Reimagining High-Tech Supply Chains for the Never Normal

The pandemic brought unforeseen challenges to the globalized economy, affecting both businesses and people alike. In the high-tech industry, it crippled supply chains that were already strained by the Brexit fallout and global trade tensions.

The disruption of the high-tech industry started with the closure of all non-essential manufacturing. The shock propagated to the demand side in a matter of days, as many hig-tech companies delayed or canceled new product launches. Now, more than 18 months after the first shutdowns, high-tech companies continue to face critical disruptions owing to the global semi conductor shortage — a direct fallout of the pandemic.

However, the notion that only a pandemic can cause large-scale supply chain disruptions is myopic. In this paper, we look at the potential risks for high-tech companies, the critical need to build agility, flexibility and resilience into supply chains, and how to go about creating a supply chain that can thrive in the never normal world of the future.

LOOKING AT RISKS BEYOND COVID-19

There is a range of risk factors other than a pandemic that can have severe consequences on high-tech supply chains. For instance, in the not-so-distant past, the 2011 Fukushima earthquake sent shock waves across global high-tech supply chains as Japan was the epicenter of manufacturing critical components such as the 300mm silicon wafer, lithium battery chemicals, and flash memory anisotropic conductive film used in LCD flat panel displays.

RESILIENCE: START PLANNING PROACTIVELY

Resilience has been a part of boardroom discussions for a long time. Despite that, when the pandemic hit businesses and exposed vulnerabilities in the supply chains, most leaders were caught off guard. Supply chain resilience is about the ability to minimize or avoid disruption by sensing and responding to risks. Resilient organizations respond not only to past issues (reactive action) and current issues (corrective action), but they also lay plans to deal with potential problems in the future (proactive action). Companies that are not able to do this get left behind in the long run.

.

SHORT TERM VS. LONG TERM: ACHIEVING BALANCE

Supply chain managers are taught early in their careers about the various conflicting goals that supply chains need to manage. The tactical trade-offs, such as customer service levels vs. inventory costs, logistics costs vs. delivery time, working capital vs. early payment discounts, even quality vs. price, are all critical factors that need to be managed continually. Unfortunately, supply chain executives spend too much time working these trade-offs, instead of making a focused effort to design supply chains that are future-proof.

There are three key reasons why supply chain teams stay focused on short-term goals:

• Short-term success is valued over longer-term sustainability, and success is measured by quarter-over-quarter return on capital and shareholder capital
• Existing supply chain KPIs measure success in a stable, predictable external environment
• Supply chain leaders are stuck in the past with historical success stories of lean concepts such as just-in-time, kaizen, process optimization, etc.

In some of our recent projects in the high-tech industry, GEP has seen many enterprises add inflexibility to their manufacturing and distribution footprint, by valuing intellectual property protection more than cost. For them resiliency then translated to higher inventory, when a more long-term solution would have been ensuring redundancy in the supply chain configuration. Collectively, having more inventory, air-freighting materials, higher PO prices, etc., had a greater business impact when there was disruption. Organizations need to reexamine their approach of stocking up in anticipation of disruptions instead of building for recovery.

In a February 2021 GEP survey of C-suite executives, conducted by The Economist Intelligence Unit, 60% of the surveyed executives agreed that redundancy and resilience in their supply chain are more important than efficiency and agility, signaling a significant shift in strategy.¹ The shift might be short-lived, as many executives will move back to lean practices and an agile supply chain as meeting demand, being quick to market, and fighting off increased competition will remain necessary. Then, few organizations will find ways to balance efficiency, agility, and resilience in their supply chain.

In the diagram below, we look at the comparative performance of two companies with different supply chain designs and priorities, after multiple disruptions.

Company A is designed for super-efficiency under stable external conditions, while Company B is designed for resiliency and optimized for efficiency.

In a stable external environment, Company A performs marginally better on all supply chain KPIs than Company B.

But the journey of these two companies looks different after a series of disruptive events:

 

• Company B performs better
• Company B has lower low-performance quarters and higher high-performance quarters
• Company B recovers quickly from supply chain shocks

Eventually, Company B will achieve higher efficiency and sustained competitive advantage through greater customer loyalty, better brand reputation, better pricing opportunities, higher product availability, and limited lost sales for a longer duration. Additionally, owing to its higher valuation, Company B will be better positioned to seize M&A opportunities presented by distress sales.

The question then becomes one of stability. And let’s not fool ourselves — we haven’t seen stable supply chain conditions in the high-tech sector for over five years now. Organizations are deluding themselves if they design their supply chains based on stability.

THREE STEPS TO BUILD SUPPLY CHAIN RESILIENCE AND AGILITY

In the never normal world, it is imperative for organizations to find ways to build resilience while simultaneously improving supply chain efficiency and agility. Here we look at three key steps high-tech companies should take to create a supply chain for the future:

1. Change Mindset Across the Value Chain

Perhaps what’s most critical is the need to change the mindset of the C-suite so it starts viewing supply chains as delivering competitive advantage for their organizations. What does this entail? It means a shift in tactical-level discussions from products delivered on time at the lowest possible costs to strategic-level conversations in the boardroom about building supply chains of the future that balance efficiency, agility and resiliency.

