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Today, we give you an insight into our 5th root cause: the complexity of supplier network. In the previous articles, we already addressed the root causes of product portfolio complexity, speed of innovation, new types of competition, and multi-channel sales complexity.
The complexity of supply networks is determined by the diversity of supplier relationships and their changes over time. The main drivers for the diversity of the network are the number of suppliers involved and the topology of the network, which is expressed in the number of levels, the degree of networking, and the types of relationships. Examples of supplier relationships are direct material suppliers, logistics services providers, contract manufacturers, engineering contractors, equipment vendors, and professional services providers. In addition to the structural complexity, the geographical location and thus political and social structures have an additional influence on the complexity of the supplier network.
We have observed several effects based on the complexity of the supplier network to the contained flow values: quantities of material, financial resources, and information. Buffer stocks are commonly formed at the interfaces of other companies in a supply chain to serve the respective downstream service level requirements. Fluctuations in market demand or results of isolated materials requirements planning decisions can build up to bullwhip effects if insufficient information is passed on and, in turn, leads to fluctuations in liquidity.
Handling of Information is Essential
The handling of information is essential, so know-how and intellectual property form the basis of competitiveness. In contrast, the disclosure of actual availabilities, delivery capabilities, cost structures, manufacturing processes, and sources of supply is typically avoided. International networks also have to deal with dynamic, political, and economic challenges, which on the one hand, express themselves in trade barriers such as customs duties, taxes, and embargoes and on the other hand in state support and subsidies and thus end up in circumventing legal framework conditions.
The example of the automotive industry, which has already been covered in a previous article, shows that the vehicle components for a car come from a large number of countries and are made available by a large number of suppliers. In addition, the depth and breadth of the supplier structure are growing in many cases, as development tasks are increasingly being delegated to suppliers and their subcontractors, and the degree of division of labor is constantly increasing (Taylorism). Large car manufacturers nowadays have product portfolios with several dozen models, divided into numerous customer-specific variants. To manage a product portfolio with such a large number of variants in a cost-effective manner, the companies follow a strict platform strategy and enter into strategic alliances with their suppliers.
The suppliers themselves most commonly are geographically dispersed and provide their parts globally. This customer-supplier relationship extends over many levels in the automotive industry. Consequently, an OEM only has limited visibility into a supplier network beyond Tier 1 (direct suppliers). Most cars are also mass-produced in large numbers. The number of material flows increases the more suppliers participate in a network. Suppliers also calculate buffers to be able to deliver at any time. Therefore, the material flows in the supplier network and the capital tied up in it are an important economic lever for optimization. Efficient supplier management and the creation of transparency in a network, therefore, play a crucial role. From the manufacturer's point of view, many influencing parameters have to be considered when managing and optimizing such a complex supplier network.
In the context of supplier management, companies often find themselves in a charged relationship between several, sometimes diverging, objectives such as minimizing costs, optimizing quality, and speed of reaction. Delivery from China to Europe is often associated with low costs, long delivery times, and sometimes quality fluctuations. This scenario contrasts with a regional but expensive supplier, with whom close cooperation leads to high-quality assurance and short response times. The so-called "Lieferkettengesetz "is a much-discussed new factor influencing complexity. An initial survey of the companies concerned shows that the majority of them face great difficulties in dealing with this new form of complexity. Less than 20% of the 400 companies surveyed have taken precautions to comply with environmental and social standards in their supplier network; another 2600 companies did not even participate in the survey. Businesses know about the challenges regarding the lack of transparency and enforceability of measures in their network, and now is the time to proactively address these challenges.
The example of the COVID-19 crisis also shows serious difficulties concerning the security of supply due to a strong international distribution of suppliers in combination with a high concentration of suppliers for critical products. In many cases, the failure of one party interrupted the value creation process and resulted in production stops or delivery bottlenecks, e.g., for human pharmaceuticals. A look at the automotive industry shows that the supplier structure, in addition to the very large players such as Bosch or Continental, has a large number of small, highly specialized medium-sized companies whose failure risk - e.g., as a result of the COVID-19 pandemic - could not be correctly assessed.
For a targeted, i.e., active control of the supplier network, a clear definition of goals is essential. However, this should not be optimized exclusively on one side, i.e., according to a single objective (such as cost minimization). The aspects of risk minimization and image are just as important, as "black sheep" among the suppliers can quickly cause a serious image problem for their customers, shown for example in the criticism of Apple's supplier Foxconn shows.
These are the three key elements for successful supplier network management.
1. Create transparency
The first step is to create transparency about the status quo. On the one hand, this includes recording the supply network structure and, on the other hand, mapping the flows in the network to a broader extent. They should appropriately reflect essential influencing variables such as the depth of the supplier structure along certain material flows, knowledge of supply structures and alternatives, the definition of critical materials, e.g., availability, price fluctuations, quality effects, social and legal evaluation.
