The pandemic has made clear that there are trade-offs in the way supply chains are currently designed.
Tom Derry
CEO, Institute for Supply Management
How does the recent supply chain disruption affect Americans? What about the rest of the world?
In general, supply chains are built to be hyper-efficient. They are designed to produce goods at the lowest cost, meet quality standards, and move materials on a just-in-time basis from factory, to warehouse, to retail store. One of the primary reasons they deliver at lowest cost is that many companies will direct as much of their spend volume as possible to a single supplier to obtain the best price.
For these reasons, supply chains are also highly fragile, and therefore are very susceptible to disruption. One current example that affects American consumers is the market for new bicycles. Many Americans have turned to bicycling as a good source of exercise and a convenient, socially distant means of travel. But they are finding that new bicycles are on back-order status for months. Virtually all bicycle frames and components sold in the United States are manufactured in China. The production shutdown response to the coronavirus outbreak meant factories fell several months behind on filling orders. Meanwhile, new orders were increasing as more Americans were ordering bicycles. And even with production returning to near-normal levels in China, we had a transportation disruption – we couldn’t ship cargo containers by sea for a while, and we cancelled passenger flights that carry much material between the U.S. and China in their cargo holds. As you can see, it is very easy for a supply chain to be disrupted, and it can take months for the normal equilibrium to be reestablished.
What are three ways to help overcome supply chain disruption?
One of the most effective ways to mitigate a supply chain disruption is to have multiple sources for the product or ingredient the company needs to purchase. Companies usually prefer to deal with a single supplier to get the best possible price. However, during the pandemic, companies are starting to talk about “risk competitiveness” in addition to “price competitiveness.”
Risk competitiveness means that companies recognize that if they are unable to do business with their supplier – because of catastrophic weather, for example, or a pandemic as in our current circumstances – they are at risk of losing that revenue altogether. They could lose that business in foregone sales, or they might lose their customer to a competitor not impacted by the same disruption. Therefore, companies are beginning to factor supply chain disruption risk more directly in their strategies.
Another way to mitigate disruption is to carry more inventory on hand. Carrying more inventory will get you through a disruption – especially if its relatively short term in nature – but carrying inventory also ties up a company’s cash. The money spent on carrying extra inventory could have been used to expand employment, or for any number of more productive uses than sitting in a warehouse or distribution center. A third strategy to minimize supply chain disruption is to create separate supply networks based on your supplier and customer locations in various regions of the globe. You might be able to set up suppliers, manufacturing, and distribution all in the Asia-Pacific region for your customers there, for example. You might have a similar supply chain for your North American customers. If disruption impacts your business in Asia, your North American supply chain might continue to operate without interruption. This is a higher-cost model than operating a single, hyper-efficient, global supply chain. But it has some offsetting benefits. It can mean you can get products to your end customer faster; it can also allow a company to customize product features that are important for sales in one part of the world versus another country or region.
What does supply chain disruption mean for the future of the workplace and businesses?
The pandemic has made clear that there are trade-offs in the way supply chains are currently designed. They’re efficient, but fragile. They are subject to policy changes by governments (tariffs, for example, are a big issue in supply chains). And the vulnerability of certain supply chains – such as in pharmaceuticals, medical devices, and medical supplies – have caused some policymakers to ask whether the United States needs to maintain a “healthcare industrial base” in this country, just as we think about the impact of companies shifting operations on our defense industrial base.
Similarly, we established the Strategic Petroleum Reserve in the United States as a response to the Arab Oil Embargo of 1973, knowing our country’s economy was very susceptible to a decision not to sell oil to the United States.
I believe the scale of the pandemic’s economic impact is sufficient to get companies to begin to think about supply chains a little differently going forward. It will not only be about getting the best possible price. Decisions will also factor in the risk of disruption. Companies will add a second or a third supplier, or maybe a contract manufacturer, to mitigate the risk of supply disruption. Companies are already moving operations to new locations. Our research doesn’t support the idea that manufacturing might be “reshored” from China or other countries to the United States. But some may be near-shored, for instance, to Mexico, which has lower operating costs, a high-quality workforce, and is close to American and Canadian customers.