With the recent buzz in the media hinting that a recovery has begun, many companies have started to plan for a volume ramp in the first half of 2010. Even if you are not projecting an increase in demand for your products, you may be impacted by a turnaround in the economy as the supply-demand balance shifts. With inventories low and excess capacity removed, there is little fat in the supply chain. Even minor shifts in demand could lead to supply shortages and jeopardize your revenues.
As you start the New Year, there are a number of steps you that you may want to take to prevent unpleasant surprises.
Verify component lead-times.Component lead-times have been artificially low as companies throughout the supply chain have worked through the inventory left by the downturn. Lead-times can change dramatically as the supply in the channel dries up and you are faced with the full manufacturing lead-time at the factory. If you do not already update lead-times on a regular basis, now is a good time to validate them. If you have been relying on distributors, it will be important for you to get their outlook on component lead-times. For those of you with an outsourced manufacturing model, review your contract manufacturers’ process for lead-time verification and determine how they can respond to sudden lead-time changes with component suppliers. Pay particular attention to long lead-time, active components. While excessively long lead-times lead to unnecessary inventory exposure, artificially low lead-times are a key contributor to supply shortages.
Revisit your supply buffers. Buffer programs tend to be one of the early victims of an economic downturn. In an effort to slash inventories, all of the fat in the system is removed. At the cusp of an upturn is when you need buffers the most. In order to capture business, you will need to respond to new demand and that necessitates that you have enough component supply. Both supply and demand are more volatile and represent the greatest risk to your revenue stream. Unfortunately, many companies do not realize that they have no cushion in place until they run into shortages. To avoid that scenario, assess key products that are critical to your revenue stream and mitigate the supply risks you might face. Although you may develop a more comprehensive plan later, now is a time for quick, focused action. Triage your situation and take care of the most important products first. Look for ways to keep the renewed buffers in the least finished form (e.g. components or raw materials) so you have more flexibility to apply them where needed.
Reassess your supply base. The recent economic storm has been quite severe, with potentially debilitating effects on some of your suppliers. A volume ramp often requires significant investments in materials, tooling, and equipment, which may be a challenge for suppliers that have experienced significant financial losses. It may be worthwhile for you to conduct an audit of their financial health, reviewing their financial statements, key contracts, resource plans, and credit worthiness. In the case of a contract manufacturer with questionable financials, you may be asked by component suppliers to provide financial guarantees for component purchases.
Confirm your cost structure and stabilize component prices. If your component suppliers have reduced their capacity during the past two years and are suddenly faced with increasing demand, your worries will no longer be limited to supply shortages. You will now have to be concerned with increasing market prices and on-going variations in your product cost structure. Drive for complete transparency with your contract manufacturer and insist that they disclose their costed bill-of-materials (BOM), labor rates, and overhead. If you are confident in your demand profile, consider a longer term purchase agreement with your key component suppliers in which you secure supply and predictable pricing by making a commitment on a portion of the volume you expect to consume. Another option to stabilize pricing is to consolidate your purchases with fewer suppliers and take advantage of volume discounts. If you do this, however, make sure that you do not exacerbate your supply risks by limiting yourself to fewer suppliers.
The strategies outlined above outline only a few approaches that you can take to ensure you are adequately poised for a ramp. Keep in mind that your supply chain conditions have likely evolved significantly since the start of the recession in late 2007 and certainly since the last upturn in 2003.
Should you have any questions or require any assistance with implementing some of the strategies above, please feel free to contact us at info@symphonyconsult.com