Has supply chain management become an increasingly challenging process for your organization?
Are issues like overordering and excessive lead times hindering your company’s long-term success? If so, supply chain fragmentation may be to blame.
What is supply chain fragmentation, exactly? This article will explore how supply chains become fragmented, along with the mitigation strategies companies like yours can leverage to reduce risk.
Supply chain fragmentation refers to the breakdown of trade pathways into disparate, often disconnected parts. These disconnects can lead to inefficiencies in production rates, poor communication with suppliers, and operational challenges.
In a fragmented supply chain, various components, such as suppliers, manufacturers, logistics firms, and distributors, operate in silos rather than as integrated systems. As a result, you’ll experience delays, increased costs, and a lack of data visibility.
Supply chain fragmentation can be difficult to measure. However, in 2021, a team of scholars introduced the supply chain fragmentation (SCF) ratio, which helps businesses determine how fragmented their cross-border supply chains are. This metric sums up the volume of imports across all nations that participate in a supply chain.
You can use the SCF rate to see a high-level view of fragmentation prevalence within your supply chain. However, you’ll need to drill down into the data to unlock insights specific to your business.
If you operate in a sector that’s particularly prone to fragmentation, such as food and beverage, it’s vital to understand the SCF rate so you can take proactive steps to mitigate the risks and impacts.
In the complex ecosystem of global logistics, many factors can affect the outcome:
Globalization has expanded supply chains across continents. In your own business, you likely collaborate with suppliers, manufacturers, and distributors from around the world.
Although a global reach allows you to source materials and products more cost effectively, it also creates longer and more complex chains. In addition, the greater the distance between different parts of the supply chain, the more difficult it becomes to maintain a cohesive and integrated operation.
Time zone differences, language barriers, and varying regulatory requirements further exacerbate these challenges, making it harder to ensure smooth coordination and communication.
You rely on a varied network of trade partners to keep the goods flowing to your customer base.
Your suppliers and partners provide everything from raw materials and components to specialized services necessary for manufacturing. While these relationships are necessary, managing them can lead to fragmentation.
Many (if not all) of your trade partners likely use disparate systems, processes, and standards. Without effective communication and collaboration, these relationships may become strained, and the rest of the supply chain will suffer.
To avoid this outcome, you must align your business objectives with the day-to-day operational practices of your trade partners. A disconnect can lead to significant efficiency issues and make your business more susceptible to disruptions.
How many different tools and software systems do you use to manage your operations? Is the answer five, 10, or even more?
All of these solutions play a critical role in your operations. However, if they aren’t integrated, you’ll experience data silos. A silo forms when critical information becomes trapped within one part of the supply chain and isn’t accessible to other systems.
A lack of integration makes it difficult to gain an end-to-end view of your supply chain processes. This poor visibility can lead to inefficiencies and missed opportunities for optimization.
For example, let’s say your production costs have recently increased. To determine why, you need a clear view of all variables that impact your overall costs, including transportation fees, material expenses, and production costs.
How do you know whether your supply chain is fragmented? Here are a few warning:
One of the most obvious signs of fragmentation is inconsistent communication between different stakeholders. You must regularly share information with your trade partners, including manufacturers, distributors, suppliers, and logistics providers.
Your business needs a clear point of contact for each entity, so you know whom to contact any time you need answers. Likewise, you need to identify a go-to person that your partners can reach out to if they have a concern.
A lack of communication is a clear indication that your supply chain isn’t functioning as a cohesive unit. Inefficiencies in the dissemination of information can have resounding impacts on efficiency and productivity.
As noted, data silos occur when different parts of the supply chain have access to different sets of information.
Silos are common when businesses use disparate applications rather than a unified system for sharing data across the network. This can lead to a lack of visibility into key supply chain metrics, including on-time delivery rates, current inventory levels, and consumer demand.
You need to create and maintain a holistic view of your supply chain—at any moment, you should be able to access accurate, real-time data about your company’s logistics performance. If you don’t have these sorts of insights readily available, it’s time to unify your applications and technology suite.
When a supply chain becomes fragmented, processes become inefficient due to a lack of coordination and integration.
For example, let’s say one of your suppliers is unaware of a delay in another part of the chain. They might continue to produce goods that will ultimately sit idle, leading to increased lead times and wasted resources; these inefficiencies tend to compound over time.
