Supply Chain Strategies: What the Pandemic Has Taught Us So Far?
In a blog at the very start of the COVID-19 outbreak when confirmed cases had just exceeded 40,000, we discussed the considerations for organizations facing the outbreak. Now nearly 10 months later as many industrialized nations are facing a new peak in infections, it is a good time to review these recommendations, take stock of what we have learned, and discuss how organizations can prepare for this new spike. At the time, this article is being drafted, COVID-19 Cases have topped 59M, underscoring how much the world has endured in 2020. This immense human toll is also accompanied by a huge economic toll as cases continue to climb and widespread vaccines are still many months away. Many nations are now facing the prospect of new lockdowns which will undoubtedly further impact global supply chains.
Supply Chain Risk Management on the World Stage – Lessons Learned
As we step back and review the impact of COVID-19 on the flow of goods and services, we see how organizations and supply chains have responded. There are several observations, best practices, and lessons learned we could discuss. However, four key lessons stood out that are worth exploring as they are likely to continue throughout the pandemic and beyond.
1.Global Supply Chains are Here to Stay
At the start of the pandemic, many voices were calling for the shortening of supply chains and an equal number calling for the reshoring of products. While this strategy appears to be a viable solution, as there will be some shortening of supply chains moving forward, it is not realistic to expect that a vast global supply chain network will not continue to exist. As we began to study supply chains, it became obvious why the supply chain strategies have evolved in this fashion. When it comes to factors like access to labor, it becomes an improbable task to reproduce a labor market the size of say China or India. The skills developed and the sheer size of the labor pool makes it improbable. In addition to labor, access to key materials is concentrated in key areas. Materials like rare earth elements have a high concentration in Asia. For example, China and the United States are ranked 1 and 2 respectively for the production of rare earth elements, but this is deceiving as China is producing 5 times the amount of the United States. Closing this gap may not even be feasible, nor would the environmental impact be something the United States would want to undertake.
2. Supply Chain Resilience vs Low-Cost Supply Chain
With the prospect of reshoring or nearshoring limited in scope, many organizations are pivoting their supply strategies to mitigate the impact of another disruption. This is apparent in the transformation from a low-cost strategy to a resilience model. This is demonstrated in some places by the employment of “plus one” strategies. While organizations continue to utilize low-cost regions like Asia, they are also employing strategies like “Asia plus one” or “China plus one” where they develop secondary sources in another region or another country to provide some insurance against regional or geopolitical disruption. Reallocating their volumes and splitting between regions means increasing production costs for the security of supply.
3. Stalwarts of Business Planning Showing Cracks
Efficiency concepts like using lean initiatives and just-in-time delivery to manage inventory have become commonplace for many years and have made individuals like Deming household names in many business schools. However, during the pandemic, these concepts have “hamstrung” many organizations causing them to re-evaluate many of these strategies. We are now redefining the concept and levels of safety stock and strategic inventory within warehouses and at suppliers to ensure a bulwark against future disruptions.
4. Managing Risk Across the Supply Chain Remains Challenging
A clear recommendation at the start of the pandemic was for organizations to map their supply chains so they know where their suppliers and key logistic hubs are located. But the pandemic showed us that this is easier said than done. It became obvious that many organizations could only identify their Tier 1 suppliers and lack the visibility and the tools to quickly identify, track, and manage suppliers below the first level. This made it impossible for organizations to foresee disruptions or even adequately identify mitigation strategies as they had difficulty identifying the source of the disruption as it cascaded through their supply chain.
While many of these lessons learned may not seem surprising, they do have a definite impact on an organization’s strategy, response, processes, and tools. Based on these lessons and their impact, let us look at some of previous recommendations we made when the pandemic was in its infancy
1.Know where your Supply Chain is located – This recommendation continues to hold and has become more essential. Organizations must team with their Tier 1 suppliers to understand suppliers deeper within the supply chain and collect key data points on them. This includes information like locations, financial stability, and key logistics strategies. Accurate and timely supplier information will become the fuel that powers many of the other recommendations. Based on the difficulty experienced to date, we know recommend organizations implement systems and processes to effectively map the supply chain at scale. This pandemic and its effects are likely to last many more months, if not years. It is imperative to develop the processes and tools to map this information correctly and accurately now to build resiliency for the future.
2.Continuously monitor changes – Nothing has changed with this recommendation. Organizations should continue to monitor and analyze events around the world and develop a risk management process to gather risk signals and information to alert stakeholders to potential disruptions. They should develop, deploy, and track strategic response and mitigation plans based on the identified risks. As mentioned above, supplier information will be the key to implementing. Basic information like supplier location is imperative for analyzing geographical risk, and information on their position within the supply chain and interdependencies are necessary to assess the risk of a product’s supply chain.
3.Diversify the supply base – While this recommendation still holds, the advice to manage the supply base like a portfolio seems a little naïve and simplistic after the events of 2020. Supplier discovery and diversification should be key tenets of supplier management plans moving forward. This strategy should have a geographical focus to deliver a resilient supply chain that can respond to geopolitical risks or cascading risks like we saw as COVID-19 spread across the globe. This recommendation also places a premium on the ability to discover and onboard suppliers effectively. Organizations should look at discovery solutions that go beyond the limitations of closed supplier networks to identify as many suppliers as possible. These solutions need to be able to curate information on new suppliers quickly, and efficiently update information into supplier management systems to qualify and onboard suppliers. The days of having a manual discovery process or one that uses a stale, closed network have passed. We need to look to new solutions that expand our search and effectively digitize and integrate with our supplier management systems. When it comes to discovery during and after the pandemic, what got us here is not likely to get us to where we need to go.
As in our previous articles, this crisis continues to underscore the need for organizations to continue to establish and enhance supplier risk and performance management, as well as discovery and the qualification of new suppliers. While these programs cannot anticipate all the impacts, they can allow organizations to respond and mitigate the impacts now an into the future.
Learn more about the challenges and steps necessary to build an effective and proactive Supply Chain Risk Management program in this research “Integrated Risk Management: A Playbook for Procurement” from The Hackett Group or see Ivalua’s Supplier Management Solution in action with this on-demand demo.
Senior Product Marketing Manager
Jarrod McAdoo brings over 22 years of procurement experience across multiple industries, including higher education, retail, manufacturing, and engineered products. During this time, Jarrod held various roles in category and supplier management including the management of strategic sourcing and procurement teams as well as leading teams in implementing shared service procurement models and source to pay systems. Jarrod holds a Masters in Business Administration from Duquesne University and a Bachelor’s degree from Carnegie Mellon University.