Supply Chain: The New Complexity

Agility and intensive market observation are helpful. IT tools for refining the ERP system can also curb negative effects. The field of activity and the framework conditions of supply chain management have fundamentally changed in the past two years. Figuratively speaking: A road race has become an obstacle course in rough terrain. Turbulent times have dawned. As a result, the demands on SAP-supported supply chain management are also changing fundamentally. To stay with the metaphor, it is not primarily a matter of driving around the bend a little cleaner and faster in good weather conditions. Instead, it’s about making sure that you can get to the finish line in unfamiliar terrain and in bad weather.

Scarcity as the new normal

The challenges are well known; every company is affected in one way or another. It started with strict pandemic regulations in China’s ports and manufacturing plants, continued with container ship congestion and drastically rising freight costs. In parallel, the shortage of semiconductors emerged, affecting the entire mechanical engineering industry in addition to the automotive industry. Paper and plastic packaging materials are in short supply everywhere, partly due to another escalating factor – skyrocketing energy prices. Supposedly trivial events such as a stuck container ship in the Suez Canal further fueled the crisis. The war on European soil resulted in further shortages of products, ranging from automotive wiring harnesses to nails for wooden pallets.

In an ifo survey conducted in March 2022, around 80 percent of the companies surveyed were affected by shortages. The Kiel Institute for the World Economy (IfW) estimates that German industrial production in 2021 was twelve percent below the level it would have been without supply bottlenecks and material shortages. This corresponds to a value of 70 billion euros and two percent of German gross domestic product lost. Unfortunately, it cannot be assumed that we will return to the (from today’s perspective almost paradisiacal) conditions of a pre-pandemic era. Energy prices will in all likelihood remain high and the semiconductor crisis will keep us busy until at least 2024.

Procurement goes C-level

Many manufacturing companies have switched to crisis mode in this situation. In design and development, machines are being redesigned so that available microchips can be used. Procurement, for example of semiconductors, has been declared a matter for the C-level – the boss or the board of directors -, and in the case of many supplier parts and raw materials, buyers are looking for secondary suppliers who should ideally be located in vicinity instead of on other continents.

Under these circumstances, supply chain management software has a new role to play – or rather several new roles. One thing remains the same: management’s demand on supply chain experts to ensure a smooth and cost-optimized supply chain. However, fulfilling this task has become much more difficult. This is because it virtually means squaring the circle: You have to forecast the unpredictable and reliably plan the impossible.

What seems manageable in such an abstract way quickly becomes almost impossible when you get specific and describe the unforeseeable. For example, if it only becomes apparent at the start of a shift that the required materials were not delivered just in time, the previous day’s planning does not work. This is also the case when it only becomes clear in the morning how many employees are in quarantine or customer call-offs are adjusted numerous times throughout the day.

Flexibility does not come cheap

Flexibility is required, but flexibility does not come cheap. It costs time in the form of setup and planning, it means higher logistics costs for smaller production quantities, and more machine downtime due to short-term full load instead of smooth production. So, is it better to increase the safety stock, to stock more intermediate and finished products? No, because this also costs, and not only because of capital commitment and warehousing. Price changes – a big issue at the moment, anyway – or the loss due to the perishability of materials also have to be factored in.

First, companies need to look more closely at their entire supply chain. End-to-end ERP systems based on SAP are a good prerequisite. However, they should be supplemented and refined by SCM-specific tools such as the GIB Suite on ERP/ECC 6.0 or GIB SCX on S/4 Hana. These tools increase transparency across the entire supply chain and create the prerequisite for quickly identifying irregularities. The users then have a kind of “bottleneck radar” at their disposal, based on which they can react at an early stage and take targeted countermeasures.

More agility

The GIB software ensures transparency and speed. In other words, it promotes agility. It immediately warns of changes in customer requirements and simulates intralogistics processes to determine the best production sequence given capacities and material availability. It also allows you to jump directly from the order to the independent and dependent requirements to directly identify and resolve bottlenecks. Furthermore, it provides transparency right at the machine in order to remain capable of action even in the last stages of production.