It’s imperative to maintain an end-to-end view of supply chain performance. If something isn’t going as planned, you need to be able to figure out why so you can solve the root cause of the problem.
If your supply chain is fragmented, then missed deadlines, stockouts, and quality issues become the norm.
These disruptions are often due to a lack of coordination between you and your trade partners. A single issue can quickly ripple through the entire network, especially if it occurs early in the flow of goods.
For example, imagine that you operate in the food production space.
An upstream raw materials supplier encounters an issue with their climate control system, causing an ingredient to become contaminated. However, they don’t catch the problem in time, nor do they pass the information on to you, as there are several links between the supplier and your business.
Consequently, your company receives the contaminated ingredients and uses them to produce 20,000 units of a popular food product. The lack of coordination in the supply chain leads to significant waste and, potentially, a public health outbreak that could tarnish your reputation.
You can’t effectively govern and optimize your supply chain if it’s not running seamlessly from one end to the other. Here are a few of the most significant repercussions of a fragmented supply chain:
Fragmentation often leads to higher costs due to inefficiencies in processes and operations. For example, if suppliers and manufacturers aren’t communicating, it can result in overproduction or underproduction. The former can lead to excess inventory, while the latter can cause stockouts.
Additionally, fragmented supply chains may require more resources to manage and coordinate. If you’re performing many communication and document-processing steps manually, your business will spend more time, money, and resources on these tasks.
A fragmented supply chain can cause significant delays in both production and delivery. If each part of your chain is out of alignment, there’s a greater risk of missed deadlines and a slower time to market.
These delays can compound over each phase of the chain, disrupting production schedules and lowering customer satisfaction.
Your customers expect you to deliver high-quality goods that meet their expectations. Fragmentation can interfere with that mission and cause compliance concerns. A lack of coordination between your business and its trade partners makes it tricky to maintain consistent quality across the supply chain, potentially resulting in defective products, recalls, and legal issues.
Wavering quality can have especially severe repercussions in tightly regulated industries like food and beverage, electronics, and consumer goods. For this reason, it’s essential to implement policies and workflows that protect consumers, your reputation, and your bottom line.
If you don’t have a clear view of each link in the supply chain, managing risks and building resilience becomes significantly more difficult. Without a unified approach to risk management, it’s harder to identify vulnerabilities in your workflows or respond effectively to disruptions.
If the last few years have taught us anything, it’s that supply chains must be able to pivot in the midst of shifting market conditions. A lack of resilience can make your supply lines more susceptible to geopolitical events and other external disruptions. Even the most loyal customers may be tempted to turn to your competitors if you’re unable to meet their demand for goods.
Let’s look at some basic examples to better illustrate the difference between the two scenarios:
Consider a company that sources raw materials from multiple suppliers across different countries.
Each trade partner operates independently and engages in minimal communication with other links in the chain. To make matters worse, the company uses disjointed applications to handle procurement, production, and distribution.
As a result, the company experiences severe data silos. It also suffers from frequent delays and increased costs due to the lack of coordination.
Now, imagine a company with an integrated approach. All trade and logistics partners are connected via a unified system that allows for real-time communication and data sharing.
The company has consolidated its data, meaning it can run robust analytics reports to better understand supply chain performance and optimize processes.
Company leaders also rely on the unified platform’s automation tools to improve efficiency and reduce lead times, resulting in a more nimble supply chain.
To create a connected supply chain, you’ll need to take the following steps:
There aren’t any quick fixes to supply chain fragmentation—you must consistently work to unify your processes, applications, and trade partners. Over time, you’ll be able to eliminate silos and create a holistic view of your supply chain.
Modern supply chain management (SCM) technologies are foundational to reducing fragmentation. Cloud-based platforms allow you to integrate and unify disparate applications, making it easy for your workforce to access relevant data from a single location.
To keep pace with the evolution of supply chain tools, make it a point to explore replacements for disjointed legacy technologies, prioritizing modular solutions that can replace multiple applications and platforms.
A cloud-based enterprise resource planning (ERP) solution can be particularly valuable for improving visibility and decreasing fragmentation. ERPs include multiple modules, each of which addresses key business functions while promoting overall efficiency.
As a leading ERP provider for the make, move, sell industries, we have helped countless clients overcome their fragmentation challenges.
Our suite of customizable SCM solutions can play a critical role in your journey toward a more agile and resilient supply chain.
Contact us today to discuss how you can reduce fragmentation and enhance productivity every day.
