Small and medium-sized businesses are essential to American supply chains, but they lag behind in productivity and technology adoption. If government and industry can help these smaller supply chain companies upgrade their technology, supply chains would be significantly more resilient by enabling data sharing and collaboration.
Troy, the director of operations for 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 the requirements for two large industrial overhead cranes. In normal times 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, the strong temptation was to increase orders to ensure that at least some of the parts he was expecting could be delivered on time. But he remembered 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 ever higher prices) to the famous whip effect established, bankrupting student teams. Troy was determined to resist the urge to over-order his suppliers, but he knew something had to change. Was there a way to create better partnerships and streamline his supply chain, creating win-win results?
Troy’s experience is familiar to those faced by companies around the world today. Global disruptions caused by the pandemic, coupled with extreme weather events and the Russian invasion of Ukraine, have wreaked havoc on global supply chains over the past two years. as long as 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 company’s 10-day production interruption leads to 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. You can prevent future outages by fundamentally improving the way they operate. The key is to focus on small and medium-sized businesses that are critical to supply chains but typically fall behind on costly technology investments, particularly 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. Research by Daron Acemoglu of MIT and colleagues has shown that in the US, the productivity of small and medium-sized businesses is two-thirds lower than that of the largest firms, in part due to their lack of investment in new technology .
The importance of small and medium-sized enterprises in supply chains goes well 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 US private employment, according to Karen Mills. recent research with Mercedes Delgado of the Copenhagen Business School, these companies have a huge impact on innovation in the US and account for the majority of STEM jobs and patents in the country. They represent a large share of highly-skilled workers, with wages 66% higher on average than those in business-to-consumer (B2C) industries. And these companies are mostly small and medium-sized companies, not giants. Companies with fewer than 500 employees account for 98% of supply chain companies and more than 20% of private employment in the US.
These companies represent a tremendous 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 providers.
Digital transformation, the collection and sharing of data in real time within companies and with customers, will define successful supply chains in the 21st century.st century by enabling greater inventory visibility, demand planning, and traceability. Software such as enterprise resource planning (ERP) systems, cloud 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-driven technologies such as predictive maintenance can help make suppliers more productive and supply chains more resilient and sustainable. Of course, these investments are not just about layers in digital technology: They also require organizational restructuring..
Increase workforce training to retrain and upskill workers.
In today’s new production floor, digital information can be made available in real time to frontline workers so they can become informed problem solvers, using technology to improve quality and production. But to make that vision a reality, companies need digitally savvy workers. Companies must invest in their workforce, but national and regional workforce training programs can also help create a larger pipeline of digitally-skilled workers, especially for smaller companies with fewer resources to invest in training.
Improve access to capital and create demand guarantees.
Better access to finance can help “lubricate” supply chains when there are delays and shortages, as well as support investments in new technologies. For example, customers can help providers speeding up your payment terms, advancing partial payments before final delivery and providing financing vehicles that help smaller suppliers access lower-cost capital based on supply chain relationships. In addition, customers can provide demand guarantees that give smaller providers more security before investing in new technology. companies citing high costs as the main factor limiting the wider adoption of new technologies. These guarantees can improve your access to credit to pay for necessary technology upgrades. A recent example is Additive manufacturing Forward (i am forward), where companies make a firm 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, in the last decade we have seen significant advances in digitization that are transforming offices, manufacturing plants and supply chains. Partly in response to these forces, the US 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, semiconductor and digital capacity, and clean energy over the next decade, present a tremendous opportunity to rebuild the country’s industrial base, including through more efficient domestic supply chains, sustainable and resilient. Part of the funding provides incentives that will benefit small and medium-sized businesses in the supply chain (including a doubling of R&D payroll tax credit). However, the goals and ambitions of this legislation will not be achieved unless providers and their customers step up and make crucial technology investments and improve their connectivity, collaboration and trust.
Troy knew he wouldn’t solve his supply chain challenges overnight. Nevertheless, he remained optimistic. The challenges of recent years have shown that the confrontation, The disconnected and distant supplier relationships of the past needed to change. “I told my vendors that if we exchange information in real time, synchronize our payment schedules, and move forward with new technology, then we can all win,” Troy explained. And a victory for these supply chain companies strengthens US productivity, resilience and global competitiveness.