Small and medium-sized businesses are critical to US supply chains, but they lag behind in productivity and technology adoption. If government and industry could help these smaller supply chain companies upgrade their technology, it would make supply chains much more resilient by enabling data sharing and collaboration.
Troy, COO of an overhead crane service company, hung up the phone and looked worriedly at the backlog of orders on his desk. A major customer had just confirmed its needs for two large industrial overhead cranes. Normally he would be delighted, but with a 12-month backlog totaling nearly $100 million, the company faced a dilemma. Given the disruptions and delays in his own supply chain, there was a strong temptation to increase orders to be sure that at least some of the parts he was expecting could be delivered on time. But he recalled the beer gamea business simulation exercise developed at MIT: students in a beer keg supply chain simulation ordered more and more from their distributors (at increasingly higher prices) until the famous whiplash effect set up, bankrupting the student teams. Troy was determined to resist the urge to over-order his suppliers, but he knew something had to change. Was it possible to create better partnerships and streamline its supply chain, creating win-win outcomes?
Troy’s experience is a familiar one faced by businesses around the world today. The global disruptions caused by the pandemic, along with extreme weather events and the Russian invasion of Ukraine, have wreaked havoc on global supply chains over the past two years. While there is some signs of improvement, the reality is that it takes a long time for disrupted supply chains to get back on track. As David Simchi-Levi of MIT has shown in his recent work on semiconductor supply chains, a A 10-day interruption in a company’s production results in at least 300 days before its inventory returns to normal.
The United States has an opportunity to do more than just get its supply chains back on track. It can prevent future disruptions by fundamentally improving their operation. The key is to focus on small and medium-sized businesses that are critical to supply chains, but typically lag behind in expensive technology investments, especially enterprise software and advanced manufacturing innovations. The result is a lack of real-time operational connectivity between supply chain partners and their customers, reducing the efficiency of the entire system. To research by Daron Acemoglu of MIT and his colleagues showed that in the United States, the productivity of small and medium-sized enterprises is two-thirds lower than that of large enterprises, in part because of their lack of investment in new technologies.
The importance of small and medium enterprises in supply chains goes far beyond a few key products or industries. Supply chain companies – defined as those that sell their output primarily business-to-business (B2B) – account for about 44% of private employment in the United States. According to Karen Mills recent search along with Mercedes Delgado of the Copenhagen Business School, these companies have an outsized impact on innovation in the United States, accounting for most of the country’s STEM jobs and patents. They make up a large share of highly skilled workers, earning wages 66% higher on average than those in business-to-consumer (B2C) industries. And these companies are largely small and medium enterprises, not giants. Companies with less than 500 employees represent 98% of supply chain companies and more than 20% of private employment in the United States.
These companies represent a huge opportunity to improve supply chain resilience while increasing overall competitiveness. To do this, we have three recommendations.
More investment in new technologies by small and medium suppliers.
Digital transformation – the collection and sharing of real-time data within businesses and with customers – will define successful supply chains in the 21st century by enabling greater inventory visibility, demand planning and traceability. Software such as enterprise resource planning (ERP) systems, cloud-based product lifecycle management, and “digital threads” in supply chains can smooth information flows. Additionally, investments in advanced manufacturing technologies such as 3D printing, robotics, and AI-based technologies such as predictive maintenance can help make suppliers more productive and supply chains more resilient and efficient. durable. Of course, these investments are not just about layering digital technologies: They also require organizational restructuring.
Increase workforce training to retrain and upskill workers.
In today’s new shop floor, digital information can be made available to frontline workers in real time so they can become savvy problem solvers, using technology to improve quality and efficiency. But to achieve this vision, companies need digitally savvy workers. Businesses need to invest in their workforce, but national and regional workforce training programs can also help create a larger pool of skilled digital workers, especially for smaller businesses with fewer resources to invest in training.
Improve access to capital and create demand insurance.
Better access to finance can help “lubricate” supply chains in the event of delays and shortages, as well as support investments in new technologies. For example, customers can help suppliers by speeding up their payment terms, advancing progress payments before final delivery and providing financing vehicles that help small suppliers access capital at lower cost based on supply chain relationships. Additionally, customers can provide demand guarantees that give smaller providers more assurance before they invest in new technologies. Companies cite high costs as the main factor limiting wider adoption of new technologies. These guarantees can improve their access to credit to pay for necessary technology upgrades. A recent example is Additive manufacturing ahead (Advance AM), where companies make a strong commitment to purchase 3D printed products from their suppliers, providing a strong demand signal that supports supplier investments.
The new legislation presents an opportunity to invest in smaller companies in the supply chain.
The global economic landscape is changing due to the disruption of global supply chains, the threat of climate change and geopolitical dynamics. Simultaneously, over the past decade, we have seen major advances in digitalization that are transforming offices, factories and supply chains. Partly in response to these forces, the United States has enacted three major federal laws: the bipartisan Infrastructure Act, the bipartisan CHIPS and Science Act, and the Inflation Reduction Act.
These investments, totaling more than $1 trillion in physical infrastructure, digital and semiconductor capacity, and clean energy over the next decade, present a huge opportunity to rebuild the country’s industrial base, including through to more efficient, sustainable and resilient national supply chains. A portion of the funding provides incentives that will benefit small and medium supply chain businesses (including a doubling of the R&D tax credit on salaries). Yet the goals and ambitions of this legislation will only be achieved if providers and their customers step up their efforts and make crucial technology investments and improve their connectivity, collaboration and trust.
Troy knew he wouldn’t solve his supply chain problems overnight. Nevertheless, he remained optimistic. The challenges of recent years have shown that the confrontation, the disconnected and independent supplier relationships of the past had to change. “I’ve told my suppliers that if we exchange real-time information, synchronize our payment schedules, and move forward with new technologies, we can all be winners,” Troy explained. And a win for these supply chain companies bolsters US productivity, resilience, and global competitiveness.
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