How will the supply chain look in the new normal?
As soon as the pandemic hit, the manufacturing giant that is China experienced a supply shock that affected pretty much all industries—exposing the vulnerabilities of supply chains worldwide.
Apple announced significant production issues due to virus-induced shutdowns in Chinese factories. The global supply of wedding dresses dried up, too. The Economic Commission for Latin America and the Caribbean (ECLAC) Special Report COVID-19 even estimated that 2.7 million companies would close their doors as a result of this.
Ethan Harris, the head of global economic research at the Bank of America, described it as a “rolling natural disaster,” where trade restrictions and shortages of pharmaceutical supplies further highlighted the weakness of existing supply chains.
Now that we’re slowly recovering from the effects of COVID-19, businesses need to reassess the resiliency of their supply chains. Consumers will continue to seek low prices, and firms will remain pressured to operate efficiently, using capital and manufacturing capacity frugally. Companies in all industries are now challenged to strengthen their supply chains without compromising their business in the post-pandemic landscape.
This article will discuss how supply chain managers should identify their supply chain vulnerabilities, decentralize their supply base, and take advantage of new technological innovations to establish supply chain resiliency.
Redesigning a Low-Risk Supply Chain
Modern product manufacturing often depends on materials that require specialized skills or technology to work with. However, it’s nearly impossible for a single firm to have the breadth of capabilities needed for producing such high-level products.
Instead, manufacturers tend to outsource to multiple suppliers who specialize in specific areas, materials, or products. While having a diverse range of suppliers offers flexibility and technological advancements in production, it also opens the firm to higher disruption risks in the supply chain.
Supply chain managers need to do the following in order to improve their risk levels:
Identify the vulnerabilities.
Identifying risks in your supply chain is expensive and time-consuming. It requires you to go beyond the initial tiers of production, mapping out the entire supply chain to include all distributors and transportation hubs.
The tendency is to focus on the suppliers that hold the largest part of the company’s expenditures. However, a surprise disruption could cost your business more than an extensive reassessment of your supply chain would.
Instead, follow these steps to identify the vulnerabilities in your supply chain:
- Categorize suppliers: Map out your supply chain and categorize suppliers based on their level of risk. Apply key metrics, such as their contribution to your revenues, the time they’ll need to recover from a disruption, and the availability of alternative materials or suppliers. Determine how long your company could handle a supply shock without shutting down.
- Assess suppliers: With your suppliers now categorized, assess them based on their flexibility and capability. See which ones need to be reconfigured or redeployed—especially for the operations that are either manual or semi-automated, and those that require highly specialized and difficult-to-replicate operations.
Once all vulnerabilities are identified and understood, the next step is to minimize risk by diversifying the sources or stocking up on key materials.
Decentralize your supply chain.
One of the most effective strategies for risk reduction is to decentralize the supply base for your primary materials.
Decentralizing your supply chain is not about having one product with its parts manufactured by several countries. Rather, it involves having two or more manufacturers or suppliers responsible for one part or commodity, ideally in different geographical locations.
By distributing production across sources that are not vulnerable to the same risks, you can effectively mitigate most of the risks associated with relying on single locations or authorities to supply the necessary materials for production. We’d go as far as to say decentralization is what could have saved companies from shutting down due to supply chain disruptions brought about by coronavirus.
Here are the benefits of decentralizing your supply chain:
- Draw competitive advantages from manufacturing capabilities and raw materials of other locations. For example, the US would have more timber and lumber than China, Thailand would have more rubber than Indonesia, and South Africa would have more platinum than Zimbabwe.
- Improve cost and speed to market to the final delivery destination. For example, serve North America by shifting labour-intensive work from China to Mexico and Central America, or supply Western Europe by relying on eastern EU countries, Turkey, and Ukraine.
- Mitigate the risk of supply chain failures due to full dependence on single sources for a substantial proportion of key goods. Instead, create a system wherein you can produce the highest quality products with minimal risk to the entire supply chain.
