Creating a Supply Chain from Scratch: Part One - Understanding What Supply Chain is And When to Start Establishing Your Product’s Supply Chain
Co-Founder, Berlin KraftWorks Inc.
“How do I establish a supply chain? What are the most important elements of a supply chain for a start-up or early stage company? How can I build supply partners when I don’t have any volume yet?” These are the most common questions that I hear from start-ups and early stage companies, and they are excellent questions! How do you create a supply chain when you have very few people, minimal resources, low volume, and next to no budget?
In Canada more than 90% of our manufacturing firms are Small and Medium Enterprises (SMEs), and that number is growing rapidly. Unfortunately, most supply chain discussions and methodology are focused on improving already existing operations for larger firms, often with more capital and higher volumes of production than the majority of SMEs.
As an entrepreneur, this is incredibly frustrating. From a supply chain perspective, a business that bases its revenue on producing tens and hundreds of something can be harder to manage than continuously improving an established supply chain that has scaled to mass-production due to the extreme variables in cost, time, customer and supplier terms, etc. Although, with the onset of COVID-19, even the well-established methods being put to the test.
Shifting consumer values and economic conditions are changing the way companies produce - high-volume, low mix/value production is giving way to low volume high mix/customization/value products and services. Here in Canada, we are well positioned to be global masters of low volume, high value products. Products in this category include items such as mission critical medical devices, scientific equipment, and consumer goods designed for a market where longevity, quality, and sustainability are prioritized over cheap and disposable products. However, this model is infinitely more complex with far more variability than traditional high-volume manufacturing.
Building a supply chain from nothing is an entirely different science than anything that applies to the mass-manufacturing world. Today I’ll give you my 4 best tips for establishing your supply chain.
1) Focus on What You Can Control
If you find yourself in a company that’s establishing a supply chain for the first time, then odds are that you have some sort of business education or career experience. You may have formal supply chain training, as I do. If that experience has been focused on well-established supply chains, you may find starting from zero to be an overwhelming proposition. Worse, if you are rigid in “how it should be done”, you may find that it’s almost easier to forget what you know than to try to determine how to apply it to completely different circumstances. Traditional standards and best practices from large or well-established firms and/or mass manufacturers are often just not practical for early stage or low volume/high value producers. Today with COVID-19, business conditions can change hourly (forget daily) and that level of variability can’t be met with incomparable past experience. So, the first step is to shift to a mindset that doesn’t try to control variables that we can’t (with incomparable experience) and instead focus only on that which we can control. We do this through system thinking and evidence-based decision making.
2) Understand that Supply Chain is not a thing or a standard, it’s a result that is dynamic and constantly changing.
Supply Chain is a result, not an independent function or activity. It is the result of several cross-functional business processes and how well (or not) they work together. You can’t build or refine a supply chain as an individual entity; you must build better business processes and integrate them with a system view (focused on the business case and delivering customer value - or not producing anything customers aren't willing to pay for) which will result in better supply chain performance including resilience and agility. That’s not to say that supply chain will “build itself”, but rather what you do build as supply chain can only be as good as the business processes to which its connected, and all of it only as good as the whole-system view and value chain.
This is why Supply Chain is a strategic function, despite common ideas that it’s a transactional or administrative function. Supply Chain is the ultimate measure of your overall business system in real time, and your focus on delivering value to your customer.
3) Supply chain begins long before you have a physical product.
I’ve often seen firms get a working prototype and announce that they are now ready to consider supply chain and manufacturing, only to find out that much of the work they have done must be undone and redone (at the expense of time and cost) because what they developed is not manufacturable or able to be supported with supply in the volumes, costs or quality required. The resulting delay to market or unplanned capital requirements can be deadly. In reality, your supply chain considerations begin sometime after someone has a product idea but before its first iteration is scribbled on a napkin. You need to have input from professionals within the various disciplines that are collectively called “supply chain”. As a new product idea iterates from vision, to napkin, to proof of concepts to pre-production prototypes, the supply chain iterates also and in parallel. To me, it can’t be anything other than a fully integrated development cycle. While the product designers, engineers, product managers, marketers and sales team are working to create a product that a customer is willing to pay for, supply chain folks (sourcing, purchasing, logistics, materials/inventory/production management) as well as potential suppliers (for individual products, or contract manufacturers) must weigh-in to advise what is possible to produce within the constraints of cost, materials availability (short and long term) lead time, as well as international trade concerns, shipping regulations, quality standards, etc.
The supply chain begins as an evolution of an idea, grown by the acquisition and validation of information and resources that are ultimately tuned to the business case and customer demands. It identifies areas of risk, and often facilitates negotiation and trade-offs between different areas/interests in a firm to arrive at the best and most viable outcome from an execution point of view. If all the functions involved have done their due diligence along the way and validated customer needs against identified constraints of delivering those needs, the end result will a manufacturable product that provides value the customer is willing to pay for. It is important to note that there are two customers to consider - the external customer who buys, and the internal customer who depends on information.
Access to these professional skill sets can be tricky for early firms, in many cases it can be far more economical to hire professionals on an as-needed basis so long as you understand how to properly integrate those resources within a system thinking framework that supports your business case.
4) Remember Everything You’ve Learned but Keep an Open Mind
While in step 1 above it may have felt like it would be better to forget everything you know, in this step you may realize that you have the opportunity to apply portions of your past experience that (with testing, modification, or improvement) may be adaptable to this new product or business case. And other portions may be completely inappropriate to the specific business case and should be left behind. But until you are ready and willing to throw it all out in favour of a wide-open mind, then you are subject to the same old enemies of progress: “I’ve always done it this way”, and you cannot see the opportunities that lie hidden in the knowledge gaps that everyone has, which are uncovered through collaboration. This shift in mindset is the single biggest factor that will make or break a young company or product, because it limits one’s ability to adapt old knowledge with the present conditions, and create new knowledge and experience that is highly relevant to the firm right now and down the road. While it sounds trivial, its actually harder than one may think.
In a future blog, I’ll discuss the most important functional elements required to establish a supply chain system from scratch, in any firm.
Want to read more in the Creating a Supply Chain from Scratch Series? Click the links below:
Part 1 - Understanding What a Supply Chain is and When to Start Establishing Your Product's Supply Chain
Part 2 - Understanding Chaos and How to Work With It
Part 3 - The Planning Hierarchy: Unlocking the Path Forward
Part 4 - The Bill of Materials - The Journey is At Least As Important as the Destination
Part 5 - Supplier Management