Blog Article

Capacity Constraints: Red Pill or Blue Pill?

Supply chains are strained, constrained, and twisted around. It doesn’t matter what industry you are in – you are feeling the pain of either severely constrained supply, changing and volatile demand or both.

The impact of these constraints has manufacturers scrambling to optimize production with greater efficiencies and challenged distributors to take greater ownership of planning around these as well as shipping and freight constraints.

According to a survey conducted by the U.S. Census Bureau between May 31 and June 6, 2021, more than 60 percent of manufacturing companies reported challenges with delays from domestic suppliers.

On Friday, July 26, there were 33 container ships anchored off the coast of Southern California. A recent COVID outbreak in Shenzhen, China led to the temporary closure of the Yantian port disabling the ability for goods to be picked up headed for Europe and North America. Manufacturers across the board from Ford to Microsoft and Sony are feeling the pinch. Apple recently noted the silicon supply constraints could impact its sales of phones and tablets.

Disruptions aren’t new but the severity and length of these disruptions has caught many off balance. The question now – how do we minimize the impact and ensure our decisions align with our profitability goals.

The Blue Pill – Onboard Another Supplier 

A natural disaster such as a flood or earthquake takes out a supplier, a vital transportation lane is blocked for days or weeks, political instability and trade wars place unforeseen risks. For these, and many more reasons, companies have sought a way to diversify their suppliers. And, it makes sense. When factories in China started to shut down in early 2020 how nice would it have been to call up another supplier you already had a relationship with and shift your order to them? The recent trade wars had many companies looking at alternate sourcing strategies. The reality is, bringing on additional vendors is not an overnight task; it takes months and sometimes years of negotiation and planning.

Instead, as Chinese manufacturing slowed to a snail’s pace, many were calling suppliers they had never spoken with; unable to source the key components they needed to keep their business running to meet unprecedented demand. Let’s not let this happen again. Make sure you have strong relationships built on data-driven decisions that can help build trust. If a supplier knows the numbers you provide them are more accurate than your competition, chances are your order is going to go through while others wait behind you.

The Red Pill – This is Your Supply, Figure it Out 

Onboarding another supplier is the obvious answer. However, an alternate supplier is not always an option and you simply have to figure it out. When approached correctly, this is actually an interesting (and dare I say fun) approach. If you can’t find another source or your resource has a finite limit such as an ingredient for pharmaceutical companies, lumber, oil, or water you have to start thinking differently. It’s time to flip the script and not let demand dictate supply.

Let’s take an example of a lumber manufacturer who has a finite inventory of trees available each year. Demand, which is through the literal roof right now, cannot be met. Planners still need to determine, given the limited capacity, how best to meet that demand. Taking the Red Pill, our planners use a Reverse BOM approach. ‘I know how many logs I have, now let’s determine the finished products I can make with it to maximize my profit.’

In pharmaceuticals, there are APIs (active pharmaceutical ingredients). These are critical components that produce the intended effect in the patient and are often in limited supply, especially now. Knowing you will not be able to source more APIs, planners must take the given supply and determine the optimal distribution of the API to best serve the needs of patients who rely on those medicines.

In each of the examples, you are starting with supply to build your plan and optimizing that plan to meet your profitability and service level targets.

The Purple Pill – Best of Both Worlds? 

There really isn’t a best scenario to deal with the significant supply constraints supply chains face today. The key is knowing you have options to minimize the impact of these disruptions and stay aligned with your company’s strategic objectives. There was a scramble (and still is) for securing relationships with multiple suppliers. But even if you have multiple suppliers lined up, you’re still likely to face supply constraints. This is where you need to be strategic in how you utilize the supply you have, how you determine which SKUs to produce and how to allocate that product across your customers to maximize profitability and strengthen your key relationships. The answer is likely a combination of both options – think strategically to maximize the supply you have while working with partners to mitigate the impact of constraints.