How to build resilient supply chains
The minutiae of daily operations, logistics, and the performance evaluation of diverse and dispersed suppliers must be managed alongside implementing visionary strategies that address trends, threats, and opportunities in fast-paced and complex marketplaces. Until the disruption of the COVID pandemic, supply chains appeared to generally run at peak efficiency. Globally dispersed suppliers provided B2B and B2C consumers with goods across all industries and at speed.
Efficiency has been a cornerstone concept for industry for decades. But it was the very structure of the efficiency-driven industry model that contributed to supply chain failures under the pandemic, during which COVID restrictions were merely one of several critical factors. Geopolitics, Brexit-related regulatory restrictions, the Suez Canal obstruction, Hurricane Ida and energy shortages – these crises crippled supply and created huge barriers to meeting demand.
Tomorrow’s leaders must better prepare for such contingencies. But how can they identify the causes of supply chain fragility and mitigate its effects?
Causes and effects of supply chain fragility
What manufacturers and service providers across industries learned about supply chains during the pandemic is that supplies are often too far, in too few places, and with too little inventory to meet unpredictable and highly variable demand.
Too far. Sourcing supplies in far-flung locales has been a go-to solution for manufacturers looking to lower their costs. But this requires long transportation chains and thus increased exposure to adverse events. When the container ship Ever Given blocked the Suez Canal for nearly a week in March, the resulting traffic jam affected approximately 12% of global trade at a cost estimated at nearly $10 billion each day. Shipping rates also skyrocketed – costs that were partly passed on to customers used to lower prices on faster deliveries.
Too few. Focusing on a single geographic region or country for supplies has further helped some manufacturers to drive down costs, due to economies of scale and increased specialization. But, as diverse manufacturers learned, this can mean exposure to specific vulnerabilities in supply, while alternatives are largely absent. For instance, semiconductor production in Taiwan and South Korea makes up 70% of the chip manufacturing market, a fact that – under COVID restrictions in Asia – meant shortages for automobile and electronics manufacturers relying on chips.
Too little. The just-in-time model pioneered by Toyota in the 1970s has long dominated manufacturing. The financial advantages of having less standing inventory – meeting only the needs of the next operation – are considerable. But as the pandemic showed, just one major adverse event meant there was little inventory to tap into to absorb the shock. And the shocks reverberated further throughout the supply chains creating a bullwhip effect.
Building resilient supply chains
Manufacturing executives can mitigate the effects of the efficiency paradigms in order to make supply chains resilient in the face of critical threats. Three top solutions are:
Reshore production. Instead of offshoring, relocate production closer to home. Ford recently did this – launching a new battery development center in southeast Michigan to meet growing demand for electric vehicles without increasing reliance on overseas suppliers.
Diversify suppliers. More inventory in still too few places will not be enough to mitigate the risks of significant disruptions. Manufacturing executives must diversify the suppliers they draw on to hedge global supply chain risk.
Increase inventory. Alongside just-in-time supply chains, consider what experts are calling just-in-case solutions. This requires building inventories at critical points of the supply chain so that they weather the storms of diverse crises.
While these strategies come at significant cost, supply chain fragility must be addressed in order to meet demand and restore consumer confidence. We must acknowledge that the earlier gains in efficiency undermine resilience. Sustainable business futures need both efficiency and resilience, as well as visionary leaders ready to learn and apply the lessons on the value of resilience.
This article was originally published by Forbes on December 7, 2021, and republished with permission.