Supply Chain Strategies in a World of Uncertainty

Organizations are struggling to deal with the paradigm shift happening in the manufacturing supply chain sector. We have:

• Increases in commodity volatility with Copper up 90% from 2020
• Increases in frequency and severity of supply chain risks
• Growing geopolitical disruptions

In this new paradigm; it is critical for businesses to have an effective supply chain strategy that adapts to the chaos of uncertainty.

To review the fundamentals of supply chains, read part one of the series: “Supply Chain Fundamentals: Sourcing” via the link below.

Before we dive into supply chain strategies, it’s important to understand the concept of Multi-tier Supply Chains or Supply Chain Tiers.

What are Multi-tier Supply Chains?

Suppliers can be split up into multiple levels depending on their capabilities and stage within the product development process.

Source: Partsimony presentation on “Supply Chain Strategies”

The above image is an example of the concept of Multi-tier Supply Chains such as a Tesla car. The further down the supply chain a supplier is, the more focused the supplier is on making a singular aspect or component of a product. To further crystalize the concept of Multi-tier Supply Chains, we’ll break out the supply chain of our Tesla example into three tiers (as pictured above). This can be broken down as follows:

Tier 1 Supplier

Tier 1 suppliers are typically focused on final assembly, testing, and packaging prior to sending to the business (i.e. Tesla), warehouse, or retail store. For example, the manufacturer shipping assembled, tested, and packaged Teslas to Tesla customers/warehouses.

Given that Tesla cars are typically assembled in-house, the Tesla manufacturing facility functions as a Tier 1 supplier.

Tier 2 Supplier

Tier 2 suppliers are typically focused on manufacturing components or sub-assemblies of a given product. An example is the manufacturing of custom fabricated or electronic components within the Tesla cars (e.g. fender panels, circuit boards, etc.).

Tier 3 Supplier

Tier 3 suppliers are typically focused on the manufacturing of raw materials that are used by the Tier 2 supplier such as the manufacturing of sheet metal or plastic resin used in the fabrication of the Tesla cars.

Supply chains are fundamental networks that impact our everyday lives from the development of our favorite devices, such as our mobile phones, to our Amazon shipments. Supply chains are the driving force that makes hardware companies and global economies tick. The key competitive advantage of any business building physical products (e.g. hardware) can be determined by how strategic and dynamic their supply chain is structured — effective sourcing strategies are a very important part of competitive hardware businesses that thrive when times are tough.

“I get it, but how do I get the components I need today?”

Good question. Firstly, it is worth noting that there aren’t any silver bullets that magically address all supply chain challenges — we are constrained by the physical limitations that come with turning raw materials into products. However, there are strategies to stay ahead of the curve and navigate the chaos like a skilled sailor on turbulent seas.

A key concept to understand when addressing component shortages is a concept we at Partsimony refer to as the Buyer Leverage Formula. Below is a visual representation of the formula.

Source: Partsimony presentation on “Supply Chain Strategies”

The Buyer Leverage Formula states that the more fragmentation within suppliers within an ecosystem, the more leverage/optionality Buyers have within that ecosystem. For example, when there was an increase in available apartments in New York City due to the effects of the COVID-19 pandemic, rent prices were lowered and renters (i.e. Buyers) had more leverage to negotiate more favorable rent discounts. However, this is not the case as more people are moving back to New York City. The more options that are available to Buyers (i.e. more fragmentation within the supply), the more leverage Buyers have in negotiations (i.e. favorable pricing/availability).

Interestingly, the Buyer Leverage Formula varies by prevailing dynamics (i.e. shutdowns, port delays, etc.) but tends to be different for mechanical components versus electronic components. Let’s evaluate this further.

Electronic Components & Supply Chain Strategies

The Buyer Leverage Formula for electronic components is as follows;

Source: Partsimony presentation on “Supply Chain Strategies”

Due to the complex and costly infrastructure required in manufacturing electronic components, there is less fragmentation of available suppliers within the electronic component ecosystem.

How should supply chain experts adapt to challenges within electronic component ecosystems?

Potential Approaches

• Order from distributors (i.e. Arrow, Digi-Key, etc.).
• Script bots to automatically purchase components. However, this is not scalable/advisable. This could also be against many app policies.

Ideal Strategy

• Build relationships directly with component manufacturers.
• Leverage purchasing power & reach of Tier 1’s.
• Build redundancies in your supply chain to mitigate risks. Supply chain resilience is extremely important — regardless of pandemics.

Mechanical Components & Supply Chain Strategies

The Buyer Leverage Formula for mechanical components is as follows;

Source: Partsimony presentation on “Supply Chain Strategies”

It is important to note there is also significant complexity and costly infrastructure required in manufacturing mechanical components. However, due to many prevailing dynamics (e.g. new fabrication technologies such as 3D printing making fabrication of mechanical components more accessible, automation, etc.), there is more fragmentation of available suppliers within the mechanical component ecosystem.

How should supply chain experts adapt to challenges within mechanical component ecosystems?

Potential Approaches

• Utilize supplier databases/word-of-mouth. However, this could take months and isn’t always a reliable or easily repeatable process.
• Leverage on-demand manufacturing services.

Ideal Strategy

• Build relationships directly with manufacturers.
• Allocate components based on core competency vs ease. It is oftentimes convenient to send RFPs of mechanical components to suppliers you’ve had a history working with. However, sourcing decisions should be based on the core competencies/types of equipment required to make the specific component in question. By sending items to manufacturers regardless of the core competency of the component, you will inevitably introduce additional unnecessary layers within your supply chain and have increased costs from “middle-men” actors within the process, as well as lower quality yields. This tends to happen with high order values where suppliers typically don’t say “no” to the order due to the potential revenue regardless of the required competencies.
• Build redundancies in your supply chain to mitigate risks. Supply chain resilience is extremely important — regardless of pandemics.

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Supply chain strategies vary based on business needs and prevailing dynamics within the multi-tier manufacturing landscape of a given product. The right supply chain strategy can make or break a business and is the competitive advantage of organizations building physical products.

It is important to establish an infrastructure that enables your organization to rapidly adapt to potential supply chain disruptions and give you the peace of mind that comes with being ahead of the curve. This is where Partsimony comes in.

Organizations leverage Partsimony to build an intelligent manufacturing supply chain infrastructure that is more resilient and sustainability-focused.

To upgrade your manufacturing supply chain infrastructure, request access at partsimony.com

Here is a link to the full presentation deck on supply chain strategies which covers the prevailing supply chain dynamics and effective strategies to adapt to the uncertainty.