Once we start living in the post COVID world, which is when the pharma companies produce the vaccines and the world has started to resume from its lockdown world, I’m pretty sure & confident that the world is not going to be the same and will look different. The procurement shocks began to look clearer & better around the early half of 2020 which disrupted every part of the industrial world and took its toll on the supply chain world.
With the fall out between two great economies of the world United States & China pitted giant each other in the backdrop of modern age cold war – the trade war, trade restrictions and shortages of pharmaceuticals, critical medical supplies, and other products highlighted their weaknesses. They gave rise to a new world of economic nationalism, which one could feel very strongly in my country India was just after we lost the lives of 40 brave Indian soldiers in the higher regions of India during a border dispute clash between India & China.
The fallout of all these rising tensions during the COVID onslaught as if didn’t have enough on platter gave more increasing pressure to manufacturing to retailing organizations to increase their domestic production, grow employment in their approach to economic nationalism.
The fallout of this is positive only but to the ones which have robust infrastructure to rethink, redesign and realign their supply chains to mitigate the outsourcing risk on external supply chain and redeploy procurement sources for creating more inventory and also on the flipside to evolve strategies to minimize their on-hand inventory.
Well, things are not going to be easy with the above new normal, where the customer who is already facing the heat of poor household income due to lockdown where companies are cutting headcounts due to loss of sales and trying to survive in the new normal, consumers will demand low prices and the already squeezed manufacturing doing in shoring making will create tougher and leaner supply chains. This may result in pressuring the operational capital turbulence and the balance between them is going to be a task.
The variance on the above will be similar to specifics to every industry in their respective subsets. Resilience is the new normal wherein supply chains have to more elastic in their function wanting to survive the market forces, keeping in mind their challenges, and then devising steps. In my opinion, the strategy for this should have been taken long ago when the supply chain folks should have been visionary’s goggles.
Look for White Elephant in the Room
Currently, manufacturers across industries have turned to suppliers and subcontractors who narrowly focus on just one area, and those specialists, in turn, usually have to rely on many others. Such an arrangement offers benefits: You have a lot of flexibility in what goes into your product, and you’re able to incorporate the latest technology. The white elephant here is sole supplier dependency who’s in your procurement network, may or may not be in a single crucial component or several parts of the FG. If that supplier produces the item in only one plant or one country, your disruption risks are even higher. I’ve worked for most of my career in the fashion retail world and there have been times where one component or several are being sourced from China or South Korea, and even minor disruptions in the supply line jeopardized the entire production lines.
Well before the COVID, makers acknowledged these truths but couldn’t do much as there were aren’t any alternates and most of the time, the buyer nominated his supplier due to price benefits. Vicious circle!!
Risk Assessment –
1. Understanding where the risks lie
So that your company can protect itself may require a lot of digging. It entails going far beyond the first and second tiers and mapping your full supply chain, including distribution facilities and transportation hubs. This is time-consuming and expensive, which explains why most major firms have focused their attention only on strategic direct suppliers that account for large amounts of their expenditures. But a surprise disruption that brings your business to a halt can be much more costly than a deep look into your supply chain is. The goal of the mapping process should be to categorize suppliers as low-, medium-, or high-risk. To do that, Tom Linton, who served as a supply chain executive at several major companies, and applying metrics such as the impact on revenues if a certain source is lost, the time it would take a particular supplier’s factory to recover from disruption, and the availability of alternate sources. It’s important to assess how long a company could ride out a supply shock without shutting down, and how quickly an incapacitated node could recover or be replaced by alternate sites when an entire industry faces a disruption-related shortage.
The answers to the above questions depend, in part, on whether your manufacturing capacity is flexible and can be reconfigured and redeployed as needs evolve. E.g.: India the Atmanirbhar drive is motivating for the industry (as is the case for many manual or semi-automated assembly operations) or whether it consists of highly specialized and difficult-to-replicate operations. The production of smartphone chips, which is concentrated in three facilities in Taiwan owned by the Taiwan Semiconductor Manufacturing Company; fabrication of exotic sensors and components, which happens largely in highly specialized facilities in a handful of countries, including Japan, Germany, and the United States; and a few important components are still being made in china is the cause of concern.
Once you’ve identified the risks in your supply chain, you can use that information to address them by either diversifying your sources or stockpiling key materials or items.
2. Spread Supply Base
The obvious way to address heavy dependence on one medium- or high-risk source (a single factory, supplier, or region) is to add more procurement points not be exposed to the same risks.
Supply Chain teams should consider a regional strategy of producing a substantial proportion of key goods within the region where they are consumed. The United States might be served by shifting labor-intensive work from China to Mexico and Central America. To supply Western Europe with items used there, companies could increase their reliance on EU countries. Chinese firms that want to protect their global market share are already looking to Egypt, Ethiopia, Kenya, Myanmar, and Sri Lanka for low-tech, labor-intensive production.
