Is there a way to make supply chains antifragile?
Like most industries, the automotive industry is hard hit by the vagaries of the economy. And, just like the economy, the automotive business goes through cycles of highs and lows. During a boom, sales go up and during a downturn, the sales plummet. Curiously, the former is always accompanied by stock-outs, and the latter by a pile-up of excess inventory. The dealers are hit the hardest. Ancillary small vendors are pushed out of business. (The current slowdown has dealt a blow to the automotive industry. Automobile: Firmly in the grip of a slowdown, Why is India’s car industry in breakdown mode?). The last one came after the financial meltdown of 2008–2009. These periods are the roughest on companies already on the verge of bankruptcy. Most collapse under the burden of working capital costs which rise rapidly during a downturn.
The good news is that this problem is one that companies can overcome. Firstly, they need to build agile operations and supply chains that can respond spontaneously to subtle changes in market consumption. This entails attuning themselves with market demand, aligning manufacturing to customer demand In addition, agile companies need to fortify their survival mechanisms to help them tide over a downturn. That’s how they can thrive and grow, during both upturns and downturns in the industry.
Acquiring agility, however, is not easy. Companies need to make a ‘paradigm shift’ in their approach to business. This shift involves replacing their push-based models of operation with pull-based systems. As per the push-based model, companies manufacture the product and push them down the supply chain (warehouses, depots, distributors or dealers, etc.)The quantities of product are based on assumed sales (i.e forecast for a period) or expected order booking in the period.
The basis for the push strategy is the forecast. Forecasting for an unknown future could lead to a mismatch between stock on hand and incoming orders because, at times real demand differs from forecasted demand. The longer the horizon of the forecast, the more inaccurate it can be. Multiple uncertainties in the environment can interfere with the forecast, rendering it unreliable.
Manufacturing as per the directives of an ‘unreliable’ forecast leads to a situation where, ironically, surplus and shortage co-exist. On the one hand, the production team labours to move out surplus inventory, and on the other, it grapples with shortage of raw material/components/parts to manufacture inventory/products that are in demand in the market. Therefore, despite, investing copious amounts of working capital, companies struggle to meet customer demands. Thus begins the vicious loop. To revive sales and profits, companies funnel more and more working capital into the business. This capital, however, ends up as mountains of mismatched inventory. Unable to meet customer requirements with existing inventory, companies source more capital to produce more inventory and, thereby, keep the business going. This loop is the root cause of companies’ collapse when an economic downtrend hits the market.
Way Out:
Pull-based mode of operation: A company is said to be in this mode when it manufactures product as per market consumption or as per firm orders from the market.
In a pull-based system, manufacturing activity or inventory movement is triggered when the appropriate signals are sent and received. These signals are transmitted when products are consumed in the market. In other words, consumption and production are interlinked. Products are moved/manufactured based only on consumption. This eliminates the problem of surplus and shortage in the supply chain and operations.
For instance, in the automotive sector, actual manufacturing lead times for most components is limited to a few hours or 2–3 days (except for forging or casting products). The current lead time, as experienced by the companies, is 15–20 days.
Thus, a pull-based system when gets coupled with the unlocked inherent lead times of the supply chain can bring down the overall working capital needs of the supply chain and operations. Companies can accomplish all of this while providing the same or higher customer satisfaction.
Too good to be true? No.
Companies like Sonalika Tractors, Fleet guard filters, J.K. Fenner, Shri Ram Pistons have created pull-based systems by aligning their supply chains with market consumption. Along with making their supply chains agile enough to react to market changes, these companies have transformed their businesses to be ‘antifragile’ (a term coined by author Nassim Nicholas Taleb). They can now thrive, downturns notwithstanding. What’s more, they will possess a definitive advantage over competitors barely equipped for challenges posed regularly by inevitable events such as economic downturns.
