Their discussion painted a bleak picture of the current supply chain crisis, and how the crisis is amplified because it is hard to predict when it will end. As Paul explains,
“What we have learned over the past 18 months or so is that we have consistently underestimated the impact and duration of the pandemic. Further, extraordinary weather conditions are becoming more and more ordinary. Understanding this, no one knows the timeline to return to normal…”
While the current picture is bleak, Paul and Harry believe there are clear actions that manufacturers and distributors can take that will enable them to address the impacts of the supply chain shortage and prevent challenges like these from occurring in the future. In this post, they discuss their thoughts on the short-term, mid-term, and long-term actions that can help organizations react to and prevent supply chain shortages of this scale in the future.
Q: What can be done in the short-term?
“You have to invest in addressing this problem, just like you would invest in improving vehicle quality or increasing capacity on the production side of the business”
Lost fill, or below average parts fulfillment (for system fill, facing fill, or backorders) can cost manufacturers significantly. Some of the cost is measurable while some of it is difficult to measure because tarnishing one’s brand happens slowly, and the impact on lost market share and pricing power is subtle. Investing to address this problem is thus merited and should be viewed as a priority similar to investments to improve quality or increase capacity in production. Knowing this, how can manufacturers invest in their supply chains?
Labor | The labor pool is small, and the only way to compete is to differentiate through higher wages
Purchasing departments need to understand that their suppliers and carriers are competing for labor, and compensation needs to be high enough to enable them to hire qualified labor in the marketplace. For example, Carlisle has a client still insisting they pay their 3PL $14 an hour for labor – this may appear to be an appropriate wage, but consider that Amazon is hiring 125,000 people in the US at $18-23 an hour with a $3,000 signing bonus. At $14 an hour, this 3PL cannot compete for labor.
Now is not the time to try to save 2% on piece costs or LTL rates. Be prudent but pay at or above market wages, so you can secure capacity over your competitors. Once you have a sufficient group of qualified people capable of doing the work, you are ready to focus on broader actions.
Q: What can be done in the mid-term?
“Increasing redundancy and reducing supply risks need to happen”
Once manufacturers and distributors invest in their people (following short-term recommendations), they can take action to mitigate the risks associated with supplier shortages. This all comes down to increasing redundancy in parts suppliers and reducing supply risks. Paul and Harry have four recommendations that can help manufacturers achieve these goals.
1 | Onshoring Production
Many manufacturers rely on offshore suppliers for the vast majority of their parts; however, this has proven challenging due to container shortages, ship shortages, etc. Carlisle agrees with the popular sentiment to onshore production to mitigate these challenges. The benefits – shortening supply distances, reducing lead-times, and simplifying supply chains.
2 | Dual Suppliers
Manufacturers felt the impacts of having one supplier for their critical parts. Carlisle recommends securing partnerships with two suppliers for key components, rather than just one. For current production parts, your manufacturing colleagues need to take the lead. For past model parts, you, as aftersales supply executives, need to take the lead. In the beginning, focus on the most constrained parts or suppliers that support uptime, like powertrain; over time, expand this redundancy to additional products.
3 | Remanufacturing / Reconditioning
Now is the time to reconsider what can be remanufactured or reconditioned. Doing this can free up capacity. Particularly in the area of electronics, remanufacturing may be an opportunity to increase supply capacity. The added bonus? It is better for the environment! As organizations push their sustainability pledges to the limit, remanufacturing / reconditioning can be the win-win.
4 | Additive Manufacturing
In times of stress, especially on the supply chains, it is helpful for manufacturers to be able to produce their own goods. With advanced technologies, more products can be 3-D printed. Ask yourself where you are on your additive manufacturing journey and accelerate your R&D.
In conclusion, all of these recommendations can help manufacturers make smarter, more strategic supplier decisions and together, they mitigate the risks of current supply chain constraints.
Q: What can be done in the long-term?
“We are going to recommend some actions that are bold, strategic, and controversial. They require investment…lots of it”
Now is the time to think big and consider the long-term actions that can help manufacturers avoid the perils of the current supply chain shortage. The recommendations that Paul and Harry make are bold, strategic, and controversial. These recommendations can be grouped into three categories.
1 | Tracking the right metrics
In the first post of this series, Paul and Harry discussed the current metrics used to track fulfillment – system fill, facing fill, and backorders. However, we have been measuring what we can most easily measure, not what is most important to the customer. The metrics that are most significant to the end customer, when they are buying parts or getting a repair, are off-the-shelf fill and repair order fill.
Off-the-shelf fill can be measured in pieces or lines. This is a measure of how much of the demand, in pieces, that came in today could have been satisfied based on how much inventory the dealer had on-hand at the end of yesterday. For example, if demand was 10 pieces and the dealer had 8 on-hand, that means 80% piece fill.
