COMPANIES invest a lot of time and money to source for the right suppliers. They want to ensure they are getting the best deal in terms of cost, quality and efficiency.
But recent events have shown that manufacturers may have to consider other factors to guarantee uninterrupted supplies at all times. After all, ensuring that materials and goods move smoothly along the supply chain is key for businesses to run.
This has become even more apparent with the Covid-19 pandemic.
When China first instituted the lockdown on Wuhan on the eve of Chinese New Year, local businesses were already fretting about not being able to get their imported products on time. And when Malaysia implemented the movement control order (MCO) in March, local manufacturers were at a loss over trying to get sufficient supplies for their production.
“It was hard to source for materials. So we were getting them from whichever source was available, including getting them online even if the cost was higher, ” shares a disinfectant manufacturer.
Apart from low cash flow, supply chain disruption was one of the biggest challenges faced by manufacturers as companies and whole industries were caught off guard by the restricted movement measures and border closures.
“That sent a shockwave of ripple effects through their supply chains and businesses, ” says Ernst & Young Advisory Services Sdn Bhd director Tan Chiaw Hooi.
“These disruptions fundamentally changed how supply chains worked in the past, and the likelihood is that many will not recover for years to come, ” she adds.
With the reopening of the economy post-MCO, Tan expects supply chains to be restructured, both globally and domestically. The shutdown of economic activities in China and key trading markets have caused companies to re-evaluate their supply chain sources to minimise risks and ensure operational resilience.
Based on a recent EY Global Capital Confidence Barometer survey, 67% of companies in Asia Pacific have indicated that they have taken active steps to restructure their supply chains.
Another survey by EY showed that the three main impacts that Covid-19 had on supply chains were delay in fulfillment and delivery, delay in receiving supplies, and accumulation of inventory.
These impacts were felt by local SMEs as well as billion-dollar conglomerates alike.
“A small number of SMEs have started to consider switching from overseas to local suppliers. To ensure business resilience, SMEs need to re-strategise and diversify their supply sources and find local or Asean near-market sources to manage uncertainties and disruptions, ” says Tan.
New supply models
While supply chains have historically been about cost, quality and efficiency, businesses may now want to look at the resilience of their supply ecosystem.
Tan notes that manufacturers had previously looked at factors such as low safety stock levels, geographic concentration and vendor rationalisation when considering when and where to source their materials from, all of which have been designed to drive up efficiencies and drive down expenditure.
“Now, there is a need to bring in the concepts of resiliency, responsiveness and agility. It may sound counter-intuitive, but moving forward, greater geographic dispersion, greater stock inventory or a lengthier supplier list would allow companies to continue their operations even though their supply chains may be disrupted.
“These will inevitably bring a huge challenge to organisations as the cost of goods sold and the selling, general and administrative expenses will be higher.
“The Covid-19 pandemic has also increased the price gap between what sellers expect and what buyers are prepared to offer, so companies are facing pressure on sustaining margins too, ” she notes.
However, SMEs need to pay attention to their supply chain agility and resilience.
Tan points to the 2008 recession as a comparison, noting that companies that emerged stronger in the previous crisis had a common winning strategy – they balanced cost-cutting measures with selective investment, particularly in new technologies.
“We anticipate a similar situation to unfold in response to the current crisis.”
As SMEs relook their supply chain strategy, adapting at speed is paramount.
One of the things they will need to consider to foster a stronger competitive advantage is balancing cost and flow. Until a vaccine is found, Covid-19 is likely to keep reappearing in waves and periodically disrupt supply chains.
“Simply focusing on cost is no longer enough. Modeling a resilient supply chain that is optimised for cost as well as flow will allow organisations to keep goods and services flowing to their customers.
“To help manage increased costs and remain competitive, SMEs should review and revisit contracts or extensions or negotiations to suit the current business landscape. Leveraging initiatives that reduce financial burdens or provide reliefs on loans and obligations should also be a priority, ” says Tan.
