Typically, a supply chain will consist of designers, manufacturers, warehouses, transportation companies, distribution centers, researchers, consultancies, and retailers. The total sum of their efforts will result in a specific product or service being sold and delivered to the end customer in the name of the company that operates the supply chain.
Any one supply chain is somewhat recursive by nature. Each supply chain contains other supply chains because every node in a supply chain network is another business that is, in effect, heading up its supply chain.
Due to the complex and diverse nature of the products and consumers demand, interdependent supply chains span the globe in the quest for human talent, rare and precious materials, and economically priced components and services.
Disruption To the Supply Chain
Throughout recent times, the global population has experienced many consequential disruptions in the form of restrictive political policies, terrorism and wars, natural disasters, epidemics, pandemics, and the alarming meteorological catastrophes assured by climate change. These, in turn, will lead to disturbance and even collapse at various points in the supply chain.
Examples of disruption
Brexit has disrupted the supply chain's cost, speed, and efficiency due to the introduction of tariffs and customs duties to and from the UK's biggest markets.
Trump's trade tariffs and the America First policy led to supply chain stress. (Note President Biden is now working to underpin homegrown manufacturing with international partners to ensure supply chain resilience)
Hurricane Katrina knocked out power and transportation along the Gulf of Mexico.
The unreasonably freezing temperatures in Texas in February 2021 caused power loss in the whole state for several days impacting logistics and the movement of goods.
Unexpected Demand: After Disney's film Frozen, demand for Frozen merchandise and toys outstripped supply, and consumers were highly vocal about their disappointment on social media.
The increase in microchip demand created a supply bottleneck for this commodity which is yet to recuperate.
The Suez Canal was blocked by a ship for three weeks bringing major disruption and delay to huge container ships.
The Pandemic - Whole ways of life were changed suddenly around the globe, leading to massive changes in demand for many products and unprecedented supply chain disruption.
How Can Disruption to The Supply Chain Be Mitigated?
Recently, primarily due to the pandemic, businesses have realized that having a broader range of suppliers could mitigate risk. However, this opposes the traditional trend of building a supply chain consisting of a few resilient, strong, and reliable partnerships.
Diversification In the Supply Chain
Diversification of the Supply Chain is becoming a more significant trend in the industry. Companies are starting to entertain the idea that diversification of footprint and suppliers may be a competitive advantage.
Diversification, in simple words, is a strategy utilized to mitigate risks.
To diversify the supply chain, businesses must challenge previous trends. Instead of dealing with a few large enterprises in the supply chain on whom the company had previously relied, diversification means swapping and expanding the supply base with an increased number of small to medium-sized suppliers. These smaller businesses, located at home and overseas, can offer efficiency at the local level and resilience abroad.
We have seen how Tesla and Panasonic are revisiting their uniquely close supplier-buyer relationship. In the case of Tesla, it has started to engage with other battery manufacturers to diversify its supplier base and is evaluating insourcing its own battery making.
Diversification within a supply chain means that the impact of a large catastrophic event is less likely to disrupt it. But diversification usually increases costs. Why? Because it inevitably implies some level of duplication, redundancy, and extra work maintaining more business partnerships. Companies have a choice between diversification - better protection against disruption but at a higher cost, or optimization - lower costs but a greater chance for disruption.
But Is Supply Chain Diversification Old News?
Diversification of the supply chain is not a new idea. After every major disruption, the prevention of future supply chain breakdown becomes a priority. Management will spend significant effort and money on diversification. Mattel, which owns several factories in Asia, is leveraging its global manufacturing footprint to mitigate the effect of freight bottlenecks.
But when normality resumes, the benefits of a diversified supply chain may no longer look attractive to contemporary management. So, once memories fade, companies start to seek opportunities to consolidate their suppliers until the next catastrophic disruption, when the cycle repeats.
What Can We Learn from The Pandemic?
Supply chain diversification is only one arm of a strategy that can be employed to reduce risk during any new disruption. What else could be done?
