When it comes to supply chains, there is an inherent tradeoff between resilience and efficiency. For decades, American manufacturers in a wide range of industries have favored supply chain efficiency over resilience, opting for measures such as minimal inventory and production concentrated in a single region. However, going all in on efficiency leaves supply chains weak. Thus, we saw the breakdown of American supply chains in the wake of COVID-19 (coronavirus). Businesses can learn from these breakdowns and build up resilience to prevent future crises.
Here are some characteristics of supply chains that lean all the way toward efficiency:
- Production centered in a single region: Since the 1980s, American companies have been concentrating production in Asian countries to reap the benefits of lower production and labor costs. This trend has been reversing somewhat in recent years due to logistics fees, a skilled US workforce and the popularization of customization (meaning manufacturing plants are being set up near customers). However, it remains cheaper to produce many parts and goods in developing economies (e.g. Vietnam and Thailand). In the wake of the coronavirus, sole reliance on production in Asia created a ripple effect of manufacturing shutdowns. High-value-added manufacturers suddenly couldn’t get inputs necessary for production, and the whole system fell to its knees.
- No redundancy: Manufacturers have failed to establish back-up vendors upstream; this means they have been unable to transition efficiently between suppliers when issues and delays have emerged with their primary suppliers.
- No transparency: Manufacturers were familiar with their Tier-1 suppliers and sometimes their Tier-2 suppliers, but they were largely unfamiliar with Tier-3 and above, meaning that they were unable to anticipate disruptions. Thus, manufacturers didn’t have enough lead time to shift strategies once supply chain disruptions took place.
The shift toward resilience
The coronavirus pandemic is not an isolated event. Supply chain disruptions due to geopolitical issues, adverse climate events and public health crises are on the rise. The world is becoming increasingly chaotic, and manufacturers’ reliance on minimal inventory levels and low-cost suppliers is leaving their supply chains vulnerable. What can we learn about supply chains from the coronavirus pandemic? It’s time to invest in supply chain resilience.
Here are some ways to invest in supply chain resilience:
- Strengthen Teams: Teams that are decentralized can respond quickly to destabilizing events and data insights from advanced analytics. What was once considered acceptable flexibility is simply not good enough anymore.
- Join Forces Digitally: Businesses can boost their information-sharing activities through the acquisition of collaborative applications and cloud-native supply chain platforms. These tools enhance the ability of employees to make decisions amongst themselves, as well as decision making with external players (e.g. upstream suppliers).
- Gain Supply Chain Visibility: Management teams can respond quickly to supply chain disruptions by enhancing their ability to quickly assess internal and external data. This means using artificial intelligence (AI) and machine learning (ML) to generate analysis. AI and ML technologies can set in motion early-warning technologies, create preprogrammed protocols and develop models of risk scenarios.
Resilience: A Competitive Advantage
By investing in resilience, companies can develop a competitive advantage. For example, according to Bain & Company, firms that invest in supply chain resilience can grow more rapidly because they can pivot faster to meet the needs of customers when market demand suddenly shifts. Companies that make changes to fortify their supply chains also see a 20% to 30% improvement in customer satisfaction. Furthermore, supply chain resilience helps manufacturers boost savings and increase cash flow. For example, companies with resilient supply chains typically see a 1% to 2% decrease in operating expenses.
The coronavirus pandemic exposed weaknesses in global supply chains, disrupting American manufacturing and threatening revenue generation for thousands of companies. The coronavirus will not be the last geopolitical crisis that threatens US manufacturing. However, by investing in resilience, manufacturers can prepare to take on the next challenge and expect to make it out on the other side.
By: Remi Nathanson