SMEs are essential to American supply chains, but lag behind in productivity and technology adoption. If government and industry can help these smaller supply chain companies upgrade their technology, supply chains will become more resilient by enabling data sharing and collaboration.
Troy, CEO of an overhead crane service company, hung up and glanced worriedly at the number of orders behind his desk. A major customer had recently confirmed the requirements for two large industrial overhead cranes. Normally he would have been happy, but with a 12-month backlog totaling nearly $100 million, the company faced a dilemma. Given the disruptions and delays in his supply chain, the temptation was strong to increase orders to ensure 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: In a supply chain simulation, students ordered more and more beer from their distributors (at higher and higher prices) until Bull whip effect It was launched and bankrupted the student teams. Troy was determined to resist the urge to overorder from his suppliers, but he knew something had to change. Was there a way to create better partnerships and streamline his supply chain to create win-win outcomes?
Troy’s experience is a familiar one that companies around the world are currently facing. Global disruptions from the pandemic, combined with extreme weather events and Russia’s invasion of Ukraine, have wreaked havoc on global supply chains over the past two years. While there Some signs of improvement, the reality is that it will take a long time for disrupted supply chains to get back on track. As MIT’s David Simci-Levy has shown in his recent work on semiconductor supply chains, A 10-day disruption 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 chain back on track. It can prevent future disorders by fundamentally improving the way they work. The key is to focus on small and medium-sized businesses, which are critical to supply chains but typically lag behind in costly 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 reduced efficiency for the entire system. Research By Daron Acemoglu of MIT and colleagues have shown that in the United States, the productivity of small and medium-sized firms is two-thirds lower than that of larger firms, in part because they do not invest in new technology.
The importance of SMEs in the supply chain goes far beyond a few key products or industries. Supply chain companies—defined as companies that sell their output primarily on a business-to-business (B2B) basis—account for about 44 percent of private U.S. businesses. According to Karen Mills Recent research According to Mercedes Delgado of Copenhagen Business School, these companies have a huge impact on US innovation and account for most of the country’s STEM jobs and patents. They represent a large share of highly skilled workers, with wages 66 percent higher than wages in business-to-consumer (B2C) industries. And these businesses are mostly SMEs, not behemoths. Companies with fewer than 500 employees account for 98 percent of supply chain companies and more than 20 percent of private businesses in the United States.
These companies represent a huge opportunity to improve supply chain flexibility while increasing overall competitiveness. We have three recommendations for this.
More investment in new technology by small and medium suppliers.
Digital transformation—the collection and sharing of real-time data within companies and with customers—will define successful supply chains in the 21st century.Street Century with more inventory visibility, demand planning and tracking capabilities. Software such as enterprise resource planning (ERP) systems, cloud product lifecycle management and “digital chains” in supply chains can smooth information flows. In addition, investments in advanced manufacturing technologies such as 3D printing, robotics, and AI-based technologies such as predictive maintenance can contribute to more manufacturers and more flexible and sustainable supply chains. Of course, these investments aren’t just about layering in digital technology: They also need organizational restructuring.
Increase workforce training to upskill and upskill workers.
On today’s new factory floor, digital information can be made available to frontline workers in real time so they can become knowledgeable problem solvers using technology to improve quality and output. But to realize this vision, companies need digitally savvy workers. Companies need to invest in their workforce, but national and regional workforce training programs can also help build a larger pipeline of digitally skilled workers—especially for smaller companies with fewer resources to invest in training.
Improving access to capital and creating demand guarantees.
Better access to finance can help ‘oil’ supply chains in the event of delays and shortages, as well as support investment in new technology. For example, customers can help suppliers Accelerate their payment timelineAdvancing partial payments before final delivery, and by offering financing tools that help smaller suppliers access lower-cost capital based on supply chain relationships. In addition, customers can provide demand guarantees that give smaller suppliers more confidence before investing in new technology. companies High costs are cited as the main factor limiting the wider adoption of new technologies. These guarantees can improve their access to credit to pay for needed technology upgrades. A recent example is this The progress of additive manufacturing (AM Forward), where companies commit to buy 3D printed products from their suppliers and provide a strong demand signal that supports the supplier’s investment.
The new law provides an opportunity to invest in smaller supply chain companies.
The global economic landscape is changing due to global supply chain disruptions, the threat of climate change, and geopolitical dynamics. Simultaneously, 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 major federal laws: the bipartisan Infrastructure Act, the bipartisan CHIPS Act, and the Science and Deflation Act.
These investments, totaling more than $1 trillion in physical infrastructure, digital and semiconductor capacity, and clean energy over the next decade, offer a huge opportunity to rebuild the country’s industrial base, including through more efficient, sustainable and resilient domestic supply chains. Some funding sources provide incentives that benefit small and medium-sized supply chain companies (eg Doubling of research and development tax credits). However, the goals and ambitions of this legislation will not be realized unless suppliers and their customers step up and make significant technology investments and improve their connectivity, collaboration and trust.
Troy knew it wouldn’t solve its supply chain challenges overnight. Still, he was optimistic. The challenges of recent years have highlighted this conflict, Discrete and long supplier relationships of the past must change. “I told our suppliers that if we exchange information in real time, synchronize our payment plans and move forward with new technology, we can all have a win-win,” Troy explained. And a win for these supply chain companies will strengthen US productivity, resilience and global competitiveness.