Supply And Demand Prediction
A reactive supply chain that addresses what happened versus what may happen is suboptimal for today's organizations
No management team worth their salt can allow a business to run without some understanding of demand fluctuations. Predictive analytics is evolving. Predictive analytics combines data mining, statistical techniques, machine intelligence, and risk management to provide information that can help anticipate future scenarios and allow organizations to adapt their processes to be ready (i.e., logistics, inventory, planning, etc.). It enables organizations to recognize potential supply chain breakdowns and mitigate them in a time-effective and proactive manner.
Businesses will need more people who are technically qualified to set up and run modeling and analytics. Intelligent IT solutions will require significant investment in technology and training, and personnel.
Contactless Delivery
In response to the pandemic and the pandemics to come, contactless delivery of goods and services is a proactive method that helps. It can preserve the health of both employees and consumers and instill confidence. It means supply chains may be able to continue during this pandemic and the next. (According to infectious disease scientists, this is inevitable).
Supplier Strategy
Just-in-time supply chains are beautiful, complex, and problematic. Although super-efficient when everything is running smoothly, they are easily disrupted by political changes, border disputes, severe weather, and pandemics. Now, a focus on redundancy and building local stocks is vital. These strategies should be implemented alongside a multi-supplier system.
According to Kurt Sievers expectations (CEO, NPX Semiconductors), the automotive industry will start to shift from a just in time inventory strategy for semiconductors...
Given the recent experience with shortages and the long manufacturing and supply lead times for this component, having an inventory buffer to cover the gap seems to be a much more palatable option.
Local manufacturing of everyday items is also essential. Shortages of toilet paper, hand sanitizer, and even foods demonstrated to suppliers that some locally operated supply chain resilience is now of utmost importance.
3D Printing
Investing in 3D printing could allow a business to create necessary parts quickly when other methods fail quickly. A 3D printer can be printing one object one day and something totally different the next. During the pandemic, 3D printing allowed manufacturers to turn their talents towards printing in-demand products such as protective equipment when demand for their traditional products fell.
"Even during severe disruptions in supply chains, critical parts can be manufactured on-demand by any decentralized 3D-printing facility in the world by leveraging designs shared online." Source: Nature Reviews Materials
Further Benefits of Diversification
We have already discussed how diversification can minimize certain types of risk, but there are other possible benefits.
Increased innovation
When you talk to more suppliers, you discover new ideas and approaches to problem-solving. This alone can lead to innovation back at base.
Better Understanding of the Customer
We live in a diverse society with people from all corners of the world forming local communities. When there is a diversified supplier base spread across small local companies and small businesses abroad, a company will better reflect the customers they serve. This can only help to strengthen customer loyalty and product applicability.
Cost Savings
Although supply chain diversification is often associated with higher costs, it can sometimes encourage lower costs if the new supplier base is composed of small to medium-sized suppliers. They are often more agile than large corporations and are more willing to tweak pricing to win a contract. Also, having more than one supplier means each needs to be competitive to remain in the picture.
Diversification Promotes Diversity
As supplies are diversified, both in terms of adding more of them to the supply chain and adding more that are culturally, geographically, and ethnically diverse, the benefits of diversifying the company's own workforce become increasingly clear to management. It has been shown that the productivity in diverse workforces is 1.32 times higher than in firms lacking diversity. (source: https://www.nbs.net/articles/how-diversity-increases-productivity)
Summary
While the pandemic is just the latest disruption to the supply chain, it is the only one recently to reach every country in the world simultaneously. Everyone has been affected and continues to be impacted. So, for this reason, dealing with COVID has taken many companies through a steep learning curve, whose teachings won't be forgotten any time soon.
Maybe this time around, the redundancy people now see as necessary to the supply chain will persist forever. Many scientists are telling us that this may be just the first of many.
Climate change is another massive factor. We are in for more storms, more severe weather, drought, and more fires. We seem to be on the path to a potentially permanent world-wide, profound and far-reaching supply chain disruption.
The new normal may well demand an ability to be permanently ready for shock, surprise, and change. The new normal supply change management strategy has to be built on a mix of creativity, technology, world-wide, agile, sustainable diversification for society as we know it to survive.
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