Reading the Tea Leaves at Tea and More Resolving Complex Supply Chain Issues
Thought in Cursory
The Problem
Disruptions and shortages during the Covid-19 pandemic exposed weaknesses in global supply chains, which already faced threats from trade wars.
The Cause
Many companies hadn't rigorously identified and addressed hidden vulnerabilities.
The Solution
Thoroughly map your supply chain to uncover risks. To mitigate them, line up culling supply sources in various locations or increase stocks of critical materials. Revisit your product strategies. And explore new manufacturing technologies that could increase flexibility and resilience.
When the Covid-19 pandemic subsides, the globe is going to look markedly dissimilar. The supply shock that started in Red china in February and the need shock that followed as the global economy shut down exposed vulnerabilities in the production strategies and supply chains of firms but virtually everywhere. Temporary trade restrictions and shortages of pharmaceuticals, critical medical supplies, and other products highlighted their weaknesses. Those developments, combined with the U.Southward.-China trade state of war, have triggered a rise in economic nationalism. As a consequence of all this, manufacturers worldwide are going to be under greater political and competitive pressures to increase their domestic production, abound employment in their domicile countries, reduce or even eliminate their dependence on sources that are perceived as risky, and rethink their use of lean manufacturing strategies that involve minimizing the amount of inventory held in their global supply chains.
Yet many things are non going to change. Consumers will continue to want low prices (peculiarly in a recession), and firms won't be able to charge more only because they manufacture in higher-toll habitation markets. Competition volition ensure that. In addition, the pressure level to operate efficiently and use capital letter and manufacturing chapters frugally volition remain unrelenting.
The challenge for companies volition be to brand their supply chains more than resilient without weakening their competitiveness. To meet that challenge, managers should starting time understand their vulnerabilities and and so consider a number of steps—some of which they should have taken long before the pandemic struck.
Uncover and Address the Subconscious Risks
Modern products oftentimes incorporate critical components or sophisticated materials that require specialized technological skills to make. It is very difficult for a single firm to possess the latitude of capabilities necessary to produce everything by itself. Consider the growing electronics content in modern vehicles. Automakers aren't equipped to create the touchscreen displays in the entertainment and navigation systems or the countless microprocessors that control the engine, steering, and functions such every bit power windows and lighting. Another more arcane instance is a grouping of chemicals known as nucleoside phosphoramidites and the associated reagents that are used for creating Deoxyribonucleic acid and RNA sequences. These are essential for all companies developing DNA- or mRNA-based Covid-19 vaccines and Deoxyribonucleic acid-based drug therapies, just many of the key precursor materials come from South korea and China.
Christoph Morlinghaus
Manufacturers in most industries have turned to suppliers and subcontractors who narrowly focus on just one area, and those specialists, in plow, commonly 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. But yous are left vulnerable when you lot depend on a single supplier somewhere deep in your network for a crucial component or textile. If that supplier produces the item in only i found or ane country, your disruption risks are even college.
Place your vulnerabilities.
Understanding where the risks prevarication and then that your company can protect itself may crave a lot of excavation. Information technology entails going far beyond the start and 2d tiers and mapping your total supply chain, including distribution facilities and transportation hubs. This is time-consuming and expensive, which explains why most major firms take focused their attending only on strategic straight suppliers that account for big amounts of their expenditures. Only a surprise disruption that brings your business organization to a halt can exist much more costly than a deep expect into your supply chain is.
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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 MIT'south David Simchi-Levi suggest applying metrics such as the touch on on revenues if a sure source is lost, the fourth dimension information technology would take a item supplier's factory to recover from a disruption, and the availability of alternate sources. (Disclosure: I am on the boards of directors of Flex, a big manufacturing and supply-chain services provider where Linton is a senior adviser, and Veo Robotics, a company that has developed an avant-garde vision and 3D sensing system for industrial robots.) Information technology'south vital to ascertain how long your 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 those questions depend, in part, on whether your manufacturing capacity is flexible and can be reconfigured and redeployed as needs evolve (every bit is the example for many transmission or semiautomated assembly operations) or whether it consists of highly specialized and hard-to-replicate operations. Examples of the latter include production of the virtually advanced 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 scattering of countries, including Japan, Frg, and the United States; and refining of neodymium for the magnets in AirPods and electric-vehicle motors, most all of which is washed in China.
