Diversifying your Supply Chain Part 2: How to do it with Low Volume & Slow Growth Products
This third article in my series on supply chain diversification will describe "how to" get to diversification and replication of your supply sources for low volume and no-to-slow growth products - a very typical set of products not diversified. You can find my other articles on my views of supply chain diversification at the www.desertsageadvisors.com articles/blog.
As I discussed in my previous article, it's much easier to cost (and effort) justify diversifying and replicating your production or supply sources when you have faster growing products; you typically have to invest more in equipment, tooling or supplies so why not do it at an alternative location? However, for products that are low volume or are not growing the solutions to diversification are not as straight forward and more difficult to cost justify.
For firms that produce products, the typical bias is to "make it in-house". Understandable if you've been a manufacturer for years. However, there are options that can compliment your manufacturing capability, namely in the form of contract and consortium manufacturing companies. I will elaborate a bit on each of these now.
Contract manufacturing companies have been around for many years. In fact, most major consumer electronics devices aren't produced by the company that designs & markets them. The largest example is Apple; their phones and computers are produced entirely by contract manufacturing. Contract manufacturing manufacturers your product to your specification, using your designated suppliers, and to your specifications quality standards.
Most people think these companies are just electronic "board stuffers", meaning they populate printed circuit boards with electronic components for electronic products. They do that work. However, they are much, much more than that. Most contract manufacturers today mold plastics, cut and form metal, and assemble and package finished products. They can truly be a near-turn-key manufacturing solution and not only for electronics-based products.
What I have used contract manufacturer for in my corporate days is to compliment my internal manufacturing capability to achieve geographical diversification. Meaning, I engaged a contract manufacturer in a region of the world that was closer to my customers, where I didn't have capability internally - and couldn't cost-justify setting up production. So using contract manufacturers, I replicated locations that could produce my products, thus reducing my supply chain risk and improving my customer satisfaction.
Most contract manufacturers operate production centers in many countries in the world and are typically able to produce your product wherever your want. I've included a link of the major CM's here: https://www.eetimes.com/top-50-contract-manufacturers-ranked/# ... give it some thought, and maybe a try! It's really not that difficult to establish.
A second form of shared manufacturing is "consortium manufacturing". This is somewhat different than contract manufacturing. In consortium manufacturing, you engage with a consortium manufacturer that specializes in making certain types of products and you commit/purchase "capacity" or "space" as part of the consortium manufacturer's total capacity. So, in effect, you're buying capacity and capability to make your products but can flex what is actually made with that commitment.
Let me give an example: We used to produce a very low volume but very complex (and expensive) set of active optics products, which started with an electronic "chip" or die. But we could never get any of the major component foundries to look at the business due to low volume - we couldn't even fill up a single semiconductor wafer of electronic die. We joined a consortium coordinated by a firm that allowed multiple companies like us, with low volumes, to purchase "space" on the wafer to produced our products - the wafer was all produced at one time and we received our products.
These types of consortium manufacturers exist in several areas including semiconductor and electronics, plastics molding, metal cutting & forming and other more niche manufacturing technologies. What's particularly attractive about consortium's is the amount of your investment in capability/capacity is typically very minimal. We at Desert Sage Advisors can introduce you to various consortium manufacturers.
The last topic for today's article applies to both manufacturers who buy parts from suppliers and companies that rely entirely on purchasing materials and parts for their business. The premise here is that you can rely on your supply sources to do more than you currently ask of them -- specifically, they can be more than just a single component supplier, which absolutely can reduce your "hand-off's" and reduce the complexity of your supply chain.
When chasing cost reductions and thus favorable price variance, companies very typically end up widely fragmenting their supply chain into a lot of single component suppliers. Again, if you looked at total acquisition costs, you will find that the added hidden and overhead costs to manage this increased complexity are much greater than the favorable unit price improvement you achieved.
To support their growth, many traditional "component" suppliers have diversified their capability to provide more "vertical integration" and product breadth to their customers via sub-assembly or integrated product manufacturing. I have extensively utilized this approach of having my suppliers do more to "simplify" but also to diversify my supply sources, thus reducing my supply chain complexity, "hand-off's" and in many cases, reducing my total acquisition costs. This can be a very powerful means of simplifying your supply chain while in effect, cost justifying more diversification.
As my anecdote for today, I thought I would share a real world example of my own experience of a "fragmented" supply chain on steroids! We made a component where the substrate was produced by us in Europe, which was shipped to he USA for initial processing, then shipped back to us in Europe for in-house secondary processing, which then was sent to a supplier in Europe for final processing and then, ultimately returned to me for final packaging. It took 12 weeks for this all to happen before I could ship a final product. Needless to say, our customers were less than pleased with our cycle time!
When I asked why are we doing this, the response was well, we have certain internal capabilities and others we can't do. The next question is can one of these suppliers do most or all of the steps required? After working with our supply chain, the answer was, YES... So, let's do it! When we were done reorganizing the "who does what" supply chain, we reduced this cycle time to less than 3 weeks. Obviously, our customers were pleased and we reduced the cycle time, our risk of multiple hand-offs and actually saved money not shipping our products all over the world for 3 months!
I hope you enjoyed reading this article and perhaps it spurred ideas on how you can address diversifying your supply chain with low volume products. As before, I would welcome your responses to my post and welcome you to share this article link with others you believe might benefit for the content, or are interested in learning more from contacting me directly.
Until the next in my series, everyone please stay safe, stay healthy and stay optimistic. The time will come soon that we are all back to doing business, perhaps though in a new era of supply chain diversification and localization.
---- Tom Weikart, Desert Sage Advisors