Transparency has become a necessity, as it acts as a data foundation for all decision-makers. In addition to transparency, GIB tools also provide meaningful metrics that indicate the quality status of the supply chain and define exactly where action is needed in supply chain management. This ensures that all parties involved are looking at the same database in the SAP system and are talking about the same topic. Suppliers – even those without their own SAP system – can also be included in this information chain.

Goodbye globalization?

Apart from these currently important optimizations, fundamental questions also arise: Is it now time to adjust the supply chain strategy? For years, the trend has been moving toward internationalization, and this definitely brought advantages. However, now the disadvantages are becoming apparent, many a purchasing manager or supply chain manager will wish for the supposedly good old days before globalization (which they only know from hearsay, though). In those days, you simply sent a truck to the supplier when parts were missing and were not affected by what was happening in Chinese ports or shipping accidents in the Suez Canal.

Insourcing und nearshoring

The desire to reintegrate previously outsourced processes is understandable. Probably never before has the supply chain been so unstable and critical in so many companies. However, are strategies like insourcing or nearshoring realistic? Can they be a real alternative from an economic perspective? The answer is complex. Short chains are more stable, it’s true. But it’s important to note that if you want to sell globally, you shouldn’t limit your sourcing to your neighborhood. What if the example of customers in China and the USA sets a precedent? Then entire markets break away.

In addition, wage differences, for example, cannot be explained away. And it might be difficult to buy microchips or special sensors through nearshoring. Some supply chains are global – if you take raw materials into consideration, that applies to almost all supply chains. Economies of scale and core competencies also play a role. If a service provider produces, paints, or finishes components for 50 or 200 customers, they can most likely do it both better and cheaper than each customer can on their own. Consequently, we will have to live with complexity. There is no return to a pre-globalized economy. However, every company should proceed with caution when it comes to globalized supply chains and find points in the chain where risks can be reduced.

One measure could and should be to check where you could buy locally instead of globally. Price should not be the only consideration here, because it is often likely to be higher with local suppliers. It is also worthwhile to put cooperation and communication to the test. With a local supplier, cooperation can be structured differently than with suppliers on the other side of the globe. Perhaps the local supplier has an idea for optimizing the design? Or maybe they deliver a complete module instead of various components? Companies should definitely keep in mind that physical proximity opens up other opportunities for working together.

Stabilizing the supply chain

Consequently, supply chain optimization, which is often driven by necessity, should not only be about the physical proximity to the supplier, but also about the type of relationship you maintain. And regardless of where the supplier is located – whether in Stuttgart or Shenzhen – you should create transparency in the supply chain. Ideally, you will then be able to plan according to demand, monitor directly, and, as far as supplier management is concerned, sit at the steering wheel instead of in the passenger seat. This stabilizes the supply chain.

Another thing that can help is to make use of qualified services in the form of consulting. At ifm (previously GIB), consulting with the goal of Continuous Improvement is already part of ongoing customer support. Both parties can learn from this – the customers through comprehensive market knowledge of the consultants who have completed many different types of projects and have thus accumulated expertise, and the consultants by getting to know new and practical use cases for which solutions have to be found.

Good reasons for supply chain optimization: Apart from the disruptions of increasingly complex supply chains, there are other reasons for targeted and IT-supported supply chain optimization. Both new regulations and the increasing consideration of sustainability factors demand a higher degree of transparency across the entire logistics and procurement process.

Stable supply chain ensures success

The ifm group, which also includes GIB, is a good example of how a close look at the supply chain makes a lasting contribution to corporate success, especially in turbulent times. In the past fiscal year, the specialist for innovative automation technology was able to increase the previous year’s sales by 21 percent and achieve a new sales record of around 1.16 billion euros. “The fact that we have come through the crisis with this much strength shows that our growth strategy with a diversified market and industry structure has been successful,” comments Christoph von Rosenberg, CFO of ifm, on the publication of the business figures. “Furthermore, a stable supply chain despite globally disrupted logistics processes has played a significant role in our success. In 96.4 percent of cases, we were able to make the delivery on the date specified by customers in 2021.” Earnings (EBIT) of 10.6 percent (previous year 7.6 percent) also increased significantly compared to the previous year and reached a record level. These pleasing data and figures are certainly not exclusively due to the use of GIB software tools developed in-house, but they have certainly contributed.

This is the third article of a series! If you would like to read the next one, click here. If you would like to read the first one, click here.