Vital Global Supply Chains Lessons Taught By the Pandemic
When the Covid-19 Pandemic finally goes away, the world is going to be completely different. There was a supply shock that originated from China in February and this gave way to a demand shock following the global economy shut down that forced everyone to stay at home.
During this time, a lot of vulnerabilities in the supply chain and production systems used by different firms around the world were brought to light. Some of the events that highlighted these weaknesses included a shortage of pharmaceutical supplies, temporary trade restrictions, and the lack of critical medical supplies.
With the world now starting to recover from the pandemic, manufacturers and other players within the global supply chain will now be compelled to start focusing their attention on increasing their domestic production capabilities, get skills from within their geographical locations, rethink the application of lean manufacturing strategies, and reduce their dependence on sources already considered as risky.
Through the implementation of some of these operations management strategies, there will be a significant reduction in the amount of potential inventory that is kept within the global supply chain.
But not everything is going to change after the pandemic. For example, consumers’ desire for low prices will remain, and manufacturers won’t have the luxury of increasing their prices because they are manufacturing at higher costs within the domestic markets.
The competition will always have a good grip on the prices. Additionally, there will be no changes in the pressure for the firms to operate more efficiently and to use both capital and manufacturing capacity more sustainably.
Companies now have the monumental task of making their supply chains resilient without necessarily weakening their competitive edge in the market. To ensure this, it is vital for the managers to have a clear picture of the potential vulnerabilities they may be faced with, then devise the necessary steps that should be taken as mitigation for those vulnerabilities – some of these steps ought to have been taken long before the pandemic.
Discovering and addressing hidden risks within the supply chain
The manufacture of most modern products requires certain critical components that need specialized technical skills to make. It is not usually possible for a single firm to have all the skills, experience, and resources to produce everything by itself, and even if this was possible, it would be very expensive and may end up stretching beyond the limits of what the company can accommodate.
Consequently, manufacturers in most sectors usually utilize suppliers and subcontractors with great skills or expertise in just one area of production. As such, they may rely on more than one supplier or subcontractor for the successful completion of their product.
In as much as this arrangement in manufacturing is normally beneficial, it usually leaves the manufacturer vulnerable, especially in instances when they are completely dependent on a single contractor buried somewhere deep within the chain. If that supplier or contractor is producing an item in one plant or from just a single country, then the risks of disruption become even greater. Therefore, it is important that you dig deep into your supply chain, and critically analyze every link to identify any hidden risks that may jeopardize your operations.
Identification of vulnerabilities
Discovering potential risks may take time and may also require a lot of digging. You will have to explore beyond the first and the second tiers and fully map your entire supply chain, without forgetting about the distribution hubs as well as the transportation facilities.
This is always expensive and time-consuming, and perhaps the main reason why most of the top firms prefer to focus on strategic direct suppliers who are responsible for the largest portions of their expenditures.
But you should realize that a surprise disruption with the potential of bringing your business to a complete halt may prove to be more costly in the long run compared to the time and resources you may need to deeply evaluate the supply chain.
The main reason for the mapping process is to profile suppliers according to their potential risk levels – for example, you could categorize them as low, medium, and high risk. One of the ways through which you could go about this categorization is to use metrics such as their impact on revenue should certain sources be lost, the amount of time that may be needed for a total recovery in case of disruption from one source, and the presence or easy availability of alternative sources for a particular supplier.
It is important for every company to take into account the duration that they can successfully ride a supply shock without closing down the business and how fast the affected supplier can recover or be replaced so that the operations of the company can remain sustainable.
How a company responds to these concerns will partly determine the flexibility of its manufacturing flexibility and how quickly it can respond if one node is taken out of the supply chain. Following the successful identification of risks within the supply chain, the information can then be used in crafting solutions that will ensure that the operations of the company are not hampered adversely should any of the assessed risks be encountered.
Supply base diversification
With a medium or high-risk supply source, one of the best ways to address heavy dependence on them is to consider getting more sources in locations or economies that don’t share the same vulnerabilities. A clear example of the need for this kind of diversification can be seen in the US-China trade wars.
As a result of this war, some companies have been motivated to adopt a strategy that is popularly known as China Plus One where they are spreading their production to other Southeast Asian countries such as Thailand, Vietnam, and Indonesia.
It is also highly recommended for managers to think about adopting regional strategies for the production of large portions of key goods within the regions where the bulk of the consumers are located.
