Strategies to Protect Our Supply Chains.

Strategies to protect our supply chains.

The consequences of Covid caught us off-guard. Suddenly we realized how vulnerable our supply chains are. Do we now have to abandon the just-in-time principle that has proven itself for decades? Below we present four strategies to better protect our production systems from shocks.

Facts: 

  • Industrial OEM manufacturers of lower-volume, higher-mix wire harnesses desperately need to push automation.
  • A digital ecosystem that provides production transparency can produce valuable data to understand and avoid unexpected supply disruptions.
  • According to one study, companies with smart factory initiatives are experiencing 10% higher production output, 11% higher capacity utilization, and 12% higher labor productivity.

In the 1970s, Toyota and other companies began to develop lean supply chains based on the principle of just-in-time (JIT) manufacturing. The “ultimate goal” of this is to ensure a balanced, fast production flow that is precisely tailored to the customer’s needs. Three techniques are used to achieve this: eliminating disruption, using flexible system designs, and eliminating waste (especially inventory). To achieve the goals of a lean production system, we focus on four building blocks: product design; process design; human resources, and organization; and planning and control.

Outsourcing to low-wage countries

In the wire harness supply industry, JIT and lean manufacturing gained strong acceptance in North America in the 1980s by focusing on manufacturing design (decentralized cutting) and assembly work (moving to low-cost labor). Under the leadership of many large automotive suppliers, production moved from a centralized cutting model (often a self-contained plant) to a decentralized model. Now the wire processing machines were in the factory for wire harness assembly. Mid-market OEMs often outsourced to local manufacturers or offshore suppliers to simplify their production line. Thanks to duty-free zones, they could also outsource production to Mexico with lower labor costs. A high concentration of wire harness “maquiladoras” emerged in Ciudad Juarez and other border cities.

In the 1990s, manufacturers moved further inland. At the same time, a new market with even lower labor costs developed in China and many OEM manufacturers moved their production facilities there. Lean supply chains in markets with low labor costs have been the driver of the wire harness industry over the last 20 years.

The shock was profound

The pandemic shockingly showed us how sensitive our supply chains are. After the total shutdown of the economy, it was extremely difficult to get our collective economic engine going again. In addition, there were further demands on our supply chain as demand in the US shifted from services to goods.

Today, most manufacturers face four common supply chain challenges: logistics delays and costs, component bottlenecks, labor shortages, and supply chain surprises. In a survey of global supply chain managers (2021), McKinsey found that 61% of respondents cited increasing inventory levels as a strategy for dealing with supply disruptions.

It certainly looks like wire harness manufacturers will continue to be under pressure. The last two years have taught us that we need to develop more robust production systems to insulate the production system from external shocks. From the four general challenges mentioned above, four strategies emerge, which we will discuss in more detail below.

Strategy 1: Nearshoring and insourcing

According to the global online freight marketplace Freightos, between 2018 and 2021 the transit time for sea shipments from China to the US doubled from 40 to 80 days. In addition, the price of transporting 40-foot containers rose from $4,500 to over $20,000. Freightos predicts similar delays and costs for the current year. This implies that we will have to accept severe disadvantages for long transport routes in the future as well. A similar result is evident in the US with long-haul trucking, where costs are rising and delivery times are getting longer. The American Trucking Association estimates that the US was short over 80,000 long-haul truckers in 2021, and this shortage is expected to continue to increase.

A McKinsey survey of global supply chain leaders found that 90% of respondents are aiming for some degree of regionalization in the next three years. Mr. Murat Aksel, VW’s purchasing chief, was quoted in the WSJ: “We still want competitive prices, but my priority is securing supply. Without components, you can’t build cars. And zero production means zero profit.”

Thus, supply chain insourcing and nearshoring strategies are currently on the rise to protect production systems from disruption. When evaluating the location and design of their production systems, it is important to weigh the benefits of low-cost labor against the vulnerability of the supply chain to disruption. Mid-market industrial OEMs are potentially more vulnerable with distant supply chains, as their production volumes and logistical requirements are too small. Nearshoring and insourcing strategies help eliminate supply chain risks including transportation bottlenecks and geopolitical risks, while providing the additional benefit of lower total inventory and improved responsiveness to changing demands.

Strategy 2: Simplify and modularize wiring harness design

There is enormous potential in simplifying product design. The simpler and more common the designs, the smaller the need for different components. This allows us to reduce the impact of supply disruptions by reducing the complexity of our supply chain. We also increase the volume of remaining components and gain more purchasing power over our suppliers. Let’s consider a simple industrial product wiring harness. Here the rule is: as few different wire gauges, wire colors, end-of-wire terminals and connecting blocks as possible, the better the design for supply continuity.

This is especially true given the growing challenges industrial OEM manufacturers face. Disruptive technologies including connectivity and IoT are driving new connectivity technology and forcing many companies to redesign their electrical systems. OEMs should take this opportunity to also consider designing for automation by standardizing and modularizing their wiring harnesses.