The attitude and approach need to be addressed on several fronts, and it will be good to start with these four areas:

Collaboration 2.0

Although many organizations claim to have a collaborative relationship with their suppliers, we believe a true partnership should include sharing, co-creating and testing the company vision across the entire value chain. The recent supply disruptions have taught us that an industrywide reset is needed, as the failure of your supplier’s supply chain can fail the entire ecosystem. It can no longer be about collaboration with suppliers alone; it must be with all your value chain partners.

Balancing KPIs

Most of the key supply chain KPIs value and reward short-term performance over long-term sustainability. We strongly believe that companies should revisit their supply chain KPIs to appreciate long-term performance and resilience.

Plan for Volatility, Not Zero Volatility

During stable conditions, most organizations do their supply chain planning assuming zero volatility. However, as the frequency of unpredictable events rises, a change in the mindset is required. Enterprises should look beyond best-case scenarios and incorporate volatility into their supply chain plans and models.

Sustainability for Success

While supply chain managers do talk about climate change and sustainability, many don’t believe they are make-or-break factors for long-term supply chain success. But woke consumers, activist investors and government regulations are changing the landscape, and companies must strike a balance between people, planet and profits for success in the long term.

2. Strengthen Planning and Systemic Efficiency

The high-tech industry is known for highly reliable and efficient product designs. Supply chain managers should take inspiration from their design function to balance resiliency and efficiency.

Supply Chain Decoupling and Diversification

The high-tech industry relies heavily on China and the Asia-Pacific region for both supply and demand, given the market size and the immense supply chain efficiencies they offer. Companies get rare earth, raw materials components and final assembly all in one place, which drives efficiency and agility across the value chain, thus saving on both manufacturing and logistics costs. However, with rising labor costs in China and increased automation of high-tech manufacturing, the cost differences between China and local market geographies are not nearly as significant as they were more than a decade ago when everyone moved heavily into China.

Organizations should now look to hedge their bets by diversifying their geographic footprint as well as developing alternative material flows to address vulnerability and ensure quick recovery while optimizing costs. Decoupling from China completely might not be possible, but a planned diversification approach that considers manufacturing cost, logistics cost, duties and supply risk will help build resilience in the supply chain ecosystem.

For instance, a manufacturer who is dependent on a supplier for a critical part can develop a parallel source in a different geography and allocate 25%-30% of the total business so that capacity can be ramped up when needed. Another organization, solely manufacturing in Taiwan, might decide to have a lower-capacity manufacturing backup in Africa. In terms of logistics, these decoupling activities could mean having alternative route arrangements with freight providers.

Supply Chain Modularity

Modular design is a design principle that divides a system into smaller subsystems or parts that integrate with other modules to create a larger design or solution. Using this principle will allow companies to embed flexibility and scalability into the entire supply chain and ensure it does not collapse during risk events.

Additionally, enterprises can strive to regionalize their supply chains to enjoy the benefits of nearshoring while avoiding vulnerabilities during black swan events.

Supply Chain Visibility

The true test of supply chain visibility is whether or not it helps minimize supply chain disruptions. During the initial phase of the pandemic, organizations had reasonable visibility into their Tier-1 suppliers. However, very soon, supply chain managers realized that they have minimal visibility into the supply chain of their Tier-1 vendors. Multitier sourcing and lack of visibility create a domino effect during catastrophes. To avoid this, supply chain leaders should develop a broader view of exposure into not just their immediate suppliers but also into the second and third tiers.

Stress Testing and What-If Scenario Planning

High-tech component designs are stress-tested to achieve perfection and performance. Supply chain managers can use this design philosophy to do what-if scenario modeling and understand the impact of potential risk events on the supply chain. For example, what if a manufacturing plant is closed for an extended period? What if demand fluctuates by X%? What if a vital trading port shuts down permanently? These activities will improve the supply chain’s forecasting and coping capabilities during times of actual stress.

Companies should also assess recommended changes under three scenarios: minimal disruption, maximum disruption and expected disruption. The inability to do so indicates that the C-suite is focused only on funding and prioritizing efficiency changes, in which case failures will continue.

3. Remodel Supply Chain With Intelligent Technology

Technology has evolved to address many supply chain needs and fill critical gaps that were not possible previously.

In recent times, visibility across supply chain networks has become more commonplace, but it is still by no means optimal. For example, many organizations still do not include critical operating information, such as lead time, shipment frequency and volume from each supplier’s site in their supplier mapping program. Today’s machine learning, AI-powered supply chain software can allow this kind of information to be seen and shared seamlessly to enable better management of historically cumbersome tasks such as track and trace.

Intelligent software platforms with multiple modular and easy-to-implement functions can process highly complex, distributed data to achieve the much-needed multi-tier supply chain collaboration in the high-tech industry

The high-tech business landscape has become fast-paced as well as highly unpredictable. The result is that organizations must now necessarily re-envision their supply chains. It’s an opportunity to go back to the drawing board and remodel their supply chain design, planning and strategy and create a resilient yet agile future-proof supply chain where long-term competitive advantage is valued as much as short-term performance. Supply chain leaders are already working on this, and sooner or later, others will follow.