As companies begin the slow process of opening back up, assessing the damage and preparing for a massive reassessment of how business is done in the post-pandemic environment, many are saying to themselves, “I thought our supply chain was a whole lot better than it really is.”
The pandemic has caught many companies off guard. It has brought to light the hidden vulnerabilities that exist within an otherwise efficient global supply chain, reinforcing the need for digitization, optionality, better visibility and an improved balance between local, regional and global sourcing. Companies will continue to struggle. Consumer behavior has changed, perhaps permanently. Some suppliers continue to fall behind in meeting production and delivery schedules while still others have shut their doors for good, and the disruption to the supply chain is likely to last longer than the pandemic itself.
What will happen to supply chains after the pandemic is over? In a white paper published by Michigan State University and Maine Pointe titled “Is today’s supply chain dead? Have you got its replacement ready?” the authors argue that the pandemic has become a catalyst for rethinking the supply chain from the ground up. There is no “on” switch that will instantly return business to its pre-pandemic levels of productivity. Organizations will instead need follow a three-step roadmap of stabilize, recover and rebalance; a process which many have already begun.
Returning to what we used to think of as normality is not an easy process—and it really begins with a fresh look at what “normal” actually means. The question should not be how to return to pre-pandemic conditions but whether those conditions were really serving the company well in the first place. As businesses move forward from the first step (stabilization) and recovery gets underway, some suppliers get back on line and resume production, and demand starts to filter back in, companies will find themselves with new realities. The global supply chain, which delivered advantages of scale, volume and price, will have to be re-evaluated. Companies will need to reconsider the risk they take by relying heavily on a single region, such as China, one that was felt deeply as the Chinese supply chain was disrupted, ocean shipping halted, and supplies, parts and raw materials became unavailable.
Going forward, businesses will need to de-risk by rebalancing the supply chain with a more strategic mix of local, regional and global so if anything happens in any one of those sources, it will be easier to adapt and fulfill the need with the other. This requires the supply chain to be built with a new level of optionality. It also requires a new way of thinking and a completely different perspective on how to build a supply chain.
Building the resilient, digitally enabled, agile supply chain and operations of the future
The global supply chain perspective traditionally sought efficiencies of scale and cost, often through high order volumes, labor arbitrage and locating factories or contracting with suppliers in lower-wage countries. There are two limitations with this supply chain perspective. First of all, it brings on risks inherent in single-region or single-source contracting, which became clearly evident when much of China became unavailable during the height of the pandemic. Second, and more importantly, it carries with it an assumption that diversifying into a local/regional/global supply chain perspective would result in costs going up.
The assumption that costs will go up as a direct result of moving away from single-source contracting is faulty. Not only will rebalancing and diversifying the supply base result in less risk and greater optionality, in most cases, companies will find the transformation does not necessarily result in higher overall cost. In fact, in many cases overall costs are likely to go down over time in either case, particularly as the need for labor arbitrage and low-wage factories comes to an end due to an increased focus on automation and a digital production model.
The move to automation has been coming for some time, and the pandemic has accelerated the need for it. More plants, both foreign and domestic, will be moving to greater automation, factory head counts will decrease and productivity will increase, the net result of which will be lower costs.
Moving to greater automation will require short-term capital investment, although this does offer a depreciation lever to offset it. The rebalancing phase, and shift towards optionality in the supply chain at its heart, requires a change in thinking and behavior, moving away from the assumption that ordering larger volumes from a smaller number of suppliers will always lead to lower cost.
Supply chain organizations responding to the pandemic often create a “war room” to grapple with the fallout and plan a response, but the war room as control center fails without the right end-to-end visibility. That visibility allows business leaders to make better decisions around which SKUs they can manufacture or optimize to the current situation, reduce inventory and conserve cash, re-examine capital investments and better optimize and rebalance the supply chain for the future.
According to the MSU/Maine Pointe white paper, every executive will need to re-evaluate their supply chain, and rebalance it to manage supply chain and operations risk and uncertainty, while still driving EBITDA, cash and growth. That response and war-room visibility will help companies not only deal with the current situation, but also to re-evaluate their entire business model and be better prepared for the sea change that is taking place.