Strategy 3: Automation

Even before the pandemic, the labor supply in the US was sliding into crisis. The US Bureau of Labor Statistics estimates that between 2020 and 2030, the number of people over 65 will increase by 17 million — compared to 3.4 million for those aged 25-64. This means a loss of up to 13.6 million working-age people. Covid exacerbated this problem by accelerating many retirements and causing many people to rethink their career choices.

Between 2018 and 2022, Mexican minimum wages nearly doubled (from 88.36 to 172.87 pesos per day), while the exchange rate between the peso and the dollar remained nominally stable. As nearshoring continues in all industries and manufacturers look for local low-cost labor, the Mexican labor market will continue to tighten, and costs will continue to rise.

In high-volume automotive wire harness production, it is understandable to continue to rely on low-cost labor, especially when the design is standardized and protected from disruption as described above. But industrial OEM manufacturers of lower-volume, higher-mix wire harnesses desperately need to push automation as Mexican labor markets shift to more efficient and profitable options. This will also be the best guarantee of security of supply.

In the last 10 years, automation technology has made great strides, with easier-to-use platforms with higher levels of automation and faster set-up times. Add to that a system with physical and digital services that ensures high overall equipment effectiveness, OEE. A good example of this is our customer SPIE Nederland B.V., a subsidiary of the SPIE Group and independent European market leader for multi-technical services.

For years, SPIE produced the wire harnesses by hand, including cutting to length, stripping, and attaching ferrules. With the Komax Zeta 640, SPIE got a flexible and complete automation solution that generated a lot of enthusiasm. “Now the Zeta 640 assembles the wire harnesses for the assembler. So they are ready in a short time while the mechanical part can be prepared. Everything can be prepared in advance, which reduces the lead time. We save 30–70% on wiring time, depending on the number of wires per cabinet. With 100, of course, the time saved is less, but with 4000 it could well be 70%. We also benefit from having less product standing around. So we have more production space and therefore a higher capacity.”

Strategy 4: Visualize and analyze with a digital infrastructure

 The biggest challenge from the pandemic is the constant impact of unplanned production delays. If the lead time is extended but adhered to, we can at least plan around the new lead time to balance our production flow. But Covid also leaves us with bottlenecks in our own system. Fortunately, there is a solution to this provided by utilizing a digitally transparent production system. In his recent article, Dr Vishal Gaur of the SC Johnson College of Business at Cornell (NY) explains how the Internet of Things (IoT) and blockchain technologies can be used to strengthen supply chains. This includes tracking and sharing production data using secure blockchain designs. This results in predictive models that can identify potential supply chain issues before they impact our production system.

Deloitte has developed a dynamic circular model that no longer looks at a supply chain in a linear way. Rather, it duplicates the physical system with a digital twin, which is used to visualize and analyze the production system. This analysis triggers actions or measures to address disruptions in our supply.

Systems that visualize and analyze production in real time are highly recommended. They can identify potential delivery delays at an early stage so that appropriate measures can be taken to avoid these. According to McKinsey, digital supply chain technology is being implemented in every industry studied. In the automotive, aerospace, and defense sectors, it is even 100% of all companies.

There are already developed solutions for the wire harness industry. The Smart Cabinet Building Initiative, of which Komax is a founding member, plays a key role. By networking technology and know-how across all process steps, it is developing integrated solutions for current and future challenges in cabinet building – from component selection and the pre-assembly of wire harnesses, equipment, and housings to assisted final assembly and testing before commissioning. The basis for networking the process steps is the digital twin, a complete digital description of the control cabinet and its components, which can be used to control the process steps and track any specific item through the production process.

Whether an OEM or contract manufacturer, a digital ecosystem that provides production transparency can produce valuable data to understand and avoid unexpected supply disruptions.

Best results with a holistic approach

Each of these four strategies protects our supply chains and production systems from disruption in a particular way. However, it is appropriate to implement them all together as a holistic approach. For clarity, we have arranged these strategies in a hierarchical order to show the impact on the following strategy: By bringing the supply chain closer to the original equipment manufacturer (insourcing/nearshoring), the producer can better influence product design. This reduces the diversity of components. This in turn facilitates automation. Automation in turn enables the use of a digital infrastructure.

Smart Factory by Komax: shaping the future of wire harness production

The manufacturing model for wire harness production has evolved enormously in recent years. The most important factors were Industry 4.0 and IoT. The best example is the Smart Factory by Komax. It is uncompromisingly shaping the future of wire harness production through more advanced automation, shorter set-up times, and self-learning AI – all within a digital ecosystem. A global study by Deloitte looks at the impact among companies with smart factory initiatives. These achieved an average of 10% higher production output, 11% higher capacity utilization, and a 12% increase in labor productivity.

Sure, just-in-case inventories are a prudent stopgap. But more robust and economically advantageous are strategies in line with our JIT goals. This is especially true for industrial OEMs in the wire harness industry. Now they have the chance to score even in times of crisis.

Where to begin on the path to a protected, reliable supply chain?
The best starting point is comprehensive consulting. Komax can support customers not only with highly automated machines, but also, for example, with a manufacturing execution system specially developed for wire processing and services that help it optimize production and material flow.

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