Despite the volatility in the stock market, the underlying economy remains strong and tightening supply conditions continue to impact revenues with dynamics that are similar to 1999-2000. Component lead-times remain long and we are seeing spot shortages and allocation of some parts. In response, OEMs are starting to pad their forecasts and place orders with multiple suppliers in an effort to secure as much supply as they can.
So how do you assess and respond to all of this supply uncertainty? Aside from a shortage report that is generated when their supplier begins production planning, most OEMs do not have any mechanism to identify long-term shortages and lack a metric for identifying how much revenue is at risk as a result. The common mode of operation is for suppliers to simply “load and chase” demand in hopes that in time, the supplier can expedite the delivery of components and materials to complete the manufacture of products on-time. But “hope” is not a good strategy and waiting to act until you have a late delivery puts you in a vulnerable position. OEMs often measure a supplier’s delivery performance against their orders, but this is what we consider a post-performance metric that measures how the supplier “did” in prior months. By that time, of course, the damage is already done.
That is where Symphony’s Misalignment metric comes in. This metric is what we consider to be a predictive metric that looks at supply constraints over a much longer horizon, that is, as far as your (the OEM’s) forecast. The input to making this measurement is a simple report that can be generated by your supplier’s MRP systems, where a component’s “need date” and the supplier’s “commit date” is reported. It is especially ideal for you to use with contract manufacturers or any product suppliers that procure parts and components for your builds. The output of the Misalignment report, which can be customized to fit a customer’s specific environment, is a percentage of misalignments that gives you a heads-up on how much of your revenue could be at risk. For instance, a misalignment level below 5% is what we would consider as “green”, meaning that there are a reasonable number of parts that are in short supply and it is likely that the OEM and the supplier can work to mitigate them. A misalignment between 5% and 10% is in the “yellow” zone, which means that there is credible risk to revenue and that there are a large number of components that are in short supply. A percentage above 10% is what we consider to be in the “red zone”, where there is significant risk to revenue. Given current market conditions, we are seeing misalignments above 20% and in some cases greater than 30%.
While the percentage itself is of interest, the benefit of this tool is multi-faceted:
- Early Identification of Specific Problem Parts and Suppliers. One of the key outputs of the Misalignment report is that it uncovers specific components that you and your suppliers need to target for risk mitigation discussions. The ability to influence a supplier to increase its capacity, reallocate production, or authorize overtime to increase production is much more effective if you and the supplier know about the problem six months in advance of the need date vs. six weeks. The common practice that we see in industry is that long-term problems fester while short-term problems are being solved, and the cycle continues. If you can get ahead of the curve by collaboratively addressing problems months in advance rather than days in advance (especially for long lead-time components), the risk of supply disruptions can be minimized.
- Early Warning to and Prioritization of Customers. Obtaining visibility to misalignments does not necessarily mean that you can mitigate all supply risks simply because you have visibility to them. There are times when problems are beyond your control, particularly in a market where all other OEMs are fighting for supply. In these situations, you can use this tool to determine which customer orders are at risk and prioritize them based on the importance of that customer. Additionally, you can forewarn customers with a longer notice and allow them to plan accordingly rather than miss a critical shipment with little to no notice.
- Resourcefulness to Suppliers. Your suppliers, especially those that are contract manufacturers, face an increasing workload when supply is short and lead-times are stretching. Despite this increase in workload, the resources do not generally keep pace and the supplier’s team can get overwhelmed. This puts them in reactive mode, responding to the fluctuating demand of customers that are routinely escalating and putting pressure to expedite shipments. By providing analytical support like the Misalignment report, you can get a clearer picture of potential problems in the supply chain and can help focus the resources of your supplier to align with your priorities.
Generating a Misalignment report is a simple approach for you to gain visibility into both short-term and long-term supply constraints in your supply chain. It is also a tool that enables dialogue with your suppliers and helps you develop an action plan that you can both understand and support. If you are concerned about continuity of supply and are interested in finding out more about how misaligned your supply chain is, Symphony can help. You may contact us at info@symphonyconsult.com.