By Jean Regan, President & CEO
Why things were the way they were
The sight of empty shelves at a supermarket or persistent “Product Unavailable” messages online are a phenomenon that many of us never imagined witnessing. If you’ve been wondering how we got here, the answer lies in the current supply chain strategies.
As David Simchi-Levi, Professor of Engineering Systems at MIT, explained to us in a recent interview, there simply hasn’t been any recognition or incentive for minimizing—or even reducing—risk:
“Risk mitigation strategies are not cost free. They require investment. For a lot of executives, it’s difficult to justify this type investment. If you’re in charge of cost reduction and you’re able to reduce costs by 6%, everybody recognizes what you have done. If you are in charge of revenue and margin increase and you increase revenue by 3% or 4%, everybody recognizes what you have done. But if you invested in risk mitigation strategies and nothing happened, people don’t understand the return on investment.”
Offshoring and reducing inventory through lean manufacturing have been two popular ways to rack up costs reductions, but when you combine these, your supply chain becomes very vulnerable to disruptions. Add to this choosing a single supplier out of preference or necessity, and the instability is high. While there had been enough stability for enough time to push these concerns into the background, the coronavirus has brought them front and center.
What changes to expect in the market
The changes that are made to supply chains due to these disruptions will come in waves. In the near term, the focus is on immediate needs and restoring functionality, but some of the alterations made for these purposes may stick around. Product portfolios are changing based on both different patterns of demand and availability of components.
As Simchi-Levi notes in the interview, “In the long term, we are going to see significant supply chain restructuring. I have no doubt about that. And the reason for that: it started with the US/China trade war, and it will accelerate with what we see now.” For the fashion industry, Simchi-Levi notes that manufacturing will be moved outside of China to neighboring countries. For high tech, he expects to see more companies moving closer to market demand and being housed on the same continent.
Areas of manufacturing that have national security implications will be especially likely to make changes. In the United States, around 90% of the pharmaceuticals are either made or have a derivative product from another country and that’s something that could change.
The United States Department of Defense has an entire list of products that aren’t manufactured in the United States, which is another area to watch.
Supply chain changes will take time and many will depend on the expiation of contracts and decline of infrastructure. But over the long run, expect a lot of moving pieces. Ultimately, countries probably won’t be abandoning China, but will need to make the changes to respond better if there’s a problem doing trade with them or another country.
Where to make changes: Getting your objectives straight post-corona
When it comes to your company’s supply chain, start by asking: What are your main objectives? Recovering market share? Recovering revenue? Something else?
For near term planning, get your team together and decide which post COVID–19 recovery scenario is appropriate for your company. To help you address this issue, there’s some great advice in the article, "Three Scenarios to Guide Your Global Supply Chain Recovery" by David Simchi-Levi in the MIT Sloan Management Review.
When you can move onto some long term planning, we encourage shippers to follow David’s advice from an article he published in HBR, and stress test your supply chain.
You’ll also want to use this time as an opportunity to get visibility into your supply chain and the suppliers in your pipeline, if you don’t have this already. While it could be uncomfortable in ordinary times to seek out detailed information about how your suppliers operate and the justification for that is clear right now. As Simchi-Levi shares, only a small percentage of companies have mapped out their supply chain risk, and doing so could provide a competitive advantage.
We’ll leave you with a short story that Mike Regan shared with David Simchi-Levi about why this time offers opportunity for competitive differentiation:
Several years ago in the early 2000s after 9/11, I was talking to several Presidents and CEOs at a supply chain seminar and I said, “Let me give you an idea of how casually you’re treating your supply chain.”
I shared with them how at another conference I got to ask a leader within the Department of Homeland Security, Asa Hutchinson, a question: If we thought there was a bomb or a container exploded at the ports of LA or Long Beach, what would the Department of Homeland Security do?
He said they would immediately shut down the ports and would not reopen them until we could give the President assurance that we could have safe transit of containers into and out of our ports.
So I asked, “What if that lasted two or three weeks?”
He said “You didn’t hear me—we would not reopen the ports until we could provide the President with assurance and to be truthful, we don’t care how long that takes. This is a key point of safety.”
After sharing this story, I asked the gentleman and ladies in the room, “How many of you import products?”
Almost everyone’s hand went up.
Then I asked “What would happen if they shut the ports of Long Beach for a few weeks?” At the time 42% of the containers came into the country through the port of Long Beach.
One president raised his hand and asked “Before answering that, can I ask you a question: Does it affect all of my competitors equally? Because if it affects all of my competitors equally, we’re all in the same boat. But it somebody produces it in the states or gets it from Mexico or Canada, then I’m at a competitive disadvantage.”
And I said, “Great question. How many of you have even considered that?”
And there wasn’t a single hand raised in the room from someone that even considered that as a possibility.
While these may seem like obvious questions or objectives, for whatever reason, many companies simply aren’t tackling them. This gives you a great opportunity to be the company that does.