Reducing dependency on China will be easier for some products than others. Things like furniture, clothing, and household goods will be relatively easy to obtain elsewhere because the inputs—lumber, fabrics, plastics, and so forth—are basic materials. It will be harder to find alternative sources for sophisticated machinery, electronics, and other goods that incorporate components such as high-density interconnect circuit boards, electronic displays, and precision castings.
In the 1980’s China first opened its special economic zones & they had almost no indigenous suppliers and had to rely on far-flung global supply chains and on logistics specialists who procured materials from around the world and kitted them for assembly in Chinese factories. Even with the support of communist government incentives, it took 20 years for the country to build a local base capable of supplying the vast majority of electronic components, auto parts, chemicals, and drug ingredients needed for domestic manufacturing.
Shifting production from China to Southeast Asian countries (India, Vietnam, Cambodia, Myanmar, and Singapore) will necessitate different logistics strategies as well. Unlike China, these locations often do not have efficient, high-capacity ports that can handle the largest container ships or the direct marine liner services to major markets. That will mean more trans-shipment through Singapore, Hong Kong (Now part of China – though disputed), or other hubs and longer transit times to reach markets.
In the long run, though, it would be a mistake to cut China completely out of your supply picture. The country’s deep supplier networks, its flexible and able workforce, and its large and efficient ports and transportation infrastructure mean that it will remain a highly competitive source for years to come. And because China has the second-largest economy in the world, it is important that firms maintain a presence to sell in their markets and obtain competitive intelligence.
3. Manage your Safety Stock
If alternate suppliers are not immediately available, a company should determine how much extra stock to hold in the interim, in what form, and where along the value chain. Of course, safety stock, like any inventory, carries with it the risk of obsolescence and also ties up cash. It runs counter to the popular practice of just-in-time replenishment and lean inventories. But the savings from those practices have to be weighed against all the costs of disruption, including lost revenues, the higher prices that would have to be paid for materials that are suddenly in short supply, and the time and effort that would be required to secure them.
New technologies already or soon will allow companies to lower their costs or switch more flexibly among the products they manufacture, rendering obsolete the installed bases of incumbent competitors or suppliers. Many of these advances also present an opportunity to make factories more environmentally sustainable. Examples include the following:
- New processing technologies: The latest manufacturing equipment uses less energy and pollutant, produces less waste, is less capital-intensive, and is less expensive to operate.
- Automation: As the cost of automation declines and people see that robots can operate safely alongside humans, more kinds of work are being automated. The pandemic has made automation even more attractive because social distancing in factories is now a necessity. As a result of these developments, it’s becoming more practical to return off-shored production to higher-cost countries. Robotic palletizers, which can sharply reduce the need for labor in preparing products for shipping, will pay for themselves quickly, as will automated optical inspection systems for quality control. E.g.: Amazon, Flipkart, Alibaba, and many other eCommerce companies.
- Additive manufacturing: This production method, also known as 3D printing, can dramatically reduce the number of steps required to make complex metal shapes; it can also lessen dependence on distant suppliers of the machinery and tools needed for, say, the injection molding of plastics. Rapid advances in 3D printing are making it possible to economically produce an ever-expanding array of items in much higher quantities.
- Continuous-flow manufacturing: This innovation could significantly increase the resilience of the supply chain for pharma & other essential products. Eg: The use of TAKT, Cycle times to be made more aggressive as they leverage on the making time and impact efficiencies.
In many industries, technologies such as these promise to upend the traditional strategy of seeking economies of scale by concentrating production in a few large facilities. They will allow companies to replace large plants that serve global markets with a network of smaller, geographically distributed factories that is more resistant to disruption.
Juggling between single SKU or Multi SKU
During the pandemic, when demand surged in many product categories, manufacturers struggled to shift from supplying one market segment to supplying another, or from making one kind of product to making another. A case in point is the U.S. grocery market, where companies had difficulty adjusting to the plunge in demand from restaurants and cafeterias and the rise in consumer demand. SKU proliferation—the addition of different forms of the same product to serve different market segments—was partly responsible. For example, one obstacle to meeting heightened demand for toilet paper at supermarkets was that manufacturers had to change over their production lines because consumers prefer soft multi-ply rolls rather than the thinner toilet paper that many hotels and offices purchased in much larger rolls. Adding to the complexity, different retail chains wanted their own packaging and assortments.
Separating demand into many different SKUs makes forecasting more difficult, and trying to fill needs by substituting products during periods of shortage causes a real scramble. Take away: Companies should reconsider the pros and cons of producing numerous product variations.
The economic mess caused by the pandemic has exposed many vulnerabilities in supply chains and raised doubts about globalization. Managers everywhere should use this crisis to take a fresh look at their supply networks, take steps to understand their vulnerabilities, and then take actions to improve robustness. Shunning totally away from globalization by going single supplier will leave a void that others—companies that don’t abandon globalization strategies will be glad to fill. A calculated risk to adopted but
It’s time to adopt a new vision suitable to the realities of the new era—one that still leverages the capabilities that reside around the world but also improves resilience and reduces the risks from future disruptions that are certain to occur.
More thoughts to follow…