Diversifying your Supply Chain Part 3: Reducing the Costs of Diversification
In this installment of my series on diversifying (and replicating) your supply chain, I will elaborate on "how to" reduce the costs of diversifying (replicating) your supply sources as well as offering alternative means to reducing those costs. If you are interested in my prior articles on this topic or other articles that I have published, you can find them at www.desertsageadvisors.com in the Articles/Blog section.
When there are minimal or no costs to diversification, there's little in the way of hurdles to doing so. But that's not the typical situation -- replicating your sources of supply comes with costs, albeit those costs can be reduced and typically are a bit over-estimated.
The first topic I'd like to discuss is targeted to companies that need molds, tooling, jigs, fixtures or forms that would need to duplicated when you replicate and thus diversify your supply chain (either in your own manufacturing or your suppliers). The advancements in "additive manufacturing" aka "3D printing" have been remarkable just over the past 5+ years. I have never particularly thought that the terms "additive manufacturing" or "3D printing" were adequate descriptions for these rapidly-evolving manufacturing technologies.
Additive manufacturing (3D printing) is really a manufacturing process on to itself that "builds up" strongly-adhering layers of plastic resins, metal grains and other like materials to form a physical product (likened to method of your office printer that lays downs lines of ink on a page). The most amazing advancements in this process are the breadth of materials (again, many types of plastic resins, metal grains, etc..) that can be used in this process and the speed of producing the end "printed" product. Plus, the price of these "printers" have dropped precipitously in recent years. You can actually buy a "starter printer" for as little as $170.00, just to try out the process.
Several companies have begun using these additive manufacturing "printers" to build fixtures, figs, forms and even "soft" tooling that mold and form end products. The products produced by Additive Manufacturing have proven durable and completely operable. And for such things as jigs, molds, tooling and the like, much less expensive than traditional metal forming and joining processes. Now, in all fairness, you can get a very long life-time from a traditionally-made, mostly-metal fixture but when you compare the much lower cost of an Additive Manufactured fixture, you can afford to make (and remake) this fixture multiple times. Most importantly it's cheaper and faster to "print" a fixture for a new source of supply.
If interested, I have provided a link to various 3D Printer suppliers for your reference here:
The next item I'd like to discuss is related to my last article - the use of Contract Manufacturing as an alternative source of supply to your own internal capability. All contract manufacturers maintain a breath of product-making capabilities, well equipped and broadly capable of making a wide range of products. Again, this is not only just electronics PCBA (SMT) assembly but also such traditional manufacturing capabilities as molding (injection & compression), metal cutting & forming, and other related capabilities. In my experience working in contract manufacturing, I can attest to having had broad capabilities in molding, metal cutting & forming and assembly - Everything vertically-integrated that's needed to make a full end product.
The obvious benefit for including contract manufacturing in your complete strategy is that you don't have to invest in the base capital equipment needed to make the product in-house (i.e injection molding machines, laser cutters, presses and such). What you bring to the solution here is your molds, dies and forms that can run on the standard equipment that these firms run on a daily basis. And when you combine that with our first topic of additive manufacturing, you will find that the actual costs and thus the financial justification for diversifying your supply sources are much more attractive.
The last item I'd like to discuss is the how you use your suppliers and what you chose to in-source (make in-house yourself) versus what you rely on suppliers to produce for you. To be clear: I am not advocating for either direction -- outsource or in-source. The key point here is reducing the "hand-off's" (and thus the complexity) you have between you and your supply chain to finally get your end product made. Remember from our first article: The less "hand-off's" the better!
For manufacturing-based organizations, in-sourcing more of the processes may well reduce supply chain risk and complexity. Whether or not that is cost-justifiable (payback), depends on the specific situation; however, as we discussed, the payback calculation on total acquisition cost will lead you to the right answer. I have in-sourced numerous processes with several of the organizations I have worked. Most times, that decision was made to reduce complexity (reduce "hand-off's), reduce global supply risk and reduce cycle time - all keys to better servicing your customers.
But if you're not as manufacturing centric as some organizations, I want to challenge you to more-closely work with your suppliers to see what more they can do "in-house" - I think you'd be surprised what your suppliers can or are willing to do to support you. I previously shared an example of integrating more with a supply source and I could give numerous examples where we even had our "traditional" supplier do sub-assembly or even packaging, which greatly reduced our "hand-off's" and cycle time.
Suppliers that can effectively (cost & quality) do more of the work for you, as you desire, opens up your options on diversifying your supply chain. I know this sounds counter-intuitive: I am leaning more on my suppliers to do more and thus, am I increasing my supply chain risks? Perhaps, if you don't have the right supplier and you don't manage them well. However, consider the automotive industry and the so-called "Tier 1's" that now provide complete systems (i.e. drive-train, braking, interiors, etc...). They have built a model that is trusted by the Auto OEMs to deliver them complete sub-assemblies (systems) on-time, on-cost and of high quality. And those Tier 1 suppliers are managing their portion of the incredibly complex supply chain for making an automobile. The model has allowed the Auto OEMs to offer more models, shorter lead-times and more cost and style benefits for the customer.
I'd like to close with a personal anecdote from my time working with ITT Corporation. Prior to it's breaking into 3 separate businesses in 2011, my job was to build (from scratch) a global, corporate supply chain that created leverage in the traditional portfolio-style management culture. The obvious place to start was through strategic sourcing (purchasing), which we did, but also to diversify our capabilities globally.
As I proceeded to introduce and deploy the ideas discussed in my articles, one business president suggested, in jest (or at least I took it in jest): "Tom thinks all you need is procurement and suppliers can make everything for us!". Huh, interesting idea but not really!
The important message we were sending and ultimately executed is balancing what you make and what you buy is the objective. You can't MAKE everything and you most likely don't want to BUY everything. You likely can't afford (justify) MAKING everything and you likely can't risk BUYING (from suppliers) everything. You're likely not good at making everything - there are companies that are better than you on certain processes, and you should learn how to best use these external capabilities to your need. Again, your overriding goal is diversifying your risk, optimizing your cost structure, and reducing your complexity and cycle time - that's what you're customers want from you and you can do that by using a balanced and integrated approach.
I again thank you for reading this article and allowing me to share my thoughts on the "How To's" to diversifying your supply chain. I will be publishing the final article in the series in the coming week or so that will challenge the "conventional wisdom" on paybacks and help you to justify the supply chain diversification. Until then, I welcome your posted comments and responses, as well as encouraging you to share this post with anyone that might find it useful. Stay safe and stay active in managing your global supply chain.
---- Tom Weikart, Desert Sage Advisors