It has been a dispiriting decade for the multinational COO, keeper of the global supply chain-dispiriting enough to send COOs scrambling for a new model of global production and distribution.
Natural disasters costlier than any in history have battered the globe, knocking out production facilities, damaging transportation routes, and repeatedly interrupting the flow of goods. Economic nationalism has flared, prompting tariffs between world powers and driving up the cost of cross-border trade. Now a pandemic has decimated consumer demand for some products, magnified it for others, and prompted rolling factory shutdowns worldwide.
Signs of shifts and soul-searching are emerging. In October 2019, the American Chamber of Commerce in China and its counterpart in Shanghai asked 25 US multinational companies whether decoupling—separating the US and Chinese economies—would be impossible. Two-thirds said it would be, according to the Wall Street Journal. By March 2020, that number had dropped to 44 percent.
Under siege from climate change, economic nationalism, and COVID-19, the bedrock of global manufacturing for the past several decades—low-cost production in Asian countries and complex, extended supply chains—is showing fissures.
Article Snapshot: Wobbled by outbursts of economic nationalism and increasingly severe natural disasters, then floored by the COVID-19 pandemic, the global supply chain faces critical questions of risk and resilience. Will manufacturers retract into regional supply chains or diversify even more? As they decide, location will be their guide.
To Expand or Contract: That Is the Question
Experts have suggested divergent response strategies. Some say manufacturers should regionalise the supply chain—confining it to a smaller geographic area to create more reliable access to raw materials and finished goods. Others suggest more geographic dispersion—creating redundant sources of supply around the world to dampen the risk of business interruption should a particular region or supplier falter.
Despite the differences, there’s agreement that supply chain visibility is a linchpin of both approaches. As global risk adviser and insurance brokerage Willis Towers Watson recently explained, companies should know who supplies their suppliers. That is, they should inventory the Tier 1, Tier 2, and Tier 3 participants in their supply chain. If executives hadn’t done so before the COVID-19 outbreak, experts say, they need to now. Which means many COOs have a lot to learn—and quickly.
With their March Harvard Business Review article “Coronavirus Is a Wake-Up Call for Supply Chain Management,” Arizona State professors Thomas Y. Choi and Dale Rogers reinforced that view, saying the small group of companies who mapped their supply chains before COVID-19 was better prepared for disruption than those who did not.
As some executives have discovered, supply chain awareness depends heavily on location intelligence.
Mapping the locations of factories, distribution centres, and transportation routes helps a company adjust quickly in moments of crisis—a key factor in mitigating risk. It also gives them a road map to more significant, long-term changes, if they’re bold enough to make them.
Change Is Hard to Come By
Despite profound bruises to the global supply chain in recent years, COOs and their fellow CXOs have maintained a global production paradigm that looks much like it did a decade ago. Many observers predicted otherwise.
As climate change began to materialise in the form of more frequent and punishing storms, wildfires, and other catastrophes, supply chains suffered. The 2011 earthquake and tsunami in Japan are oft-cited examples. Amid the devastation, automakers, chemical manufacturers, and computer companies faced months-long delays in parts and supplies that hobbled production further down the supply chain. After they recovered, some companies increased their safety stock and added buffers to the just-in-time manufacturing model. But few made significant changes, according to Reuters.
In 2018, the US set off trade wars against countries around the globe—most notably China. Billions of dollars in tariffs created a material impact on consumer goods prices and companies’ bottom lines. Supply chain rethinking came into vogue again, and some companies made adjustments. Several Apple suppliers, for instance, initiated plans to move production out of China, according to a Bloomberg report.
But companies didn’t fundamentally change the model. They mostly shifted production to countries such as Vietnam, Indonesia, and India, which means supply chains remain long and complex.
Is the Supply Chain Facing a Liquidity Crisis?
A professor at the University of South Carolina’s Darla Moore School of Business suggests that the US may need a national stress test for its supply chain. In an interview on the school’s website, Professor Mark Ferguson likened COVID-19-related product shortages of personal protective equipment (PPE) to a liquidity crisis. Just as banks lacked liquidity during the 2008 financial crisis, today’s manufacturers lack supplies of critical goods, Ferguson said.
In the case of manufacturers, poor liquidity stems from just-in-time practices, which prioritise limited inventory to minimise carrying costs. As Ferguson notes, the COVID-19 crisis exposed that shortcoming in devastating fashion, and could provoke changes down the road.