Secondly, small businesses will need to accelerate the adoption of cloud technology or platform economy to enable them to leverage an ecosystem to enhance their business operations. This will allow them to diversify their sourcing, distribution and sales channels while improving their online presence which can help sustain their business during movement restrictions.
Tan also urges SMEs to utilise technology to automate and digitise their supply chains. By investing in more collaborative, agile planning and fulfilment capabilities such as IoT devices for demand sensing, goods movement tracking, advanced forecasting solutions and social media demand behavior monitoring, companies will be able to better understand demand signals and quickly react to them.
These are important for business performance even in normal business conditions and are more so during a crisis, where they can increase supply chain resilience.
The use of technology would also help companies have better visibility of their entire supply chain, which is often one of the biggest challenges for most organisations.
In fact, a recent EY poll found that only 6% of the respondents are very confident that they have end-to-end supply chain visibility of their systems and capabilities.
“The ability to assess and respond quickly to market sentiment and economic indicators, and to distinguish one-off temporary, postponed, accelerated or disturbed demands from new or permanent patterns of consumption, is vital so that companies can proactively rebalance supply and demand, redirect fulfilment flows, optimise material availability and geographical distribution, ” says Tan.
Of course, the increased reliance on technology will mean that companies will have to ensure that their data is safe and their virtual infrastructure is secure. It will also be important for them to consider how they can better support their customers, employees and suppliers to transact securely online.
Digital trust is becoming a key aspect of brand, reputation and customer loyalty. And this is critical to driving greater adoption of online collaboration technologies and a more aggressive push towards online presence and virtual distribution channels.
Covid-19 has undoubtedly created an unprecedented challenge for organisations, large and small, all over the world.
But as companies find alternative ways to conduct their business, it has also presented SMEs with various opportunities as attention shifts away from traditional suppliers.
For local suppliers to be able to benefit from this move, being agile and learning to work together as a networked ecosystem are key to success. Tan says local SMEs could consider establishing a new strategic alliance or network with dealers, agents, and even certain competitors that can become “co-opetitors”, to share benefits, provide mutual support and maintain customers to mitigate risks from the crisis.“
Decentralisation or deglobalisation brings about the need for dispersed and smaller scale logistics operations such as warehousing and transportation. Foreign and local companies are looking to diversify their supply chain and not be dependent on a single location or country, like having a China-plus-one strategy.“Local enterprises can look out for such opportunities as we anticipate that Malaysia is poised to benefit from near-shoring and reshoring of Asian trading activities.
“Malaysian SMEs can leverage the country’s central location in Asia and Asean, in addition to her world-class infrastructure, high-tech logistics and warehousing facilities, multilingual citizens and generally good diplomatic relations with other countries to act as an alternative near-market supplier base for others, ” says Tan.
Recall that global supply chains were already being disrupted over the last few years due to the US-China trade war. Producers were already looking to source their products outside of China and supply chains were moving to the South-East Asia region. However, local producers will have to beef up their capabilities in order to grasp this opportunity.
Associated Chinese Chambers of Commerce and Industry of Malaysia (ACCCIM) SMEs committee chairman Koong Lin Loong notes that the reason many local businesses still rely on materials from China is because Malaysia lacks the infrastructure to process raw materials at a feasible rate.“Malaysia has a lot of raw produce but we are not advanced in the early stages of processing these materials. For example, we have oil and rubber but we send them overseas to be processed and bring them back as raw materials.
“We’ll have to change the ecosystem if we want to strengthen our capability in that process. But this won’t happen in the near to mid term. We will need a lot of technology, R&D and skilled labour, which we are struggling with at the moment, if we want to achieve this.
“This will be something that we may need to work towards. However, it may not be a strategic move as well because we don’t have the economies of scale to produce at low cost. Unless we have the channels and markets for the products, then it could work, ” says Koong.
He adds that skills development and a good education system will be important in the long run as Malaysia works towards better capacity building to benefit from the changes that are taking place regionally, and globally.
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