Small businesses play a major role in supply chain resilience
Small and medium-sized businesses are vital to U.S. supply chains, but they lag in terms of productivity and technology adoption. If government and industry can help these smaller supply chain companies upgrade their technology, it would make supply chains significantly more resilient by enabling data sharing and collaboration.
Troy, the COO of a crane service company, hung up the phone and glanced worriedly at the order backlog on his desk. An important customer had just confirmed 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 temptation was strong to increase orders to make sure that at least some of the parts he was waiting for could be delivered on time. But he remembered Beer gamea business simulation exercise developed at MIT: students in a beer keg supply chain simulation ordered more and more from their distributors (at higher and higher prices) until the famous bullwhip effect set in, and bankrupted the student teams. Troy was determined to resist the urge to over-order from his suppliers, but he knew something had to change. Was there a way to create better partnerships and streamline its supply chain and create win-win results?
Troy’s experience is well known, currently facing companies all over the world. 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, 10-day interruption in a company’s production leads to at least 300 days before its inventory is back 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 how they operate. 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, leading to lower system-wide efficiency. Research by Daron Acemoglu of MIT and colleagues have shown that in the United States, the productivity of small and medium-sized firms is as much as two-thirds lower than that of larger firms, in part because of their lack of investment in new technology.
The importance of SMEs in supply chains extends far beyond a few key products or industries. Supply chain companies—defined as those that sell their output primarily business-to-business (B2B)—represent about 44% of US private employment. According to Karen Mills’ recent research with Mercedes Delgado from Copenhagen Business School, these companies have an overall influence on American innovation and account for most of the country’s STEM jobs and patents. They represent a large proportion of highly skilled workers, with wages 66% higher on average than in business-to-consumer (B2C) industries. And these companies are mostly SMEs, not goliaths. Companies with fewer than 500 employees make up 98% of supply chain businesses and over 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 investments in new technology from small and medium-sized 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.St century by enabling greater inventory visibility, demand planning and traceability. Software such as Enterprise Resource Planning systems (ERPs), Cloud Product Lifecycle Management and “digital threads” across supply chains can smooth information flows. In addition, 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 layering in digital technology: They also require organizational restructuring.
Increase workforce training to reskill and upskill workers.
On today’s new factory floor, digital information can be made available in real time to front-line workers, enabling them to become savvy problem solvers using technology to improve quality and output. But to realize this vision, companies need digitally savvy employees. Companies need to 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 “grease” supply chains when there are delays and shortages and support investment in new technology. Customers can, for example, help suppliers with speed up their payment deadlines, advancing installment payments before final delivery and by providing financing that helps smaller suppliers access lower cost capital based on supply chain relationships. In addition, customers can provide demand guarantees that give smaller suppliers more certainty before investing in new technology. Companies cite the high cost as the main factor limiting wider adoption of new technologies. These guarantees can improve their access to credit to pay for needed technology upgrades. A recent example is Additive Manufacturing Forward (AM ahead), where companies commit to purchasing 3D-printed products from their suppliers, providing a solid demand signal that supports supplier investment.
New legislation allows for investment in smaller supply chain companies.
The global economic landscape is changing due to the disruption of global supply chains, the threat of climate change and geopolitical dynamics. At the same time, the past decade has seen major advances in digitization that have transformed offices, factory floors and supply chains. Partly in response to these forces, the United States has passed three important pieces of federal legislation: the bipartisan Infrastructure Act, the bipartisan CHIPS and Science Act, and the Inflation Reduction Act.
These investments, totaling over $1 trillion in physical infrastructure, digital and semiconductor capabilities, and clean energy over the next decade, present a tremendous opportunity to rebuild the country’s industrial base, including through more efficient, sustainable and resilient domestic supply chains. Some of the funding provides incentives that will benefit small and medium-sized supply chain companies (including a doubling of the R&D payroll tax deduction). Yet the goals and ambitions of this legislation will not be achieved unless suppliers and their customers step up and make crucial technology investments and improve their connectivity, collaboration and trust.
Troy knew he wasn’t going to solve his supply chain challenges overnight. Nevertheless, he remained optimistic. The challenges of recent years highlighted this confrontation, broken, arm’s-length supplier relationships of the past had to be changed. “I told my suppliers that if we exchange information in real time, synchronize our payment plans and move forward with new technology, then we can all have a win-win,” explained Troy. And a win for these supply chain companies strengthens American productivity, resilience and global competitiveness.