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Future Proofing Your Indirect Supply Chain: Lessons From a Global Pandemic

Over the past 50 years we have built an increasingly global direct and indirect supply chain, linking markets around the world. As consumers, we have come to rely on the direct supply chain, with raw material suppliers, manufacturers, and distributors working together to provide us with goods and services efficiently and at the lowest possible cost. To see this demonstrated, we need look no further than our refrigerator: green onions from Mexico, garlic from China, and both affordable and readily available in our local grocery stores.

However, the last 2 years have taught us we cannot take this supply chain for granted. Raw material shortages, plant shutdowns, port congestion, and overtaxed shipping capacity (ocean, rail, and road) have all conspired to put this system under strain, creating at best order delays, at worst stock outs, such as the empty grocery store shelves to which we can all relate. These same forces have affected the indirect supply chain responsible for ensuring manufacturing equipment is maintained and operating. While equally impactful, the signs have been less visible to most.

Why Managing Your Indirect Supply Chain is Critical

An empty bin location in a storeroom that should contain a bearing, gear, switch, or drive may be less relatable than an empty retail shelf, but machine downtime will grind the wheels of commerce to a stop just as fast as any other link in the supply chain.

The indirect supply chain is responsible for the provision of goods and services supporting industrial equipment, such as machines and assembly lines. It is critical to continued operations and the continued provision of goods, yet it rarely receives the same consideration and attention that is paid to direct materials or finished goods. This is a common oversight that needs to be addressed.

Here are 5 things that should be considered to help future proof your indirect supply chain and ensure equipment uptime.

5 Key Considerations to Future Proof Your Indirect Supply Chain

1. Supply Base Development

If you are a manufacturer of a consumer good, for instance shoes, you are unlikely to have a single source for core raw materials such as leather, fasteners, trims, adhesives, or rubber. It is more likely your supply base is comprised of a partner vendor, as well as a secondary and tertiary source of supply. Your spend would be apportioned across this vendor base to maintain viability, which would ultimately provide qualified options should supply disruptions arise, increasing your ability to hit production targets and fulfill demand. Nurturing this supply base, managing joint performance KPIs, and proactively dealing with emerging issues would be a matter of course. It would not eliminate supply disruptions, but it would reduce the risk and magnitude of their impact.

These same principles and practices can be applied to indirect materials or MRO (Maintenance, Repair & Operations) but are less frequently applied. Worst case, repair items that can be broadly sourced are subject to sole source agreements or commercial parts are purchased exclusively through the Original Equipment Manufacturer (OEM). This is easier to administer and when resources are constrained may be the only viable option. However, the key message is that robust category management practices applied to direct materials have a role to play for indirect materials. Applying these practices consistently goes a long way to insulating operations from supply uncertainty.

2. Lead Time Management

Understanding the key elements of lead time and managing them to ensure they accurately reflect reality is key to effective replenishment planning and material availability. Modern Material Requirements Planning (MRP) demands these values be representative at the item level, otherwise systemic overstock or shortages will ensue.

Over the past 2 years both internal (Requisition to PO issue) and external (PO issue to receipt) processes have been influenced by a variety of factors, ranging from staff absenteeism to shipping container availability. Lead times have been more dynamic during this period than any time in recent memory. So, here’s the question, how often has your company reviewed and updated these values over the same period? These should be reviewed at the item level at least quarterly, ideally monthly, to ensure they remain representative. The diligent review and update of lead times is critical to ensuring replenishment planning is supported by robust assumptions, otherwise service targets are quickly eroded.

3. Ordering Value Maintenance

Ensuring ordering values (Min/Max, RP/RQ) reflect prevailing supply/demand conditions is also key to protecting ongoing operations. The more volatility there is, the more important this process becomes. Modern pattern recognition software and automated business rules make what was once a laborious process easier than ever, helping to ensure enough stock on shelves to support ongoing operations. As conditions change so should ordering values.

However, this is also an often-neglected business process with the values represented in the system of record often dating back to the most recent install or update of the ERP or EAM. Adjusting these values to reflect changes in operating context and ensuring target service levels are linked with relative item criticality are relatively easy ways to provide a layer of insulation from supply shocks and de-risk the indirect supply chain.

4. Master Data Management

Item descriptions, vendor master records, stocking locations, and related core data attributes are always important to ensure transactions run smoothly. Under pressure we can ill afford to have POs rejected, receipts held up, or invoices outstanding due to ambiguous or missing data. Generally, there remains much to be done in most organizations in this area. Getting the basics right drives value, not just in de-risking operations but also in improving transactional efficiency.

However, future proofing demands we go further. Faced with limited funds and a need to provide optimal stock coverage, trade offs are necessary. This requires we understand where each part is used and the relative criticality of each asset and its corresponding service parts. Asset bills of material and item criticality are value inputs to this decision-making process but are often absent or poorly maintained. Addressing both provide invaluable inputs to stocking decisions, in addition to improving the effectiveness of dependant processes such as maintenance planning.

5. Material Preservation

The only thing that may be worse than an out-of-stock is an in-stock component that is not fit for purpose. A series of frantic phone calls, expedited approvals, and an expensive hot shot shipment inevitably follow. Establishing and diligently executing maintenance in storage programs will go a long way to mitigating this risk. Rotating the shafts on motors and ensuring fluid levels are maintained in gearboxes are easy examples.

Appropriate storage conditions play an equally important role in ensuring operational readiness. Belts, hoses, and gaskets exposed to ultraviolet light and temperature fluctuations can be expected to become brittle and crack. Bearings exposed to dust can be expected to seize prematurely. The basics of material preservation have always been important but are now more so, as response times extend and supply surety is anything but given.

Mitigating supply chain risk

We will never be able to eliminate all the uncertainty from the supply chain, but there are certainly things that can be done to reduce the impact it has on operations. Now more than ever we neglect the basics at our peril.

Xtivity’s Pulse SaaS platform enables companies like yours to optimize parts management and proactively increase their asset reliability by effectively managing their critical parts inventory. Today’s forward-thinking companies are managing their indirect supply chain proactively and mitigating risk despite the disruptions of the moment.

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