Supply Chain Spark Blog

Supply Chain Strategies Shift

“Many global supply chains are not equipped to cope with the world we are entering. Most were engineered, some brilliantly, to manage stable, high-volume production by capitalizing on labor-arbitrage opportunities available in China and other low-cost countries.” Word of wisdom…written almost 10 years ago by McKinsey & Company.

It’s no longer a secret about how fragile our global supply chains are, when it comes to essential medical supplies, pharmaceuticals, and other vital products we are so dependent upon. Even toilet paper hoarding is the subject of new studies. News abound on how the pandemic has disrupted and exposed shortages and overall weaknesses in what was an already imperiled global supply chain due to the ongoing trade wars. As Deloitte described the situation: “A decades-long focus on supply chain optimization to minimize costs, reduce inventories, and drive up asset utilization has removed buffers and flexibility to absorb disruptions ─ and COVID-19 illustrates that many companies are not fully aware of the vulnerability of their supply chain relationships to global shocks.”

The US-China trade war the past couple of years has upended our way of doing business and ushered a new era dominated by nationalistic tendencies when it comes to economic trade. Another thing companies were guilty of was their lack of identifying and addressing their supply chain risks and overall vulnerabilities. This isn’t going to get any easier as consumers will still demand competitive pricing as we muddle through this recession. And companies will have to figure out the best way to maintain their competitive edge while also increasing their resiliency to ensure they’re not caught short again.

No longer will it be enough to assess merely your first and second tier suppliers. Companies are being advised to take on a complete supply chain mapping assessment. This includes transportation, distribution, etc. and the goal is to segment your suppliers in different risk levels – high, medium, low. All this emphasis is to get better at understanding your full supply chain to plan for unexpected disruptions and the ensuing supply shock.

Age-old advice of supply base diversification still merits attention as supply chains get reconfigured. We have heard clients talk about a ‘China plus one’ strategy and the concept of nearshoring, i.e. Mexico. Added into this list is now bring back manufacturing capabilities in the US. Building the infrastructure for that back in our country will be a hot topic in the coming years.

Another much-ballyhooed supply chain concept that is up for debate in the just in time and lean manufacturing principles. As companies beef up alterative suppliers, they still must contend with shortages on many consumer products. A large part of that is due to the way inventory has been categorized in this model, i.e., basically evil. Safety stock, inventory, or any buffer was a sign of inefficiency and the enemy of working capital (and CFOs).

McKinsey & Company wrote in March 2020 that there are six sets of issues that require quick action across the end-to-end supply chain:

  1. Create transparency on multitier supply chains, establishing a list of critical components, determining the origin of supply, and identifying alternative sources.
  2. Estimate available inventory along the value chain—including spare parts and after-sales stock—for use as a bridge to keep production running and enable delivery to customers.
  3. Assess realistic final-customer demand and respond to (or, where possible, contain) shortage-buying behavior of customers.
  4. Optimize production and distribution capacity to ensure employee safety, such as by supplying personal protective equipment (PPE) and engaging with communication teams to share infection-risk levels and work-from-home options. These steps will enable leaders to understand current and projected capacity levels in both workforce and materials.
  5. Identify and secure logistics capacity, estimating capacity and accelerating, where possible, and being flexible on transportation mode, when required.
  6. Manage cash and net working capital by running stress tests to understand where supply-chain issues will start to cause a financial impact.

We are now seeing that cargo capacity for the upcoming Holiday season is becoming constrained, and cargo rates from China are skyrocketing. Expect companies to increase their inventory safety stock in response to anticipated supply chain disruptions…also in response to discovering their own supply chain weaknesses this year.

It’s long been known that global supply chains were not ready for what was next. We just didn’t know how much this Black Swan pandemic event would expose the challenges.

The question moving forward is whether or not we have the appetite for higher pricing at the cost of losing revenue and enduring more disruptions.