Part Three of a four-part series. Read Part One and Part Two.
Faster than you can say "masks, PPEs, ventilators and antibiotics," the redesign of global supply chains has begun.
We are seeing the rethinking of the model that has existed for the past several decades, initially through the pharmaceutical and medical equipment sectors, the closure of critical meat processing centers in the U.S. Midwest and shortages of Chinese-made components for automobiles, semiconductors and telephony.
Driving these outcomes is the unprecedented vulnerability to disruption from an overdependence of critical material supplies or product components and subcomponents from single countries. Such pandemic-driven escalation of business risks is quickly followed by cost escalation and other cascading challenges to normal business continuity. Think: production capacity limits for products experiencing surging demand, workforce disruptions through illness or relocation, and collapse in the profitability and market value of publicly traded companies.
We have witnessed extraordinary examples of state and local governments inserting themselves into the global supply chains for medical equipment. Maryland Gov. Larry Hogan obtained a large shipment of medical equipment from Korea. Upon landing at the Baltimore/Washington International Thurgood Marshall Airport, the plane quickly was surrounded by the Maryland National Guard and State Police (to prevent federal authorities from absconding with the shipment) and taken to a protected, secret location. New England Patriots owner Robert Kraft lent his private plane and purchased and transported medical supplies from China to Boston, where the Massachusetts National Guard escorted them to a state strategic stockpile.
A long-term realignment
These dramatic examples of supply-chain modifications in the midst of the pandemic place an exclamation point on an even larger development: Re-alignment of global supply chains was underway before the pandemic had even begun. The pandemic has accelerated and deepened supply-chain restructuring, but it did not initiate it.
The pandemic has accelerated and deepened supply-chain restructuring, but it did not initiate it.
A number of other non-pandemic-related factors have caused global business managers to re-evaluate how to optimize their supplier relationships. These included:
- Rising labor costs in China, Taiwan and other major Asian production centers. This development already has motivated the relocation of certain product-component manufacturing or sub-assembly into lower-cost nations such as Cambodia, Vietnam and other Asia-Pacific nations.
- Continuing quality control and related risk problems. Food and pharmaceutical safety have been especially vexing challenges in China as systemic contamination problems remain unresolved in such areas as dairy, meat production and drug manufacturing.
- Increasing supply chain complexity and loss of business control. Many companies have tens of thousands of suppliers across the various tiers of their operations. These companies often lack knowledge of the identity of lower-tier suppliers and may be unaware of the embedded risks within their businesses until a problem emerges (often further downstream in a distant consumer market).
- Growing resistance of family members to live in highly polluted or politically unstable countries. Increasingly, companies have to relocate family members, and their executives may live apart from their loved ones for extended periods.
- Re-examining the costs and efficiencies of multi-tiered supply chain structures. The existing supply-chain model originated in the 1980s from expectations that lower labor costs, production efficiencies, expanding free trade opportunities and market access altered the incentives for businesses to relocate their manufacturing and some marketing and research assets to developing nations. These conditions had changed even before the pandemic due to higher labor costs, the imposition of tariffs, the erection of regulatory barriers and subsidies provided to benefit indigenous enterprises (often state-owned).
A growing number of business sectors also exhibit overcapacity, thus exposing stranded assets across their supply chains. This marketplace saturation is occurring across petroleum production, commodity plastics manufacturing, auto and aircraft production and other businesses.
Disruptions and higher costs are also affecting suppliers from accelerating climate change that intensifies heat and drought cycles, threatens assets from flooding, storm surges and tropical storm activities, and expands disease vectors that threaten workers and consumers.
Multinational companies are examining several options to reduce the rising risks and costs from complex supply chains in a post-pandemic world. Their options include:
- Regionalizing supply chains. Harvard Professor Willy Shih proposes that companies localize their suppliers closer to manufacturing operations and reduce the risk and cost of using lean and just-in-time production from more globally distributed supplier networks. Following this logic, global companies would regionalize production and supplier assets in distinctive areas within the European Union, North and Central America, and Asia-Pacific geographies. This approach will be more feasible for some sectors than others. For example, chemical manufacturers, which buy and sell individual chemical components and intermediates at various stages of the production process, will find this approach especially challenging.
- Hedging and diversification strategies. Many companies face higher business risks because they have over-concentrated their raw material sourcing or supply-chain components in too few countries. Several years ago, the report that Chinese authorities were evaluating whether to limit the export of rare earth materials sent a chill through the global automobile and electronics sectors and has stimulated investigation of alternative supply sources. A hedging strategy is not designed to cease sourcing or manufacturing operations in China or any other specific nation but, in the words of David Rennie, The Economist Chaguan columnist, to avoid "putting too many eggs" in one nation’s basket.
- Building longer-term business relationships with fewer suppliers. Many companies were considering this alternative well before the arrival of the pandemic. It represents a rethinking of suppliers as strategic partners rather than participants in a shorter-term transactional relationship based primarily on price. Redefining the customer-supplier relationship expands joint opportunities for co-innovation and smarter production, talent recruitment and retention, business continuity when faced with periodic disruptions, and longer-term competitive pricing.
Not all companies face an immediate need to repurpose their supply-chain model. However, the forces driving the expansion of global trade since the 1980s — lower costs, efficiencies in logistics and production, and restraint of nationalistic policies such as tariffs and other trade barriers — have receded. The pandemic further accelerates their decline.
How sustainability supports realignment
Business plans to make supply chains more sustainable reinforce and add value to realignment efforts already in progress. Numerous projects to introduce sustainability thinking and practices within global supply chains over the past 15 years have contributed substantial knowledge that such efforts yield a distinct value proposition. Supported by the private sector and government agencies (including the U.S. Agency for International Development, the U.S. Department of State, Australian Ministry of Transport and European Union) and carried out within the supply chains of private companies such as Coca-Cola, General Motors, Nestlé, Unilever and Walmart, sustainability’s value to supply chains includes:
- Reducing business costs. Lower material and costs from energy and packaging efficiencies, and from waste elimination and recycling, for example, decrease supplier operating expenses in ways that are both measurable and accrue to the bottom line.
- Consuming fewer natural resources and raw materials. More sustainable supply chains can be designed to reduce water consumption, soil and fewer raw materials necessary to produce goods for downstream business customers.
- De-risking the supply chain. Dashboards that measure supplier performance across sustainability metrics (including emissions, materials, costs and customer demand) identify poor performers and enable customer procurement managers to develop business relationships with better-performing suppliers.
- Redesigning business processes and products. A number of alternatives are available to install renewable energy technologies, reduce water consumption, practice sustainable agriculture and repurpose used plastics. Auto companies, for example, have become particularly adept in using a single assembly platform to manufacture a variety of brands at market scale. Chemical producers have organized joint teams to develop more innovative solutions with their customers for lighter-weight, more-durable and less-polluting materials.
- Implementing circular economy principles and practices across supply chain and value chain networks. Given the complexity of these networks, this effort requires deep technical knowledge and an understanding of the many economic incentives and disincentives that govern buying and selling decisions. The opportunities for co-innovation through collaboration across the supply chain continue to grow.
Multinational companies are examining several options to reduce the rising risks and costs from complex supply chains in a post-pandemic world.
The realignment of global supply chains will evolve over many years. Major disruptions will challenge business continuity and stimulate adaptive thinking. Going forward, the objective of supply-chain managers should be one of expanding resilience in response to a growing number of disruptive scenarios, including future pandemics, climate change and trade barriers.
As companies search to optimize value through supply-chain management, applying sustainability concepts and practice can provide substantial new opportunities for risk avoidance and management, innovation and enhancement of the customer experience.