Gartner Research

How Resilient Is Your Manufacturing Network After COVID-19?

Published: 27 July 2020

ID: G00721732

Analyst(s): Kamala Raman, Sam New

Summary

For years, global manufacturing organizations have been lulled into a sense of complacency, prioritizing cost containment and efficiency. This research helps supply chain leaders responsible for operations to build greater resilience in their insourcing and outsourcing strategy to respond to disruptions.

Overview

Key Challenges
  • Trade disputes, climate change, macroeconomic shifts, natural disasters or global health emergencies create volatility for supply chain networks. Organizations that complacently source from very few manufacturing service providers will find that the network effect that is a strength in good times also exposes the organization to vulnerability during major disruptions.

  • Diversification of previously efficient supply chain ecosystems results in at least temporarily higher costs and increased complexity, both for internal and external production.

  • Manufacturing and procurement leaders who take a reactiveview to each unfolding crisis are missing an opportunity to design networks strategically to withstand planned and unplanned disruptions.

Recommendations

Supply chain manufacturing operations leaders responsible for strategy and performance should:

  • Strive to go beyond cost optimization to include resilience as an objective for your manufacturing network, including both company-owned production assets and external manufacturing sites.

  • Holistically evaluate the geographic footprint of both internal manufacturing assets and those of external manufacturing service providers by assessing options for production buffers within a site as well as across the network.

  • Couple empirical data with scenario planning to test sourcing options for resilience by staying mindful of necessary constraints regarding the partner’s role in your manufacturing network.

Introduction

As globalization continued on a relentless upward trajectory in the past few decades, many buyers of manufacturing services have become complacent, relying on a few specialized global providers (often in Asia) for many raw materials, capabilities and services.This has often extended to how companies set up their own production sites in regions prized for specialized capabilities, albeit far from their demand centers.

In advanced supply chains where technology and product specifications tend to evolve at a rapid pace, there has been a strong bias toward producers with many specialized capabilities. There are several reasons for this. Complex production tools that are essential for mass production also require high investments in the form of skilled resources and development costs upfront. Providers who can justify the capital investments needed to stay on the cutting edge of technology by risk pooling the demand across multiple customers, therefore, reap the benefits of scale. An ecosystem of subtier suppliers of components, tools and software then builds around these large providers, creating a beneficial industrial cluster.So it follows that the more specialized the capabilities, the more pronounced the push to outsource to specialists and the harder it gets to bring such capabilities in-house, building a virtuous cycle of scale, cost-efficiency and innovation.

While acknowledging the powerful role specialization plays in today’s global economy, this research will emphasize ways to make risk-based decisions early in the design of the network, when costs and barriers are the lowest. In Gartner’s Weathering the Supply Chain Storm Survey conducted in 2020, respondents prioritized many such actions as key steps for the next two to three years (see Figure 1).

Figure 1: Mitigative Actions Taken to Improve Supply Chain Resilience

These actions can be a way to build resilience without having to retool established supply chains, which can be cost-prohibitive.

Analysis

In globalized supply chains where operational efficiency is highly prized, manufacturers and buyers of external manufacturing services often rely on a few large, sophisticated suppliers or production sites. This allows them to achieve economies of scale through low-cost sourcing and just-in-time inventory policies. Within this operating model, it is still possible to improve resilience in the manufacturing network. There are several approaches to managing for disruptions that can be effective. Here are a few examples.

A large pharmaceuticals manufacturer embedded risk-based decision making into the new product design (NPD) process, where costs and barriers are lowest. This does not mean automatically building in buffers (or dual sources) for everything by default. Rather, it ensures that when resilience is one of the required outcomes for the NPD process, it allows for them to plan for it over a preexisting timeline. This is preferable to an expensive redo after a product is approved, validated and registered with suppliers already locked in place in the extended network.This allows the company to avoid situations such as being dual-sourced but from the same geographical location, which takes away much of the intended resilience.

For this life science firm, long-term relationships with key suppliers and external manufacturers meant that dual sourcing with the same suppliers was preferable to bringing in multiple new partners. In these situations, the sharing of multiyear demand plans with suppliers allowed them to leverage the benefits of buying/managing production facilities at scale. Conversely, at the same time, it also allows absorption of local inefficiencies in volume projects, from one customer through the risk pooling of demand from many customers. This was a win-win in terms of improving resilience, while still focused on cost-efficiency. However, it is important to note that dual sourcing may not be effective in supporting resilience if the alternative source does not provide geographic diversity (i.e., both suppliers are similarly located).

For a large global consumer goods manufacturer, the benefits of the scale from one large multimode site meant that it consolidated several existing plants into one new manufacturing location. This scale allowed it to bring suppliers on-site, invest in technology that could reduce changeover costs and provide flexibility for dual line qualification (or more for key SKUs). Therefore, it created room for buffers in the end-to-end production process should equipment or a line be offline.