A Feeling of Inertia, Interrupted by a Pandemic
So why have most global CXOs balked at fundamental supply chain changes?
In a recent MIT Sloan Management Review article, Harvard professor Willy Shih pointed to a decidedly human answer: complacency. Even after Japan’s 2011 earthquake and nuclear meltdown and a spate of trade wars, he wrote, some executives felt locked in to the model of Chinese production that has fuelled global supply chains for so long. For CXOs, change isn’t just unsettling; it’s also expensive.
Now, after years of discussion about restructured supply chains, the COVID-19 pandemic is delivering another powerful provocation. Like the Chamber of Commerce polls in China, a series of PwC surveys suggests COVID-19 might stir change. The consultancy has asked global CFOs what supply chain changes they plan to make in response to the pandemic. In late April, the most popular response—with 52 percent selecting it among their top three—was to develop alternate sources of supply.
Still, the study’s authors call supply chain relocations a last resort, due to the expense. What they expect is for manufacturers to invest in forms of automation that will deliver improved data and help them make better decisions.
Companies with a GIS-powered map of their supply chain can quickly analyse two critical pieces of information—the location of suppliers and the materials at risk due to a disruption.
The Visibility Challenge: Mapping Today’s Supply Chain
Which brings us back to the strategy everyone seems to agree on: mapping a company’s supply chain. Whether executives intend to make major changes, or simply want to be prepared for on-the-fly adjustments during a disruption, they need visibility before they can make good decisions.
US automaker GM provides a meaningful example. After more than a century in business, the company has learned a thing or two about global supply. Its supply chain risk management team led an effort to map suppliers and distributors worldwide—including where they are, what they produce, and where it goes next. Once team members gathered that data, they placed it in a geographic information system (GIS) for mapping and analysis.
Using GIS and companion technologies, the risk management team monitors alerts for disruptive events worldwide. Based on the location and scope of each event, the team quickly generates a map that shows which suppliers are affected and which parts and materials they deliver to GM plants. Alternate sources of supply can then be pinpointed and ramped up.
The interactive map helps the automaker navigate quickly around disruptions. Due to its risk mitigation capabilities, it has also lowered the company’s insurance premiums.
While this brand of location intelligence is pivotal in helping GM analyse and respond to supply chain disruptions, it exists thanks to a lengthy data gathering process. Mapping the supply chain involves talking to each Tier 1, Tier 2, and even Tier 3 and Tier 4 supplier, carefully cataloguing where they are and how they contribute to the network.
Arizona State professors Choi and Rogers call the process of supply chain mapping resource-intensive and difficult. But they note that during the COVID-19 outbreak and other disruptions, executives who understood where parts and sub-assemblies were produced, where distribution centres were located, and how materials flowed along supply routes were the first to arrange alternate sources of production.
Scenario Planning for Tomorrow’s Supply Chain
The question that dogged COOs before the COVID-19 pandemic will surely remain when it subsides: Is it best to tweak, maintain, or redesign the global supply chain? The forces behind that question include climate change, economic nationalism, and now a worldwide health emergency.
For executives who choose to make strategic adjustments, GIS’s analytical capabilities play a role. For instance, analysts can map out what-if scenarios for a company contemplating smaller, regional supply chains. They might map several distribution models to see how reliably and cost-effectively goods will reach target markets from various production hubs.
A recent World Economic Forum blog summarises the importance of supply chain visibility succinctly. During normal times, the authors write, visibility helps companies drive efficiency into their supply chains. During disruptions, visibility is crucial to understanding impacts and executing workarounds.
According to PwC, it’s too soon to tell whether the supply chain will change markedly following a decade of disruption. The world feels especially unstable right now, and when risks accumulate, humans often cling to the comfort of routine.
Regardless of whether global executives make big changes or incremental ones, the best plans begin with a map.
Global Supply Chains under Siege
A short list of the factors causing COOs and other executives to rethink the supply chain:
- Climate change and the associated risk of natural disasters
- Economic nationalism and the cost of cross-border tariffs
- Corporate social responsibility and reputational risk from overseas labour practices and environmental practices
- Global transportation costs—always a moving target for supply chain planners
- A general desire for visibility and control
The increasing scrutiny of insurers as supply chain risk and volatility grow