Regions such as North America may benefit from shifting labor-intensive jobs from China to Mexico. For those looking forward to selling items to Western Europe as their consumers, it makes more sense to have manufacturing facilities in Eastern European countries such as Ukraine and Turkey.
But it should be noted that reducing dependency on China will vary from one product to another, and it will be easier to reduce this dependency on some products compared to other products.
For example, it is relatively easier to reduce this dependency on items such as furniture, clothing, and household goods which can always be obtained with relative ease from other sources.
However, it will not be the same for sophisticated machinery, and other goods that rely on high-density interconnect circuit boards and precision casting among others.
With a shift of production from China to Southeast Asia, there will be a need for different logistics strategies to also be considered.
China is known to have efficient and high-capacity ports with the ability to handle the largest container ships on the planet but these other countries have yet to develop such capacities.
This implies that there will be a lot of transshipment through countries such as Singapore and Hong Kong and this may lead to potentially longer transit times before the goods can reach the markets.
It is also important to observe that, despite the trade wars between China and the United States, and the general shift towards the Southeast Asian countries, it would be detrimental to cut off China completely from the global supply chain landscapes.
China already has very deep supplier networks, a flexible and capable workforce, large and modern ports, and excellent transportation infrastructure. These are just but a few of the attributes that make it highly competitive in the region, not forgetting that it is the second largest economy in the world.
As such, it will remain a fertile ground for firms to sell their products, and continue gathering competitive intelligence.
Maximizing process innovation
As companies look forward to relocating parts of their supply chains, it is possible for some to ask their suppliers to also relocate with them or they might as well bring back some of the production in-house.
Whichever route is chosen, this is an opportune time to make some major improvements to the production process.
As part of the change, some of the organizational routines can be unfrozen and design assumptions in the underlying original processes can also be revisited.
With the advent of new technologies, companies will soon find it easy to lower their production costs or improve flexibility in their manufacturing processes.
Most of these innovations will also present companies with opportunities to create more environmentally sustainable environments. Some of these innovations include:
Automation – the cost of automation is already on a decline, and people are starting to realize that they can safely operate side to side with robots.
Due to the pandemic, automation became even more attractive to many since it encouraged the concept of social distancing which was vital in the fight against the virus.
As such, it is now making more sense for companies to shy away from off-shored productions with higher costs.
Continuous-flow manufacturing – this form of innovation could be a major game changer when it comes to increasing the resilience of the global supply chain regarding the manufacture of generic drugs.
This can be easily achieved by simply making their producers less dependent on imported active pharma ingredients.
The adoption of new processing technologies – the most modern chemical manufacturing equipment tends to utilize less energy and solvents, are less capital intensive, produce less waste and they are also easy to manage and operate.
Additive manufacturing – with the additive manufacturing production method, it becomes easy to significantly reduce the number of steps that are needed to complete certain complex tasks.
It can also be used to reduce dependence on distance suppliers and tools and machinery needed for items such as the injection molding of plastics.
Currently, technologies such as the ones discussed above are being seen as great alternatives to traditional strategies.
They are promising when it comes to the realization of economies of scale since they can be effective in focusing the production in a few large facilities.
They will also make it easy for companies to get rid of large plants and instead replace them with smaller, geographically distributed factories that will be highly resistant to disruptions.
Consider holding intermediate inventory – safety stock
In the event that you can’t find readily available alternative suppliers, then it is vital for a company to determine how much stock they can hold in the interim in the event of a disruption.
Just like with every other inventory, safety stock will always carry along a significant risk of obsolescence and it may also end up tying a decent amount of cash. It goes against the basics of the principle of just-in-time replenishment as well as lean inventories.
However, the savings from such practices must be considered in comparison to the actual cost of disruption, without forgetting the impacts of lost revenue, the potentially higher prices for materials that are in short supply, and the time as well as the effort that will be needed to acquire those materials.
There is no denying that the turmoil caused by the pandemic brought to light many vulnerabilities in supply chains, besides creating doubts about the prospects of a successfully globalized economy.
For managers, the crisis should be a chance to explore their supply networks in detail, identify vulnerabilities, and come up with proper measures to mitigate against the vulnerabilities and use their management systems to improve robustness within their chain.
Though globalization remains a fantastic idea, companies should be keen on finding means to make their businesses thrive and gain a competitive edge that will see them thrive in the advent of another global pandemic.
This would also be a great time for companies to develop new visions that are in line with the realities of the new era and business landscapes. Companies should exploit the capabilities available around the world, while at the same time improving their resilience and reducing potential risks from future disruptions.