Production lines for suppliers and the company’s own lines were carefully designed, keeping in mind the downstream needs of customer demands per day, per SKU. The company designed production lines to cycle through high-volume items every day and long-tail volume every week. The plant and the distribution center location were both chosen to be within 50% of their customer demand in one transportation day. By integrating the upstream (supplier) location with its own production site and downstream (distribution center) location, and investing in automation and technology, the company was able to set up its network for shortest physical flows and flexibility.

It must be noted, however, that if there is a major disruption at this one site, such as a labor dispute or fire or natural disaster, this does not provide any alternate options for the firm. In this case, it must be accepted that the firm is designing limited resilience within the constraints of a single site, and therefore, is trading some of the intended resilience for cost-efficiency.

As the examples above indicate, it might not make sense to move away from large, efficient and sophisticated partners simply to diversify. Having visibility to the manufacturing partner’s network and constraints is a key step in enabling this sort of resilience for organizations that are mature and in strategic partnerships. Such communication and visibility targets may not be appropriate goals for tactical/transactional relationships with contract manufacturers.

Industries which have typically concentrated manufacturing in select geographies have had a number of reasons to reevaluate their network in the past few years. In addition to labor costs going up in a number of countries, notably China, the U.S.-China trade war has provided an incentive to not simply diversify away from China but to consider how to regionalize capabilities around the world.

Best practices from advanced manufacturers in a range of industries (low capital expenditure [capex] to high capex models) have included these actions in order to use both empirical data and anticipatory scenario planning models. This is done to test traditional and nontraditional sourcing options for flexibly switching sourcing or production locations.

Nimble footprint diversification: For one retailer of apparel, hard goods and footwear, using strong connections internally between the inbound supply chain and sourcing organization has been critical to evaluate smaller suppliers (contract manufacturers for specific niche products) in upcoming locations. With this internal integration, it was able to evaluate external manufacturers in locations such as Mauritius, Madagascar or Swaziland in addition to larger suppliers in established locations such as Bangladesh, Vietnam, India and Pakistan.Taking advantage of its relatively smaller size (and the relative ease of shifting low capex sourcing), this firm was able to be risk-forward and nimble in moving to nontraditional locations. These locations may be seen as too small or too risky for bigger players.

Having a network of agents on the ground in these locations as well as collaborating with local agencies helps organizations, such as this one, move sourcing in a reasonable period of time (six to nine months). This is true as long as moves are not carried out during the throes of a crisis.This firm was objective in understanding which products could be moved from existing sourcing locations and which ones could not be just yet. Therefore, the exercises were based in reality and placed on a timeline that allowed for methodical planning and execution.

Postponement of capabilities and a regional footprint: Postponement of final assembly often becomes a challenge for companies if all suppliers are still based in China, due to the cost of logistics. This is because shipping components takes up more volume and increases logistics costs. One device manufacturer, who had all manufacturing based in China between its own and contracted locations, needed to diversify its network when faced with the U.S.-China tariffs. Its footprint diversification took two options.

  • One was to expand its existing site in Mexico (which was already making consumables) to finish the semifinished units. The semifinished unit was no more bulky than the finished unit, and this took care of the logistics challenge. And the landed costs in Mexico were higher than those in China, but only in the low single digits, thanks to this site being company-owned, which helped with spreading the fixed costs over a larger volume base.

  • The other was to narrow the search for new sites to those countries where its Chinese manufacturing partners already had sites, rather than conduct a complete greenfield study. This limited its study to Vietnam and Thailand in Asia and Poland for Europe.

Greenfield site selection study: A large high-tech manufacturer, using external manufacturing partners, has taken a different approach to its network diversification efforts. Instead of beginning with the locations that its favored partners have capabilities in, it opened up the search to a broader set of possible locations represented by these 11 countries. It also began screening by using the data in Gartner’s Manufacturing Site Selection Toolkit (see Figure 2).

Figure 2: Greenfield Site Selection Study for High-Tech Manufacturing

This is not to say that discussions will not extend to external manufacturing partners and their existing and future expansion plans. An unconstrained greenfield site evaluation study is meant to help firms understand what countries they may be overlooking when constraining their screening only to partners’ existing locations. The objective for this firm is to provide flexibility in switching global manufacturing and sourcing capacity across two or more locations in order to protect themselves from planned or unplanned disruptions.

The primary focus of a resilient manufacturing network is to create processes and tools that enable a rapid response to changes in customer requirements, market and macroeconomic conditions or other exogenous disruptions, while still controlling costs and quality.

