By: Mark McCullough, CEO Gebrüder Weiss USA
Covid-19 was the black swan event that exposed many of the long-standing supply chain vulnerabilities and risks. Over the past year, businesses have had to redefine their supply chain relationships and reassess their operations to remain operational.
At the height of the pandemic, long stretches of empty supermarket shelves and worldwide shortages of critical protective equipment made visible the impacts of supply chain disruptions. The pandemic created significant volatility and uncertainty in global supply chains that shook entire industries to the core.
The pandemic has proved to be a fierce teacher, but how can businesses apply these lessons? No doubt, the economic implications of the Covid-19 pandemic will last for years. In order to create greater resilience, logistics players need to re-evaluate supply chains and their management.
Reckoning With Disruptions
Modern supply chains are increasingly complex. Digital technologies have enabled sophisticated dynamic interactions that heighten expectations among consumers, suppliers, and society alike, placing undue pressure on traditional supply chain models.
Even before the pandemic, global trade tensions had been mounting for months due to the China-U.S. trade war. The tariff war was marked by increased protectionism and resulted in financial barriers for global logistics networks.
In February 2020, China, the world’s largest outsourcing hub, went into lockdown, which in turn crippled industries worldwide that relied on the country’s cheap workforce. Ports and airlines were shut down, effectively halting the global shipping network. Lockdowns and stay-at-home orders in other countries led to the closure of businesses, and millions were furloughed from their jobs. All this led to an economic recession that continues to date.
The coronavirus crisis was an unprecedented type of disruption – something the world had not quite experienced before and was utterly unprepared for it. However, the pandemic also created opportunities for innovation and growth by accelerating the digital transformation of supply chains. Through all of this, the world learned that interconnected, digital supply chains are integral to anticipating, sensing, and responding to disruptions and minimizing their impacts.
As society moves forward, business leaders should assess how best to optimize the shift towards increased interconnectivity. The Covid-19 crisis didn’t reveal the interdependent nature of global supply chains. Instead, it highlighted that most organizations could not manage such interdependence.
Companies must evolve if they are to thrive in a future where uncertainty is the only certainty. Industries dependent on global sourcing have a tough road ahead as they have to mitigate against future disruptions. In planning to mitigate against such risks, they must deal with questions that have no easy answers. For instance: How much inventory should they keep on hand to tide over global crises? Should they broaden their supplier choices or focus more on near-shore sourcing?
Recover: “the New Normal” Starts Now
Over the past two decades, the primary focus of supply chain diversification was to identify minimum lead times at the lowest possible prices. The Covid-19 pandemic has revealed the weakness that underscores this manufacturing model, including single-source dependencies and inadequate adaptation mechanisms to real-time shocks.
In light of this, countries have begun the shift towards multi-level sourcing to increase the resilience of their supply chains. Several economists believe that there’s likely to be a rise in economic nationalism over the next few years. A shift this monumental will take much longer as it implies a migration back to manufacturing in the US. However, the multilateral trade system had started showing signs of fracturing, and the pandemic might just accelerate this. Manufacturers worldwide will experience greater competitive and political pressures to increase their domestic production capabilities and increase employment opportunities in their home countries while reducing the amount of inventory held in their global supply chains.
Yet, consumers will continue to demand low prices despite the higher cost of manufacturing in home markets. The challenge for companies now is to make their supply chains more agile and resilient without compromising their competitive edge. To rise to the challenge, companies must overhaul their supply chain infrastructure and adjust their mindset to include a vital virtue called patience.
Here are three inevitable shifts.
1. Shift from Globalization to Regionalization
The pandemic revealed just how stretched global supply chains were. To address the heavy dependence on one medium of supply, such as a single country or region, manufacturers will have to diversify their supply base. The obvious way to do this is to add more supply sources in areas that are not vulnerable to the same risk.
Manufacturers will have to consider a strategy of sourcing a substantial proportion of critical raw materials, sub-assemblies, or finished products within the region where they are consumed. For instance, North American manufacturers might benefit from shifting labor-intensive work from China to Mexico and other Central American countries. Western and Central European companies could increase their reliance on Eastern European countries.
Shortening the supply chain to avoid excessive shipping and freighting rates, along with space shortages and long wait times, will require heavy investments in new supplier infrastructure in different regions. Even with the support of government incentives, this shift is bound to be costly and time-consuming.
2. Hold Intermediate Inventory and Safety Stock
Disruptions are bound to occur even in multi-tier supply chains. Companies should determine the critical components of their operations and decide how much extra stock they should hold in the interim. First, they must identify the parts sourced from high-risk areas and those lacking ready substitutes. Keeping a risk index will help outline the materials that are at the highest risk of disruption.
It’s advisable to keep some inventory aside for use as a bridge to keep production running and ensure delivery to customers. The downside is that safety stock carries the risk of obsolescence and requires proactive management to prevent losses. This tactic runs counter to current supply chain optimization techniques that focus on keeping lean inventories to ensure just-in-time replenishment.
However, keeping intermediate inventory increases resilience against disruptions and can save companies from lost revenues or paying higher prices for materials that go into sudden short supply.
3. Uncover and Address Hidden Supply Chain Vulnerabilities
Understanding where supply chain risks lie is a vital part of risk management. It requires mapping your entire supply chain, including storage facilities and transportation hubs. Of course, this will be time-consuming and expensive. However, a surprise disruption could bring the whole supply chain to a halt, which can be much more costly than digging into the risks.
Supply chain stress tests will become a new norm. Identification of risks will enable manufacturers to reconfigure their supply chain and build in contingencies. Risk mitigation measures could include diversifying your sources or stockpiling essential materials.
4. Build Resilience Through Digital Transformation
To meet fast-changing consumer demands, companies must enable real-time connectivity and responsiveness. Every organization is at a different stage in its digital revolution. The pandemic pushed most organizations to accelerate their digital transformation strategies, which helped them respond and cope with the adverse effects.
Digital technologies create opportunities to improve supply chain performance, create value, enhance customer experience and build trusted resilient supply networks. Technologies such as Blockchain, Artificial Intelligence, automation, and Machine Learning will be the lifeblood of every manufacturing organization. Companies that accelerate their digital transformation will be rewarded by newfound agility in their operations.
The Road Ahead: The Imperative for a New Supply Chain Model
The decades-long focus on supply chain optimization eradicated the buffers and flexibility necessary to absorb disruptions. To develop resilient supply chains capable of thriving in a post-Covid-19 future, organizations should design for new risks.
Organizations that scale up their supply chain agility and resilience will be able to anticipate, respond, and swiftly recover from future disruptions and “black swan” events such as another pandemic, trade wars, regulatory changes, or even acts of war or terrorism.
In the meantime, organizations need to extend their timelines, increase their budgets for transport and grow their patience. Unfortunately, until regulators step in or transport providers try to expand market share and lower their prices, companies will need to adjust their supply chain models.