Many corporations are struggling to keep themselves ticking over due to the immense effect of the coronavirus pandemic on global supply chains. Since they themselves are dealing with workforce shortages, cash deficits, or blocked warehouses, many manufacturers are no longer reliable. Adding to this are the problems that impact many similar service providers, such as logistics. Therefore, the risk of supply chain breaks has risen significantly. So how can they be avoided?
Supply chains need to be more flexible, stable and stronger
The development just described also revealed the high susceptibility to breakdowns of complex supply chains. Although individual industries such as the food industry, manufacturers of farm and harvest machinery, or hardware stores have come through the crisis reasonably well so far, supply chains need to be built in the future to be more durable and resilient. To this end, at least part of the supply chains must be restored in order to work stably in the crisis situation and to be ready for a new normal after the pandemic. Experience has shown after all that supply chains face the greatest obstacles when after an extraordinary situation, market volume picks up again.
In general, understanding the changed behavior of consumers, avoiding single-sourcing strategies, and shortening and stabilizing supply chains by concentrating heavily on local, regional, or country specific suppliers is critical. Benchmarks that are decisive are:
- The number of vendors,
- A blend of manufacturers,
- The strategic value of such materials or items.
In addition, metrics are also essential, such as time-to-recover i.e. the period from the supplier’s failure to replace it or time-to-survive, i.e. the quantity of materials kept in stock to keep production going.
Strong measures to improve resilience in the supply chain
For the required changes, a methodical procedure with these four main aspects is appropriate:
1. Risk Analysis
After the recession, many supply chains need to be reactivated quickly. You would have to analyze, though, to what extent, at least to some degree, they can be replaced by other, less dangerous alternatives. Overall in terms of quantity and countries of origin, this relates to determining the supplier mix. In addition, attention should be given to the relationship between warehousing and just-in-time delivery.
However, the desired higher degree of supply chain protection and stability would have to be balanced against higher costs in certain cases. Therefore, it is more important to disperse existing stocks sensibly rather than building up new defense stocks in order to prevent increased capital commitment in economically crucial times. In addition, the use of smart forecasting and optimization systems for inventory management should be considered by businesses to align distribution capacities and stock levels.
2. Emergency Case Plans
The German government submitted a risk assessment for an emergency scenario triggered by the SARS pandemic as early as 2013. Similar notions may have been established by other countries. Nevertheless, the supply chains of most businesses here and there were not prepared for such a situation. Therefore, contingency strategies for coping with the economic crisis or other emergencies should now be established at the latest, so that supply chains can be stable and resilient. In particular, the goal is to identify possible options for reaction and to define alternatives for sourcing.
3 Sourcing Strategies
The concrete design of a supply chain needs to be assessed on the basis of the aforementioned risk analysis and the derived emergency plans. Diversification of the supplier base, avoidance of geographical dependencies, management of inventories and distribution of stocks, and even potential improvements to the company’s own depth of value development are the most important points here.
The current crisis has shown that soft factors are also essential and helpful, such as mutual support. The sharing of materials and personnel, the awareness of interdependence, greater accountability, and the disclosure and transfer of data outside the walls of the business ensure greater consistency in the supply chains that benefit everyone.
5. Diversify base of Suppliers
A simple way of addressing heavy reliance on a single medium- or high-risk source (single plant, supplier, or region) is by incorporating additional sources at locations that are not vulnerable to the same risks. Some companies have been inspired by the U.S.-China trade war to move to a “China plus one” strategy to spread production between China and a country like Vietnam, Indonesia, or Thailand in Southeast Asia. But regional issues such as the Asian financial crisis of 1997 or the tsunami of 2004 call for wider geographical diversification.
A regional strategy to manufacture a significant proportion of key products within the area where they are consumed should be considered by managers. By moving labor-intensive jobs from China to Mexico and Central America, North America could be served. Companies could increase their dependency on eastern EU countries, Turkey, and Ukraine in order to supply Western Europe with products used there. Chinese companies that want to secure their global market share are already looking for low-tech, labor-intensive development in Egypt, Ethiopia, Kenya, Myanmar, and Sri Lanka.
Different logistics strategies would also be required to move production from China to Southeast Asian countries. Unlike China, these areas also do not have effective high-capacity ports capable of handling major markets with the largest container vessels or direct marine liner services. This would mean greater transshipment to markets via Singapore, Hong Kong, or other hubs and longer transit times.
6. Keep an Intermediate stock or Safety Inventory
If alternative suppliers are not immediately available, a company can decide in the meantime, in what type, and where along the supply chain, how much extra stock to carry. Of course, security inventory, like any inventory, brings the risk of obsolescence with it and ties up cash as well. It runs counter to just-in-time replenishment and lean inventories, the common method. The benefits from such activities, however, have to be balanced against all the costs of the interruption, including the loss of sales, the higher prices that will have to be charged for goods which are unexpectedly in short supply, and the time and effort needed to secure them.
7. Take advantage of Innovation in Method
Some might ask their suppliers to travel with them as businesses relocate parts of their supply chain, or they might bring some production back in-house. Any path is a chance to make substantial process changes, such as transplanting a production line or setting up a new one. This is because you can unfreeze the operational habits as part of the adjustment and review the design assumptions underpinning the initial phase (For businesses with current production lines, one problem is that when those assets are completely depreciated, managers may be inclined to maintain them rather than invest in new, more efficient plants and equipment: because the expense of depreciation is no longer taken into account in the measured cost of production, the marginal cost of raising production in idle-capacity plants is lower).
We can also develop new strategies for resilience management in supply networks beyond supply chain optimization. Cooperation platforms are one example, enabling businesses, for example, to serve as virtual central warehouses and exchange product information. In this way, collaboration can be coordinated and made operationally useful by technical support on an overall basis.