Strengthening the Supply Chain beyond Resilience Projects

A resilient supply chain works by providing flexibility in responding to an increase or decrease in demand or disruptions in the supply and demand of products.  Typically, companies will engage in supply chain planning which provides sufficient inventory levels to respond to market changes or offset the temporary delays in manufacturing and/or transportation of products.  There are 5 common strategies: 

• Assuming significant volume, production in multiple manufacturing plants, in different geographic locations, such as China, Mexico, and Vietnam. This strategy works well when multiple plants are required due to the very high volume, such as iPhones.  However, the demand for most products is too low for this many production lines.  The capital cost of the redundant production lines, or for the tooling (if the production lines already exist), may still be excessive in comparison to the return and therefore not worth the investment. 

• Developing multiple sources in different geographic locations for key components.  This is similar to the above strategy but is viable in cases where complex products are not entirely manufactured in the final assembly plant. A current example of this is the manufacturing of computer chips.  Generally speaking, a manufacturing plant for computer chips will produce various products for many companies.  Changing from one design to another is fairly simple and can be accomplished without significant costs.  Typically, this results in lower product costs without the capital investment or the need for dedicated resources devoted to that technology. 

• Proactively developing and approving alternate substitutions for critical parts and components. Like the above solutions, parts should be produced at multiple geographical locations to offset geopolitical risk or supply chain disruptions due to ocean shipping.  This strategy is viable if there is sufficient time to increase production of the alternative part or component before the disruption causes shortages.  It also requires an ongoing relationship with the alternative factory, including the design, specification, testing, and advance approval of the alternative parts or components.  It might be advisable to routinely purchase a certain number of these parts or components to ensure that the capacity continues to exist. The alternative factory can rapidly increase production to offset the disruptions in the primary supply chain, should the need arise. 

• Proactively developing and approving alternate logistics, such as different shipping carriers, for critical parts and components.  During the disruptions of the past several years, airfreight usage increased dramatically when the ocean carriers were unreliable and ports, rails, and trucks were adversely affected by congestion and insufficient capacity. Alternatively, many importers paid 4 to 5 times the pre-crisis costs for premium freight to secure containers from China.  However, these were (and remain) costly solutions to supply chain disruptions that adversely impact profitability and return on investment. 

• Carry sufficient inventory to satisfy demand while disruptions in the supply chain are overcome. Business inventory typically is carried to ensure that customer demand can be fulfilled when orders are received.  Companies will buffer the inventory to be able to respond to increases or decreases in demand.  They may also attempt to align with customers to forecast demand so that inventory levels can be adjusted for future projected orders.  Businesses also buffer for foreseeable disruptions in the supply of products, while understanding that some events are anything but foreseeable.   

Unfortunately, this solution has significant downsides. If a company does increase inventories to better cope with the potential of major supply chain disruptions, what happens when the inventory arrives, and demand suddenly falls for those products?  Warehouses fill up, storage costs increase, and unfortunately, companies may need to heavily reduce prices to move these products through the rest of the supply chain.  

While these 5 strategies have been developed using hindsight, the fact is that most companies are unprepared for massive and unexpected disruptions to global supply chains.   Additionally, all strategies have significant cost implications that run counter to the strategy of supply chain efficiency, which is the lowest-priced goods (while still consistent with quality standards).  To achieve the lowest price, supply chains are optimized.  Redundancy in factories, manufacturing lines, tooling, key parts and components, and even raw materials, is inconsistent with the most efficient supply chains.  All these redundancies have a cost and major implications on profitability and the company’s financial resources.  All of them are designed to offset supply chain risk. 

There are many other strategies suggested by the most well-known consulting companies.  These typically center around better information systems that collect real-time data and provide instant alerts and analysis of what is going wrong.  However, none of them address the underlying cause of the disruption, nor could they have foreseen the pandemic. None of them could address the containers of product in transit once they left the port in China to redirect the container ship to another port, perhaps on the East Coast.  The supply chain logistics system simply is not flexible enough to address in any way other than to try to expedite through the existing bottleneck.