brand, Guess recently partnered with QIMA, a quality control and supplier compliance solutions provider, to digitize its quality control program across hundreds of supplier factories in approximately 30 countries. As a result, the brand can now collect necessary data more efficiently with complete real-time monitoring and collaboration.
How Pilot 44 helps companies drive incremental innovation.
Pilot44’s Supply Chain Innovation Practice helps companies drive cost savings and operational efficiency in times of uncertainty. Here are a few examples of how we do it.
Enabling Best in Class Quality Assurance.
Committed to optimizing quality processes, a global hair care manufacturer engaged Pilot44 to manage a co-innovation pilot program that identified and piloted AI and machine learning (ML) solutions for incremental innovation. Their goal was to better predict and optimize product quality, reduce costs, accelerate production, and drive digitalization and continuous improvement on a global scale.
Digitalization of Trucking Operations
A global CPG manufacturer partnered with Pilot44 to improve inefficient, manual in and outbound plant logistics operations. Through our rapid Brief to Pilot Innovation Methodology, we identified, curated and successfully piloted digital logistics solutions that powered seamless digital document and touchless workflows – reducing errors associated with manual touchpoints.
Rapid Affordable Automation for Emerging Markets
Pilot44 partnered with a global fast-moving consumer goods (FMCG) manufacturer to rapidly pilot and scale affordable automation solutions for emerging market distribution centers and warehouses. Using innovative, cost-effective technology, we reduced FTEs, lowered costs, and enabled more resilience. We also increased productivity, reduced operational costs and improved worker safety during the pandemic.
There will always be disruptions in the supply chain. That much we know for sure. However, building resiliency in the supply chain doesn’t have to be ‘a go big or go home’ approach. Incremental innovation can help companies forge a more robust supply chain over time, enhancing their ability to react to and resolve those disruptions whenever and wherever they occur.
Find out how Pilot44 can help your company build a more resilient, efficient, and cost-effective supply chain during times of uncertainty. Get in touch to learn more.