Brace for a Wave of Change in 2019: Procurement & Supply Chain Challenges

As heated debates on everything from minimum wage to tariffs to state-sponsored cyber attacks continue in public and political spheres, midterm elections in the U.S. fast approach. Combined with rapidly emerging technology paradigms, labor issues, and the rising frequency and intensity of natural disasters, these factors create myriad challenges for procurement teams, manufacturers, and suppliers. As we dive into this maelstrom of change in an effort to prepare for the year ahead, it is helpful to pick out some major trends that electronics manufacturers should incorporate into their strategic planning.

The overarching theme is this: focus on optimizing procurement processes, product and service introductions, data management and analytics, and supply chain management. These are the steps needed to prepare  to absorb the impact of both emerging paradigms and unpredictable events.

Balance speed & agility in bringing products to market

It’s increasingly important to maximize profit margins at the time of product launch.  Especially given the impact of government maneuvers in the ongoing trade war, you need to create wiggle room for disruptive events by maximizing gross margin from the outset. If you can bring your new products to market that way, you’re more prepared to absorb the impact of tariffs. There is some evidence that the current U.S. administration will hold off on further tariff announcements until after the midterms. Many companies may find that maximizing margins isn’t enough; you can still take responsive measures like switching suppliers, or looking for domestic sources. However, it’s imperative to be in the best possible position from the outset so you can more easily adapt to surprises.

Companies often move with urgency to get to market first or in time to capitalize on an opportunity. This may mean that taking time to find a lower-cost or more agile supplier is not in the plans. This often leads to making a conscious decision to go with what the suppliers you know and have on board already, even if it means sacrificing margin. We see that involving procurement and supply chain stakeholders earlier in the new product introduction (NPI) process (beginning with concept and design) can result in smarter decisions and better options around direct materials and suppliers. Given the state of procurement technology and analytics, you shouldn’t have to compromise margins to preserve speed-to-market. Optimizing procurement capabilities is a shock absorber against tariffs and other unforeseen circumstances.

The pace of new product launches shows no signs of slowing. Product lifecycles are shorter, at the same time that products are becoming more complex with the additional embedded sensors, electronic, and transmitter components. In other words, the emerging IoT paradigm is driving profound changes to the product lifecycle and infusion of technology. Procurement processes, especially around direct materials and supply chain collaboration, should incorporate this into their NPI strategy going forward.

Unprecedented focus on supplier risk

It’s not surprising that experts and analysts have been emphasizing the importance of supply chain visibility in the risk management context. It’s imperative for all the reasons mentioned above — technology infusion, IoT connectivity, tariffs, natural disasters, and geopolitical unrest — but also for factors related to reputation risk.  Social media and consumer reviews quickly surface every flaw in the product, but also many problematic aspects of how the product is made and distributed.

Even sabotage should be on your radar — recent reporting about tiny spy chips found on Supermicro servers has sent shock waves through top U.S. companies and federal agencies. Similar security and reputational risk also arises due to the inherent vulnerability to cyber attacks introduced by IoT and other connected components. This is especially true for products that collect or process personal information, medical devices, transportation-related products, food-and-beverage and products intended for children. If you are doing rapid NPI, these risks must be accounted for, and a security by design approach comes into play. Identifying and integrating the necessary supplier expertise early in the process is especially critical for companies new to embedded technology components. There are concrete, immediate upsides to better risk practices as well — supply chain insurance is easier to obtain and afford, regulatory compliance is eased, and competitive stance is strengthened in contract negotiations with highly regulated customers and partners (e.g., healthcare providers).

Large global manufacturers are changing the game

It goes without saying that China’s influence looms large in the global manufacturing, supply, consumer markets. Major Chinese manufacturers are expanding their global footprint through acquisitions abroad. While they used to manufacture products in China for shipping everywhere else in the world, they are now making products for Chinese consumers and building global brands. Their increasingly far-flung operations and global market reach will impact manufacturers and supply chains regardless of location.

Moreover, Chinese consumers are accumulating wealth, which means China is a huge market for nearly every major brand. It also means that labor costs are rising in China. While it may still be smart to source components from China, the labor delta is shrinking. Between rising labor costs and tariff implications, the prevailing practice of manufacturing and sourcing virtually everything in China will not make sense for every company or product. It’s time to assess these deltas before they turn into losses or advantage-killing restrictions.

China, of course, isn’t the only player making big moves. India, South Korea, the Philippines, South America, and Africa are all on the heat map for various manufacturing and raw materials sectors.

Emerging technology upends current models

Key technologies that have the potential to transform manufacturing are still fairly nascent in practice, but we’re seeing wide enough adoption that it’s time to start assessing their impact and preparing infrastructure in advance. Robotics, 3D printing, artificial intelligence, IoT-driven predictive analytics, and model-based manufacturing stand out at the moment, and the disruptive flow of new technologies shows no signs of slowing.

Additive manufacturing (3D printing of components and products) is a prime example. As adoption becomes more widespread, it will change relationships with suppliers. It may become more efficient to print long tail or low volume components in-house or at a nearby supplier. This is already happening in aviation, particularly around replacement parts. Subtractive manufacturing (machined parts) produces more waste than additive methods. While the economies of scale may not be there yet, they will soon. Procurement teams and OEMs will have to understand new cost structures and supplier capabilities in order to make the switch to additive manufacturing suppliers.

Eventually, suppliers will download fully integrated digital 3D models complete with tool paths, making it easier to switch suppliers and move rapidly to market. All of this, of course, will require companies to develop the capabilities and systems to manage and analyze sensor data, house 3D plans and models, and ensure information security. It’s a whole new security game, for instance, when you have millions of IoT devices sending data to cloud. This represents an enormous, multi-faceted risk, and companies should start working now to develop related strategies and capabilities.

One thing is certain — 2019 will not be a boring year for procurement and supply chain professionals. Converging technology advances, wildly unpredictable political environments, and global consumer trends will create surprising synergies and bring complex new challenges to the forefront. It’s time to prepare for significant shifts to occur in the next several months, over the next couple of years, and into the foreseeable future. Those who plan ahead can ride the wave instead of wiping out.

Article first published on EBNonline.com