Small Businesses Play a Big Role in Supply-Chain Resilience

Summary.    Small and midsize companies are essential to American supply chains, but they lag in productivity and technology adoption. If government and industry can help these smaller supply chain firms upgrade their technology, it would make supply chains significantly...

Troy, COO of an overhead crane services company, hung up the phone and shot a worried look at the backlog of orders 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 was facing a dilemma. Given the disruptions and delays in his own supply chain, the strong temptation was to increase orders to be sure at least some of the parts he was waiting for might be delivered on time. But he recalled the Beer Game, a 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, bankrupting the student teams. Troy was determined to resist the urge to over-order from his suppliers, but he knew something must change. Was there a way to create better partnerships and streamline his supply chain, creating win-win outcomes? 

Troy’s experience is a familiar one currently facing companies around 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 are 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 10-day disruption in a firm’s production leads to at least 300 days before its inventory is back to normal. 

The U.S. 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 midsize businesses that are critical to supply chains but which typically lag in costly technology investments — particularly enterprise software and advanced manufacturing innovations. The result is a lack of real-time operating connectivity between supply chain partners and their customers, leading to lower efficiency for the whole system. Research by Daron Acemoglu of MIT and colleagues has shown that in the U.S., small and midsize enterprise productivity is a full two-thirds lower than that of larger firms, in part due to their lack of investment in new technology.  

The importance of small and midsize businesses in supply chains goes 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 U.S. private employment. According to Karen Mills’ recent research with Mercedes Delgado of Copenhagen Business School, these companies have an outsized impact on U.S. innovation, accounting for most of the country’s STEM jobs and patents. 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 businesses are largely small and midsized companies, not goliaths. Companies with fewer than 500 employees make up 98% of supply chain firms and over 20% of U.S. private employment. 

These companies represent an enormous opportunity to improve supply chain resilience while also increasing overall competitiveness. To do this, we have three recommendations. 

More investment in new technology by small and midsize suppliers.

Digital transformation — the collection and sharing of real-time data within firms and with customers — will define successful supply chains in the 21st 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 require organizational restructuring as well. 

Increase workforce training to reskill and upskill workers.

On today’s new factory floor, digital information can be made available in real time to frontline workers so they can become knowledgeable problem solvers, using technology to improve quality and output. But to realize that vision, companies need digitally savvy workers. Companies must invest in their workforce, but national and regional workforce training programs can also help to create a larger pipeline of digitally skilled workers — especially for smaller firms with fewer resources to invest in training.   

Improve access to capital and create demand assurances.

Better access to financing can help “lubricate” supply chains when there are delays and shortages as well as support investments in new technology. For example, customers can help suppliers by accelerating their payment timelines, advancing partial payments before final delivery, and by 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 suppliers more assurance before they invest in new technology. Companies cite the high costs 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 Forward), where companies make firm commitments to buy 3D-printed products from their suppliers, providing a solid demand signal that supports the supplier’s investments.   

New legislation presents an opportunity to invest 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. Simultaneously, in the past decade we’ve seen major advances in digitalization which are transforming offices, factory floors, and supply chains. Partly in response to these forces, the U.S. has enacted three major pieces of federal legislation: The Bipartisan Infrastructure Law, the bipartisan CHIPS and Science Act, and the Inflation Reduction Act.

These investments, totaling over $1 trillion in physical infrastructure, digital and semiconductor capacity, and clean energy over the next decade, present a massive 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 midsize supply chain firms (including a doubling of the R&D payroll tax credit). 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 that he would not solve his supply chain challenges overnight. Nonetheless he remained optimistic. The challenges of recent years highlighted that confrontational, disconnected, arms-length supplier relationships of the past needed to change. “I told my suppliers if we exchange information real time, sync our payments schedules, and move forward with new technology then all of us can have a win-win,” Troy explained. And a win for these supply chain companies strengthens U.S. productivity, resilience, and global competitiveness.