Rethinking Supply Chain Risk in the “Never Normal” World

The heavy dependence on China across industry verticals is an obvious example of the sole-sourced nature of today’s supply chains.

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The Coronavirus disease (COVID-19) has brought great human tragedy to the world, including thousands of lives lost, the enormous strain on healthcare systems across nations and striking levels of unemployment. It has also brought unprecedented disruption to our modern, deeply intertwined global supply chains, exposing previously hidden systemic risks.

Supply chains over the past several decades were built with the cost–service tradeoff in mind. Though major events such as 9/11, large natural disasters, U.S.–China trade wars and Brexit have illuminated the nature of the risks supply chains face, organizations, for the most part, remain reactive to the threat rather than preparing for it. Before we consider the recommendations to tackle risk, here are the nature of risks in today’s supply chains with specific industry examples:

●     China built a formidable position in consumer electronics through its manufacturing competency and scale that is hard to replicate.

●      China is dominant for components and commodities. Almost 92 million motor vehicles were produced globally in 2019. Of these, 21.4 million units were produced in China.

●      About 80% of active pharma ingredient supply to the world for essential medications comes from China and India.

●      SKUs in retail and fast-moving consumer goods (FMCG) industries exploded over the years. COVID-19 is elevating the risk from this. Stockouts in certain categories, such as toilet paper, disinfectants, and cold remedies, continue to persist.

●      In the U.S. meat processing industry wherein most of the supply is domesticated, the single source risk is still dominant due to the highly concentrated nature of the slaughter capacity, triggering meat shortages as processing plants had to be shut down due to rising infections.

The heavy dependence on China across industry verticals is an obvious example of the sole-sourced nature of today’s supply chains. China is a dominant example of the phenomenon, partly owing to the sheer size of the country’s domestic market and its position as the world’s manufacturing hub, but the relentless pursuit of cost reduction and margin expansion has driven today’s supply chains toward having too many single points of failure (in China and beyond). Current events are exposing these weak links in supply chains – especially in essentials such as food and healthcare, forcing governments to rethink their role in the governance and regulation of supply chains.

Regionalization is being talked about as the panacea for mitigating risks from lengthy global supply chains. While shortening supply chains can potentially reduce geo-temporal risks to an extent, there are valid reasons why supply chains will remain global for the foreseeable future. A typical smartphone, for example, has about 70 different elements inside it, including cobalt, gold, copper, nickel and rare earths. This gives an edge to countries with vast geographies and access to natural resources. In addition to material availability, manufacturing competence and access to skilled labor also tend to be deterrents to regionalization. With a collective consumer base of 2.75 billion people in China and India, mass relocation to local supply chains remains impractical for global companies. By retrenching, organizations risk ceding the market to the rising stars of these countries. Even in cases where Western companies and industries initiated moves away from China, they tend to move to countries such as Vietnam, India, Bangladesh, and Thailand as opposed to nearshoring. For example, while U.S. imports of apparel are still dominated by China, Vietnam has emerged as a strong alternate source. Vietnam’s share of apparel imports to the United States by country went from around 8% in 2010 to 16% by the end of 2019.

If complete regionalization of supply chains remains impractical, what actions can business leaders take in managing risks? It starts with acknowledging that managing supply chains can no longer be about only the cost–service trade-off – rather, risk will need to be included as a third tradeoff element. Leaders will need to review the current design of their value chain and gain a better understanding of knowable risks that can be mitigated. Such consideration should extend beyond their immediate suppliers and into suppliers’ suppliers across multiple tiers. Optionality, in terms of having secondary and tertiary alternates, needs to be built into supply chains to combat risk. Having multiple sources of supply, manufacturing centers, distribution points, and modes of transportation in reaching the market to ensure business continuity is foundational to creating such optionality.

It’s worth noting that implementing optionality would require significant cross-functional collaboration between various business functions such as strategy, procurement, manufacturing, logistics, finance and R&D. Business leaders will need to drive change by breaking the silos that exist in many organizations to foster such cross-functional efforts. Organizations will need to be thoughtful and deliberate in identifying potential options and prioritize them. This calls for making the necessary investments in building the supply chain capability, exactly at a time when organizations will be increasingly pressured to reduce costs. How many leaders will be ready to drive such investments in the current economic conditions?

Leaders will need to think through how to adapt and evolve to a new digital decisioning paradigm that integrates strategies, tactics and operations. However, rather than ripping and replacing years and decades of investments, leaders will need to blend in emerging technologies with legacy investments to enable a digital twin of their supply chain that is suitable for simulating future disruptive events and ensure robustness.

In a world where “never normal” is the New Normal, viewing COVID-19 as a fleeting crisis and ignoring massive shifts could be quite punishing. An example of this need to change is highlighted by the increased bankruptcies of major retailers. A common theme among retailers going bankrupt is that they built decades of multi-tiered supply chain competence in catering to the brick-and-mortar store format. COVID-19 rapidly accelerated the shift to e-commerce due to stay-at-home orders around the world. In the United States alone, the online sales of food grew by 69.5% year-over-year from 2019 for a comparable period, followed by 57.5% for household care items. This resulted in many retailers and distributors getting caught flat-footed. Conscious design of the supply chain accounting for last-mile delivery and associated costs is a major need today for many retailers and distributors alike as they need to accelerate their omnichannel models.

With digital disruptors building entire business models powered by artificial intelligence, business leaders will need to embrace agile approaches and advanced analytics to stay competitive. As these leaders rethink the design of their supply chains in light of evolving business models and strategies, the “set once and forget” rules and policies that drive most of today’s supply chain decisions will no longer work. Getting external help can kick-start building competency in dynamically aligning supply chain design to enable the business strategy. However, leaders cannot outsource their way out of the problem entirely. Rather, organizations will need to build and exercise their muscle for the design of supply chains and the policies that guide them to remain relevant and be far more dynamic.

Every crisis presents an opportunity. At the other end of this current crisis awaits a new world of winners and also rans – where they will end up depends on how leaders act now.