One of the earliest effects of the global Covid-19 pandemic was that the global supply chain couldn’t deliver. Supermarket shelves went empty and early shortages sent prices of vital personal protective gear soaring. Worse, the scarcity of masks, gloves and ventilators put the health of whole nations at risk.
People raised the question of whether supply chains have been stretched too thin,” said Chazen Senior Scholar Amit Khandelwal, as he kicked off “Jump-Starting the Global Supply Chain,” a recent Chazen Institute-sponsored Webinar moderated by New York Times Senior Economic Correspondent Neil Irwin.
Glenn Steinberg, Global and Americas Supply Chain Leader at Ernst & Young, added that 94 percent of the Fortune 1,000 reported disruptions in their supply chains during the early months of the pandemic. “It’s important that, through the chaos of recovery, we don’t lose sight of the gaps that brought these businesses to their knees. Supply chain resilience is going to be at the epicenter of corporate discussions for years to come.”
Indeed, the growing awareness of supply chain vulnerabilities has pushed sourcing decisions up the management ladder. Previously, “middle managers were sent to do the sourcing decisions. Their clear mandate was to find the cheapest human suppliers on the planet and save us a few pennies,” said Medini Singh, a Chazen senior scholar. Supply chain issues “never rose to the CEO or CFO level.”
The potential solution — the enabler of the supply chain revolution — is technology.
“Historically, supply chains have been very linear,” observed Steinberg. Companies created separate silos for suppliers, manufacturers, distributors and customers, with little collaboration between the entirely separate functions. Further, end distributors often had no idea who populated a supplier’s distribution chain. “The trend is accelerating toward a networked ecosystem, where all the data is in the cloud and any event that happens in the supply chain can be seen by everyone and worked on simultaneously.”
The ensuring discussion centered around these four questions:
How do we build supply chain resiliency?
The most obvious answer is changing the inventory mindset. “My message to CEOs is simple: Buffer or suffer,” said Singh. “The cost of holding inventory is miniscule compared with disruption in the assembly line.”
Panelists turned a harsh light on the corporate embrace of just-in-time inventory systems. Conventional wisdom holds that “too much inventory is evil,” agreed Steinberg, who cited auto parts scarcity after the 2011 Japan earthquake and copper shortages following civil unrest in Chile last year. “By design our supply chains are lean and cost optimized. We strive for vendor and geographic concentration to reduce costs.”
Although additional excess capacity seems prudent, Singh said stockpiling “mountains of inventory” is unlikely in many industries.
Fortuitously, more efficient options exist. Strategies include contracting for alternative sources of supply in different corners of the world and implementing postponement strategies that bring generic products to the penultimate stage until customers place specific orders.
The biggest supply chain game changers put technology to work. Using software and simple sensors such as radio-frequency ID tags, manufacturers and distributors can create a virtual replica of each product’s entire supply chain. By modeling every node in the process, beginning with tier-one suppliers and ending with the customer, companies can create multiple “what-if” scenarios. “If a copper mine strike could happen, or a storm coming from the south moves left rather than right, you can view the impact on each supplier and how that effects your production schedules and customer delivery,” explained Steinberg.
Who’s going to pay for all this?
Luckily, most technology solutions are relatively inexpensive, thanks to intertwined digital infrastructure and falling cost of computing. Certain suppliers may be able to set up shop with little more than leased office space, short-lived computing power, and workers. Such nearly mobile sites can appear and disappear over a matter of months and costs may even be absorbed in new efficiencies.
It’s a different story when it comes to moving massive assembly lines. “Factories that require continuous flow processes, like the manufacture of automobiles, involve investments that are irreversible for decades,” said Singh.
So when planning the next generation of infrastructure, “companies try to understand whether the shocks they are hit with are temporary or permanent,” added Khandelwal.