When testing alternate sourcing options for resilience, constraints in the form of required capex, relative ability to switch suppliers and limitations on transitions or product moves and production locations should be kept in mind. This is essential to build a robust business continuity plan. These options will require that manufacturers must examine their existing sourcing strategies, including existing direct material suppliers and external manufacturing service providers as well as the set of available alternatives. This analysis should include incorporation of both historical and empirical experiences, and forward-looking scenario planning models to measure the impact of possible disruptions and the effects of implementing proposed contingencies.

Assessing partners’ role in your network. Examine the existing manufacturing network and assess it for exposure to historical disruptions as well as imaginative “doomsday scenarios.” Think creatively about how partners can help manage for trade and tariff changes, disruptive events or changes in global demand patterns. Options for exposure reduction could be through shifting the capabilities sourced from existing partners as well as exploring alternative sources. One high-tech firm had a strategy of maintaining multiple networks within its network due to its partnership with several, operationally siloed external manufacturing partners, each with their own network of a handful of sites. This ad hoc local approach had meant higher brand owner overhead to manage multiple relationships and longer time to onboard new products due to limited integration. With a global external manufacturing strategy, the firm is looking to create a single dominant network with multiple nodes,.This provides resilience and business continuity options within one partner’s network as well as the ability to conduct deeper roadmapping initiatives to support faster new product introduction.

When examining options, consider the differences in capacity, workforce availability, labor rates and technical expertise in various geographies. At a minimum, detailed answers should be obtained for the following questions:

  • What differences in labor rates exist and what is the future projection for rates?

  • Do production facilities in the proposed new location have adequate workforce levels and technical expertise to support the proposed volume?

  • Is the service provider able to simultaneously support “all” of the requests for regional shifts from “all” of its customers? If not, where will your business fall in the hierarchy of priorities?

  • What impact will the anticipated regional shift have to your inventory policy for raw materials, intermediate goods and fully assembled products?

  • What impact will this regional shift have on the ability of direct material suppliers to fill orders?

  • What impact will this regional shift have on distribution costs and service levels to meet customer needs?

  • What legal, regulatory and policy considerations exist if production is moved?

Combine these with inputs on the quality of the relationship with the provider in order to gain a thorough understanding of the midterm and long-term costs of a shift. Questions include:

  • At what stage of maturity is the relationship with this manufacturing service provider?

  • Is this engagement/relationship with this service provider tactical/transactional or strategic?

  • What are the short- medium- and long-term goals of this relationship? Is the relationship focused on filling internal capacity gaps, cost reduction, etc., or is this a complex relationship complete with mutual development of a portfolio of goods and services?

  • Is the relationship governed by traditional means, on a purchase order basis, or do you have long-term agreements, master service agreements (MSAs), etc. in place?

  • What has been the historical performance of this service provider? Reexamine key metrics related to cost, delivery and support, flexibility and ease of doing business, partnership and innovation, quality, and risk/compliance.

  • What is your status as a customer of the service provider? Where do you rank in terms of priority?

  • How does this provider rank in terms of cost versus flexibility? For instance, would I use this provider when I need the best cost or would I need this provider when I need flexibility?

When evaluating the viability of alternate geographical options, factors to consider span macroeconomic to microeconomic. Macroeconomic is a country’s position as a desired manufacturing location based on quality, availability and cost of labor, infrastructure, and relative ease of doing business, among others. Microeconomic is the labor rates for the type of labor your facility needs, distribution costs on the chosen mode of transportation and the availability of a supplier ecosystem in the proximity of a chosen location, among others.Gartner’s Manufacturing Site Selection Model provides one such combination of factors. While greenfeld site selection studies might happen infrequently in an organization, these evaluations can be carried out to compare existing sites within the brand owner’s or partner’s network to determine the optimal placement of additional capacity or technology.

Resilience and cost-efficiency often end up being two sides of the same coin with opposing impacts on an organization’s supply chain ecosystem (see Table 1).

Within the constraints of what makes for a profitable and sustainable operation, each organization has to decide where along the spectrum of efficiency versus resilience it makes sense for them to operate. The answer may differ within an organization, depending on the product portfolio, customer needs or geography.In the face of back-to-back disruptions in the form of the U.S.-China trade war, and now the global pandemic, more organizations than ever are paying attention to these factors. They are coming up with a balance that strikes the right note between resilience and efficiency in a global manufacturing network.

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Evidence

2020 Gartner Weathering the Supply Chain Storm Survey. In February and March 2020, Gartner Supply Chain Research sent invitations to complete an online survey to Gartner clients, community members and to a wider group of practitioners in supply chain and other functions globally. We received 260 completed responses during the survey period for this survey. All told, 57% of the participants were at VP/director level or above. We had participants across industries and mostly worked in supply-chain-related functions; for example, supply chain (43%), purchasing and procurement (11%), and logistics/transportation and distribution (10%). Additionally, 42% of respondents were from North and South America, 38% from EMEA, and others from Asia and Australia and the rest of the world. Finally, 46% of the survey participants were from $10 billion-plus companies.

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