In addition to the classic analysis of supply management such as category spend, savings, and supplier performance, network-oriented analysis such as cost-to-serve, compliance checks, power structures, and risks & resilience come into focus.
To map the structure of a supplier network upstream beyond Tier 1, a recursive analysis method based on cloud IT systems can be applied: The OEM contractually obligates all Tier 1 suppliers to (1) register themselves, including the materials they supply in a central cloud-based system provided by the OEM, and (2) to contractually obligate all their Tier 1 suppliers (which are Tier 2 to the OEM) to do the same, i.e., to register in the cloud system and to obligate their Tier 1 suppliers contractually. By this, a map of the complete network is build-up, which you can share with all suppliers participating in this particular supply chain, providing transparency about their upstream and downstream supply relationships.
2. Derive target states
Since some of the analysis mentioned above and key figures are often not available, a primary goal should be to establish the ability to measure.
For key figures that have already been analyzed, it is worth formulating an ambition derived from the company's strategic target positioning. This is typically accompanied by segmentation and the formulation of segment-specific objectives and compliance of framework conditions in the supply chain. The reduction of suppliers with small quantities for commodities, the standardization of purchasing conditions, reduction of material procurement from countries with high CO2 emissions as well as the curbing of goods tourism, and the increase in certified/audited suppliers can be formulated as a goal and then be operationalized using suitable key figures. The target values should be calculated to take interactions into account and to represent ambitiously achievable quantities. In this area, algorithms from different areas are used, e.g., machine learning for the classification of suppliers, materials, risks or document analysis, simulation and optimization for the reorganization of the network, identification of bottlenecks, allocation of stocks, reduction of costs, and evaluation of scenarios.
In addition to the precise formulation of goals, you must work out suitable initiatives to support achieving these goals. Initiatives such as reducing the carbon footprint usually consist of bundles of measures such as transport optimization, alternative use of materials, and energy-efficient production, which are anchored in the organization and are implemented later.
3. Drive implementation
Even with the creation of transparency and the precise operationalized formulation of goals, initiatives, and measures, a core problem remains: the lack of implementation, where most complexity reduction projects fail.
The primary problem is lacking data availability and insufficient IT system interoperability. For many organizations, it is not possible to list all suppliers and the goods they supplied. Transparency of suppliers further upstream usually is not given. The cloud-based infrastructure mentioned in 1. Create transparency needs to be built up. However, there is currently no standard software capable of providing all functionality required in this context (e.g., managing access rights, keeping the supplier structures up-to-date).
A second but related problem is the availability of experts. Often, scarce human resources become "project nomads" who cannot deal with the actual implementation. Effort can no longer be integrated into the operational work, progress and results do not materialize, and the goals are lost sight of. A crucial point here is the lack of specific details, e.g., to what exactly - specific material from a supplier, specific transport destination, specific ingredients, specific purchasing group - should a measure be applied, the procedure, and which methods and tools are used. As a result, one also loses the ability to learn from the possible difficulties. Problems remain undetected, are not addressed, and usually lead to laboriously repeated but unsuccessful efforts. An easily accessible and fully integrated action management overcomes these weaknesses and enables the real-time tracking of progress and earnings contribution to reduce the complexity of supplier networks.
The implementation of a transparency layer and the optimized target state will involve a large number of different activities, supply chain-related "objects" (e.g., materials, suppliers, bill-of-materials, transportation links), and corresponding metrics (e.g., number of upstream suppliers that have been onboarded on the cloud-based transparency system). A supply chain execution management system is required to manage this vast number of activities and the realization of the targeted benefits, like AIOimpact. In AIOimpact, we can track all known Tier 1 suppliers, all activities to onboard them on the digital transparency platform, add all their Tier 1 suppliers to get onboarded, etc. This will provide a systematic approach to building up and maintaining the upstream supplier network and establishing a new target state.
Shift from Physical Complexity to Complexity of Information
In general, the shift from physical complexity to the complexity of information means that the overall information requirement within the network increases significantly. In terms of product features such as more comprehensive product characteristics and documentation requirements, multimedia product descriptions, and supplier information lead to different consequences. For certain products, a very high availability within the network can be assumed. Procurement strategies can then be adapted and simplified by, e.g., standardizing management by a third party decoupled from the underlying network's overall complexity or spot market purchases. 3D printing, for example, as already described in Article 3 (Link), is an important innovation that replaces extensive stockpiling or a procurement network with the digital provision of manufacturing knowledge and generic printing capacity.
The upcoming article in our 10-part-series about the supply chain performance gap will continue with the 6th root cause: regulatory complexity.
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