We define Repair order fill similarly, but now if any of the lines on the RO cannot be filled, then the whole RO is considered not filled. So, it’s a binary 1 or 0 filled against each RO. This metric is aligned with what the customer actually experiences and expects. The customer doesn’t care if 8 out of the 10 parts are available, they care if all of the parts are available for the repair.
Over the past decade, Carlisle has worked with OEMs to develop a standard way to measure off-the-shelf fill and RO fill. While many OEMs now measure off-the-shelf fill by using the standard definition, only a handful have been able to crack the holy grail on RO fill. Deployment of a capable Retail Inventory System (RIM) and real-time extraction of inventory and RO data from many disparate dealer management systems (DMSs) are required. Also, dealer processes vary, so getting high quality data is a challenge. However, these challenges can be solved. They require investment and prioritization by OEMs and their dealers, and cooperation from the DMS.
Tracking the right metrics helps manufacturers achieve the ultimate goal – customer service. The customer comes first, and the fulfillment metrics need to support that mentality.
2 | Restructuring inventory
Paul and Harry’s second recommendation may be considered by some to be controversial. To optimize RO fill for the customer supply chain requirements need to change. Dealers need to stock more breadth (variety of parts). If your dealers stock a higher variety of parts, they are more likely to have the critical part needed to conduct the repair for the customer.
Beyond breadth, dealers need to stock asynchronously. That is, stocking requirements should vary by dealer and should be based on not just individual dealer demand, but the demand of other dealers in their area. There is no one-size fits all stocking strategy for all dealers across the country; it is critical to understand each dealer’s unique needs and their differentiated market.
Additionally, dealer compliance with manufacturer-recommended stocking needs to be very high. Manufacturers have done the work in creating comprehensive RIM systems that provide stocking recommendations to dealers; however, many dealers do not take advantage of these recommendations, or simply ignore them. What can manufacturers do to increase compliance? It can be anything from incentives to ROI documentation; figure out what your dealers need and deliver it.
Beyond dealers, manufacturers have a role, in same-day delivery. It can come from PDCs, other dealers, or a distributor channel. Fulfillment is dynamic. Same-day delivery is so critical for dealers that it can actually improve purchase loyalty; in Carlisle’s 2021 Parts Manager Survey, we discovered that on average, US dealers would procure 57% of their usual non-OEM purchases from the OEM if they offered same-day delivery. That is not insignificant. However, interestingly, looking at Canadian dealers, they would procure about 48% of their usual non-OEM purchases from the OEM. They too see the value in same-day delivery but also recognize that it may not be logistically feasible due to fewer PDCs.How Offering Same-Day Delivery Impacts Purchase LoyaltyUS DealersCanadian Dealers
|Country||Percent of Non-OEM Purchases that Would Be Procured from the OEM if the OEM Offered Same-Day Delivery|
Same-day delivery can be the ticket to harnessing more parts revenues for the manufacturer; however, it can be difficult to implement, as it requires forward deployment of the inventory and a high density of PDCs across the addressable market. Again, to make these changes requires investment in inventory, technology, and processes.
3 | Improving inventory planning and visibility into the supply chain
Manufacturers also need to improve inventory planning and have deeper visibility into suppliers to more quickly identify constraints. Over the past decade, service parts OEMs have learned from their production colleagues and deployed sophisticated supplier management processes and tools. In doing so, manufacturers provide credible forecasts to suppliers, measure on-time and complete orders, and ask for root cause remediations when delivery performance lapses. However, many supplier performance issues are at the tier 2 and tier 3 levels. Tier 1 suppliers do not have the capacity to identify pending failures because unfortunately for many of them…
Aftersales is an afterthought
We can take a page from other industries such as retail and electronics by deploying technology to measure supplier capacity deeper in the supply chain and using AI to continuously monitor and identify supply chain risks. Imagine monitoring thousands of news and social media feeds across the globe and using AI to convert all the noise into actionable signals. It might be a strike at a port in Thailand. It might be a flood in China shutting a major artery, or a refinery interruption in Houston. The costs and complexity to deploy these technologies can be significant, but your ability to identify a disruption days or weeks ahead of your competitors allows you to have scarce capacity allocated to you. What if your company identified the current computer chip shortage several weeks ahead of your competitors and you were able to stockpile in advance? The ROI would have been enormous.
When thinking about the long-term, manufacturers must get creative. It is the time to start reinventing what is commonplace and implementing new (and maybe controversial) approaches to adapt supply chains to the 21st century.
Paul and Harry recognize that the supply chain shortage is a concerning issue impacting suppliers, manufacturers, distributors, and end-customers across the globe. Perhaps it is too late to mitigate ALL the impacts the global supply chain shortage has had on the economy, but all is not lost. Now is the time to plan for the future and make sure these challenges do not continue to go unmitigated. We are certain that these types of challenges will continue. Just HOW BAD these challenges will be remains to be seen. The silver lining is that we’ve learned a lot during this pandemic and if manufacturers and their supply chain networks start taking action now, manufacturers can turn these challenges into opportunities for the future.
Chief Executive Officer