Ultimately, decentralizing your supply chain is drawing strength from multiple resources to improve the quality of your raw materials and finished products, and pass the benefits along to your end customer.
The common way is to source everything from China, or use the “China plus one” strategy of sourcing from China and a Southeast Asian country. However, regionwide problems such as COVID-19 or the 2004 tsunami beg the need to further expand your geographic diversification.
Chinese companies are already exploring Egypt, Ethiopia, Kenya, Myanmar, and Sri Lanka for low-tech, labour-intensive production to protect their global market shares.
As materials continue to flow from low-cost countries to high-cost countries (and technology flows the other way around), firms need to prioritize sourcing efficiencies and decentralize their supply chain to mitigate disruption risks.
Take advantage of process innovations
As you relocate or change parts of your supply chain, you’ll have the opportunity to make improvements in the overall production process, too. You can loosen your organizational routines and revisit the underlying problems of the original system, while implementing more streamlined and resilient operations.
With recent advancements in the manufacturing industry, firms can take advantage of new technologies to lower costs, switch easily among products being manufactured, and render old suppliers obsolete. They will also have the opportunity to apply sustainable sourcing for further reduction in costs and a significant boost in brand reputation.
Here are examples of process innovations with technology:
- Supply Chain Automation: Using artificial intelligence (AI), machine learning (ML), Robotic Process Automation (RPA), Optical Character Recognition (OCR), and robotics can significantly lower the operational cost of manufacturing a product. Especially after the pandemic-borne mandate of social distancing, automation has never been more efficient and cost-effective. Robotic palletizers that reduce the need for labour in preparing products for shipping and automated optical inspection systems for quality control will easily pay for themselves.
- Continuous-Flow Manufacturing (CFM): In contrast to batch production, CFM uses minimum inventory and a single production line in the production of a product. The methodology does not have any breaks in time, sequence, or substance from start to finish. In most cases, CFM saves time, energy, and costs while reducing waste. For example, CFM allows the production of small-molecule generic drugs without being dependent on imported active pharmaceutical ingredients (APIs). The US Defense Advanced Research Projects Agency even funded an initiative to develop manufacturing methods that produce APIs from shelf-stable precursors for on-demand medicine.
- 3D Printing and Additive Manufacturing: The number of steps and amount of machinery required to make complex metal shapes or plastic injection mouldings can drastically decrease as 3D printing technology rapidly advances. The once-niche technology now provides an economical way to produce an array of items in much higher quantities. Moreover, scientists are coming up with new ways to print stronger materials by mixing multiple ingredients.
- New Processing Technologies: Whether you’re in the food, chemical, or agricultural industry, there are improvements to their processes and manufacturing equipment that are more efficient and less expensive to operate. Newer chemical manufacturing equipment will use less energy and solvents while producing less waste. The latest developments in product preservation also means that they can maintain their integrity over a much longer timeframe.
Technology is enabling companies to go beyond the traditional strategy of producing products in a few large facilities. These advancements allow for increased decentralization, providing more resilience during supply chain disruptions and an increased production capacity that is scalable across geographic boundaries.
Supply Chain Resiliency in a Post-Pandemic World
The pandemic has caused a disruption in the world’s most critical systems, forcing companies to evaluate their supply networks and find ways to improve them.
In redesigning your supply chain, remember to identify the vulnerabilities, decentralize the supply base, and leverage on the advancements and innovations in technology. Supply chain leaders need to recover along with the pandemic, intentionally strengthening their supply chain to remain competitive and resilient in the post-pandemic landscape.
Redesigning your supply chain isn’t easy. Our team at Good for Life understands your struggle.
With our vast experience working with suppliers across 32 countries, Good for Life has been on a mission to de-risk supply chains away from China for a decade. We are fully committed to turning your business threats to opportunities—starting with decentralizing your supply chain for sustainability and resilience.
Get in touch with us to learn more.