Reshaping Global Supply Chains – Supply Chain Management Review
As attention to the role supply chains play in our lives has increased during the pandemic, organizations that operate these critical networks have begun to rethink some of their age-old strategies, coming up with new ways to compensate current challenges and protect against future disruptions.
As part of this exercise, many companies have realized that risk management must always trump cost considerations when sourcing the raw materials needed to manufacture their finished products. This has placed lean manufacturing, fully offshored production and a myriad of other approaches under a new level of scrutiny.
With the pandemic now two years old, companies are thinking differently about how they design and orchestrate their supply chains. With securing low-cost labor no longer the ultimate goal – and with supply chain disruptions, labor shortages and rising freight rates being the “new standard” at least for now – companies are relocating, locating and manufacturing goods closer to where they sell them.
They also place greater importance on environmental, governmental and social (ESG) considerations; look for new ways to reduce their carbon footprint; and start using advanced technologies like digital twins to achieve better business results.
No more contingency planning needed
Tan Miller remembers a time when companies only spent a day or two a year reviewing and revising their risk management and contingency plans. That was 20 years ago, when even spending so much time on the task seemed tedious. “Companies were looking at their networks and distribution centers and asking questions like, ‘What if there’s a fire and we lose a DC? How are we going to solve this problem? says Miller, a former supply chain practitioner who is now a professor and director of Rider University’s Global Supply Chain Management program.
“It took a lot of resources to do this type of planning, and there were always questions about how much a company could spend in this area, and particularly in terms of senior management involvement,” Miller recalls. “They were spending that time doing contingency planning and then hopefully it all goes well and they never really had to use it.”
Miller can’t put a number on that, but he assumes that organizations are now investing far more time in risk management and contingency planning than they ever have in the past. The disruptions caused by the credit pandemic are creating some of this urgency, as well as a global push to design more resilient supply chains that can withstand imminent and future shocks.
“I’m sure more companies are already willing to invest more in emergency planning than they have in the past,” says Miller. For example, the organization that spent 1% of its resources developing and refining its backup capabilities is probably now allocating 3-4%. “They look at their facilities, factories, distribution centers and transportation network to make sure everything is still meeting current and anticipated market demand,” says Miller, “and then make the appropriate changes.”
Do it where you sell it
Rosemary Coates, executive director of the Reshoring Institute, says the organization recently surveyed 50 different New York manufacturers about their current supply chain strategies. Of these, 98% sourced some, if not most, of their goods from China. When the pandemic and supply chain challenges emerged, many of these manufacturers rushed to find U.S. sources due to rising logistics costs, pricing issues, production delays, and more. challenges.
“Most of them were able to make pretty straightforward arguments for sourcing from the United States,” says Coates. “The prevailing idea being that if we can find suppliers here, we can probably get a price that’s about 15% of the price in China or somewhere else,” she says. With the economy in their favor, many manufacturers are looking to domestic sources of production as a risk mitigation tactic.
“For the past 20 years, these sourcing decisions have been cost-based, with a focus on how to achieve low-cost labor and operating environments,” says Coates. . “The pandemic has introduced risk in a way that has never been presented before. Suddenly everyone recognizes that it’s not just about dollars and cents; it is also about the risk of having long and/or unreliable supply chains.
In response, some companies are sourcing materials from more American sources while others are relocating their manufacturing operations. Still others look to countries like Mexico, Malaysia or Vietnam, all with the aim of minimizing the geographic gaps that exist between their operations and their end customers. This push for more localization is leading companies to “make it where they sell it” and “buy it where they make it.”
The best of both worlds
Known for its low labor costs, open trade agreements and skilled workforce, Mexico has become a popular target for companies looking to shorten their supply chains and also avoid the political climate and the conflicting business environment that exists between the United States and China. Those pulling their operations out of China may face considerable challenges, including (but not limited to) termination of existing employment contracts; whether or not they can take their machines and intellectual property with them when they leave; and the fact that applying for the required “exit permit” can take 12 to 18 months.
“It is not enough to decide that you are going to leave China; the process can be extremely difficult,” says Coates, who spent 15 years helping offshore companies in China and setting up factories there. To circumvent some of these challenges, she says companies are moving only a portion of their operations closer to their markets to reduce their overall risk and carbon footprint while avoiding some of the growing logistics and transportation issues (i.e. shortages and port congestion).
“In the long term, companies are starting to rethink their overall strategies to actually manufacture in the local environment for the local market, but also not to shoot themselves in the foot by ripping everything out of Asia if they go there. have markets,” Coates says. “So they’re just shrinking their footprint in Asia while still making and selling trusted products in those markets.”
Get tech in their corners
As they reinvent their supply chains and come up with new ways to improve the resilience and agility of these global networks, companies are also investing in more technology. With today’s labor constraints, it’s nearly impossible to simply “throw more people into the problem”, the technology that optimizes supply chains, streamlines processes and minimizes the need for manual intervention is in high demand right now.
So much so that even Wall Street has realized the crucial role technology plays in the modern supply chain. Once overlooked, logistics tech startups in 2021 have begun to receive large cash injections from large investment funds that are “pushing money into logistics tech at a rapid pace, driving up valuations digital-focused companies in freight, delivery and warehousing,” the Wall Street Journal reports.
Attribute to the fact that most individuals have come to appreciate the importance of a well-functioning supply chain to drive some of this business. The rest of the credit goes to the endemic shortages of raw materials, the persistent labor constraints, the evolution of demand and other forces to which everyone, from the individual consumer to the large multinational company, has been submitted within the past two years.
“Companies have had to deal with these issues on an individual basis, but that it’s all happening simultaneously is unique,” says Madhav Durbha, vice president of supply chain strategy at Coupa, who sees more and more companies build constrained optimization models that take into account a variety of different scenarios, and that prepare organizations for the unknown before it actually happens.
Supply chain stress tests
Organizations are also using the technology to test their supply chains to determine the resilience levels of those networks and then make the necessary changes. Durbha says companies are starting to use digital twins for this exercise. Powered by information from sensors, logistics and transportation databases, operations databases, supplier data and user experiences, these virtual simulation models can be used to measure the dynamics of the supply chain and predict process success.
“From a technology perspective, we see the idea of digital twins taking hold,” says Durbha. For example, companies can use supply chain models to simulate different conditions and subject the supply chain to shocks, or what he calls supply chain “stress tests”. “It’s becoming more and more important,” he says.
Pressure to use digital twins or other stress-testing mechanisms may come from the regulatory side, where Durbha has seen more and more governments and agencies require proof of supply chain resilience before the signing contracts or concluding agreements. He points to the food and beverage, agriculture, high-tech and pharmaceutical sectors as some of the industries where this is happening.
“If you’re in one of these critical industries, it’s incumbent on you to get ahead and make sure you have digital twin models to test the supply chain before a regulator comes and asks you. .”