Once you've identified the risks in your supply chain, you can use that data to address them past either diversifying your sources or stockpiling key materials or items.
Diversify your supply base.
The obvious way to accost heavy dependence on one medium- or high-risk source (a single factory, supplier, or region) is to add together more sources in locations not vulnerable to the same risks. The U.Southward.-China trade state of war has motivated some firms to shift to a "China plus one" strategy of spreading production betwixt Cathay and a Southeast Asian country such as Vietnam, Indonesia, or Thailand. Only regionwide problems similar the 1997 Asian financial crisis or the 2004 tsunami argue for broader geographic diversification.
Managers should consider a regional strategy of producing a substantial proportion of cardinal appurtenances within the region where they are consumed. N America might be served past shifting labor-intensive work from China to Mexico and Central America. To supply Western Europe with items used in that location, companies could increase their reliance on eastern EU countries, Turkey, and Ukraine. Chinese firms that desire to protect their global marketplace share are already looking to Egypt, Ethiopia, Republic of kenya, Myanmar, and Sri Lanka for low-tech, labor-intensive production.
Reducing dependency on China will be easier for some products than others. Things similar furniture, habiliment, and household appurtenances will exist relatively easy to obtain elsewhere considering the inputs—lumber, fabrics, plastics, and so forth—are basic materials. It will be harder to notice alternative sources for sophisticated machinery, electronics, and other appurtenances that incorporate components such equally high-density interconnect circuit boards, electronic displays, and precision castings.
Christoph Morlinghaus
About the Art: Christoph Morlinghaus is a lensman based in Hamburg whose work explores infinite and architecture. These photos were taken in various fulfillment centers and manufacturing plants in California and Germany.
Building a new supplier infrastructure in a unlike country or region will take considerable fourth dimension and money, equally Mainland china's feel illustrates. When China showtime opened its special economic zones in the 1980s, information technology 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 globe and kitted them for associates in Chinese factories. Fifty-fifty with the back up of regime incentives, it took 20 years for the country to build a local base of operations capable of supplying the vast bulk of electronic components, machine parts, chemicals, and drug ingredients needed for domestic manufacturing.
Shifting production from China to Southeast Asian countries will necessitate unlike logistics strategies as well. Unlike Red china, those locations often exercise not have the efficient, high-chapters ports that can handle the largest container ships or the direct marine liner services to major markets. That volition hateful more transshipment through Singapore, Hong Kong, or other hubs and longer transit times to reach markets.
In the long run, though, it would exist a mistake to cut China completely out of your supply picture. The land's deep supplier networks, its flexible and able workforce, and its large and efficient ports and transportation infrastructure hateful that information technology volition remain a highly competitive source for years to come. And because Red china has the second-largest economy in the world, it is of import that firms maintain a presence to sell in its markets and obtain competitive intelligence.
Hold intermediate inventory or safety stock.
If alternate suppliers are not immediately available, a company should determine how much extra stock to agree in the interim, in what form, and where forth the value chain. Of course, prophylactic stock, like any inventory, carries with it the risk of obsolescence and too ties up cash. It runs counter to the popular do of merely-in-fourth dimension replenishment and lean inventories. But the savings from those practices take to be weighed against all the costs of a disruption, including lost revenues, the higher prices that would have to be paid for materials that are of a sudden in short supply, and the time and endeavour that would be required to secure them.
Take Reward of Process Innovations
As firms relocate parts of their supply chain, some might ask their suppliers to move with them, or they might bring some production back in-house. Either course—transplanting a production line or setting upwardly a new one—is an opportunity to make major process improvements. This is because as part of the modify, yous tin can unfreeze your organizational routines and revisit design assumptions underpinning the original procedure. (I claiming for companies with existing production lines is that when those assets are fully depreciated, executives may exist tempted to retain them rather than invest in newer, more competitive plants and equipment: Since the depreciation expense is no longer factored into the calculated cost of production, the marginal cost of boosting production at a plant with idle capacity is lower.)