Companies will likely pass on some of the costs of building in resiliency to the consumer. But Steinberg also envisions capital market rewards for risk-adverse supply chains. “Will Wall Street reward publicly traded companies that create vendor and geographic diversity?” he asks, reminding that many contracts tie executive compensation to stock price. “I can imagine a bank asking a company for results of a supply chain stress test. Without one, it might be hard pressed to offer preferred terms.”
Will the pace of global diversification slow?
Rising labor costs in China have pushed multinationals to explore alternative supply chain sources over the past decade. The panelists noted particular interest in Vietnam for higher-end component assembly and Ethiopia for more labor-intensive production, adding that multiple nations are revving up to act as suppliers. “We’ve learned that diversification is important, not just in terms of number of suppliers, but also number of countries so that when a shock hits, we have somewhere else to go,” said Singh. That recognition suggests the nomadic nature of manufacturing could actually grow over the next decades.
The pandemic, possibly aided by nationalistic sentiments, resurrected public demands for on-shore production of some critical products, and generated talk that governments implement policies requiring some products be manufactured domestically. Technologies such as 3D printing and advances in automation could make some homeland products economically viable at the margins.
The panelists agree: The cost benefits of globalization remain just too enticing to abandon.
Will China’s dominance of global supply chains change?
Even as some multinationals pull up their Chinese stakes, Sino influence is entering a new, powerful phase. Riding the wave of its growing tech prowess and massive Belt and Road initiative, China appears to be evolving from the world’s factory of what one panelist called “insignificant goods” to a strategic global player that wields its clout in emerging markets throughout the world.
“When SARS hit Asia in 2003, China’s GDP was about 4 percent of world GDP,” said Singh. “The worldwide scare went away and we returned to our old ways. Today, China is 16 percent of global GDP. I don’t know where the next threat will come from, but I can bet that China’s GDP will be much, much higher when it hits.”
Exactly what role(s) China will play in the future global supply chain, though, is TBD. Still, the panelists agreed that several China-related “if/then” scenarios are brewing. For example:
- Scenario #1: If China’s Belt and Road initiative brings enough emerging markets into its orbit, then global trade could surge, providing difficult-to-reach corners of the world an opportunity to sell—and buy—products. Nobody seems completely sure if a global network of Chinese-built and owned roads, transportation, ports and factories is a nightmare or a dream come true in a world that seems hard-pressed to create and maintain public infrastructure. Although some observers attribute sinister motives to a China that wields control of global logistics, Khandelwal predicts benefits to third parties. For example, multinationals in the United States and elsewhere will be able to navigate the new avenues for selling their products and beefing up their supply chains.
- Scenario #2: If global politics prevail, then trade could bisect into separate China and US orbits. “My guess is that when the United States started the trade war in 2018, it was a short-term negotiating strategy,” said Khandelwal, who estimates that tariffs on Chinese imports to the United States soared from about 3 percent of a product’s price to 20 percent. “But [trade barriers] escalated into a longer-term shock, driven by national security voices in the executive branch regarding Huawei. Regardless of which party wins the upcoming US election, we are unlikely to see a fundamentally different tariff policy on China.” That scenario could result in separately negotiated trade pacts, creating new “most favored nation” ecosystems.
- Senario #3: If China balks at the transparency of the new technologies, then multinationals that are modernizing their supply chains through data capture and sharing could become disillusioned. “China is an opaque country,” said Singh, who cited China’s secrecy regarding the budding Covid-19 crisis in late 2019.
Despite the fact that more than half of the world’s 500 largest companies operate manufacturing plants in Hubei Province (home to the initial outbreak), they seemed as clueless as the rest of us as the consequences of the virus spread. “Without critical information, there was no way for the world to prepare. Information-based technology solutions do not work when you hit the Chinese firewall,” said Singh.
When it comes down to it, supply chain success is not fundamentally different from other ways that businesses create long-term value, said Steinberg. “Companies need to focus on three things: The human at the center, innovation at scale and technology at speed.”
Noting that some companies are already taking their supply chains down this path, Steinberg credits the pandemic with being “a giant wake-up call” for others. “I don’t think you can sit this one out.”