Several years ago I spent a week at a new Chinese factory of a major American industrial-equipment company. When creating it, the visitor had started with the designs of its U.S. and Japanese factories and then improved on them by introducing newer equipment and ways of working. The result was a streamlined performance that was much more efficient than those in the U.s. and Japan. When the company built its next new factory—in the Us—it repeated the procedure, using the Chinese factory as the starting point. Another example is the Flex mill circuitous in Guadalajara, Mexico. When increases in productivity plateaued, the company often moved smaller assembly lines to another building (or part of the same building). During each move, workers redesigned steps to utilise less infinite and less labor, boosting productivity.
New technologies already or soon will allow companies to lower their costs or switch more flexibly amongst 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:
- Automation: As the cost of automation declines and people meet that robots can operate safely alongside humans, more kinds of work are beingness automatic. The pandemic has made automation fifty-fifty more bonny, because social distancing in factories is now a necessity. As a result of these developments, information technology's becoming more practical to return off-shored product to higher-cost countries. Robotic palletizers, which can sharply reduce the need for labor in preparing products for aircraft, will pay for themselves quickly, equally will automated optical inspection systems for quality control.
- New processing technologies: The latest chemical manufacturing equipment uses less energy and solvents, produces less waste, is less capital-intensive, and is less expensive to operate. Similarly, a new generation of meaty bioreactors could allow makers of biopharmaceuticals and vaccines to produce smaller batch sizes economically.
- Continuous-menstruum manufacturing: This innovation could significantly increment the resilience of the supply chain for pocket-sized-molecule generic drugs past making producers less dependent on imported agile pharmaceutical ingredients (APIs). The U.S. Defense Avant-garde Research Projects Agency (DARPA) has funded one initiative in this area: the development of flexible miniaturized manufacturing platforms and methods for producing multiple APIs from shelf-stable precursors as specific medical needs arise.
- Additive manufacturing: This production method, also known as 3D printing, tin dramatically reduce the number of steps required to make complex metal shapes; it can also lessen dependence on distant suppliers of the mechanism 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.
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 let companies to replace large plants that serve global markets with a network of smaller, geographically distributed factories that is more resistant to disruption.
Revisit the Trade-Off Between Product Diversity and Capacity Flexibility
During the pandemic, when demand surged in many production categories, manufacturers struggled to shift from supplying 1 market place segment to supplying some other, or from making ane kind of product to making another. A instance in bespeak is the U.S. groceries market place, where companies had difficulty adjusting to the plunge in demand from restaurants and cafeterias and the rise in consumer need. SKU proliferation—the addition of different forms of the same product to serve different market segments—was partly responsible. For example, one obstruction to coming together 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. Calculation to the complexity, different retail chains wanted their own packaging and assortments.
Researchers such every bit Barry Schwartz of Swarthmore College and Patrick Spenner, a consultant who was formerly at CEB (now part of Gartner), have long argued that more than choice isn't ever ameliorate. Separating demand into many different SKUs makes forecasting more difficult, and trying to make full needs by substituting products during periods of shortage causes a real scramble. The lesson: Companies should reconsider the pros and cons of producing numerous product variations.
CONCLUSION
The economic turmoil caused past the pandemic has exposed many vulnerabilities in supply chains and raised doubts virtually globalization. Managers everywhere should use this crunch to accept a fresh look at their supply networks, take steps to understand their vulnerabilities, and and then have actions to ameliorate robustness. They tin can't and shouldn't totally dorsum abroad from globalization; doing then volition leave a void that others—companies that don't abandon globalization—will gladly and quickly fill up. Instead, leaders should find ways to make their businesses work ameliorate and give themselves an advantage. It's time to adopt a new vision suitable to the realities of the new era—i that however leverages the capabilities that reside around the world but too improves resilience and reduces the risks from future disruptions that are certain to occur.
A version of this commodity appeared in the September–Oct 2022 outcome of Harvard Business Review.
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Source: https://hbr.org/2020/09/global-supply-chains-in-a-post-pandemic-world
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