Preparing for the Next Black Swan Event
The COVID-19 pandemic has exposed many vulnerabilities in the global supply chain network. Variants of the coronavirus have led to several regional shutdowns that affected production and these disruptions continue to hinder recovery. We are still seeing delays at several U.S. ports and the transportation cost via ocean or air across continents has climbed significantly in the last 18 months.
As coronavirus cases slow down across the world, several countries are in the process of reducing—and in some cases eliminating—all restrictions. However, these small signs of normalcy have been quickly disrupted by further uncertainties caused by Russia’s invasion of Ukraine. We are already seeing issues with air and ocean routes, which will further strain the global logistics network.
Black Swan Event Frequency
As seen in the last decade, black swan events—unpredictable events with potentially severe consequences—are becoming more frequent. From pandemic to conventional war, from climate disaster to financial collapse, it has become critical that companies create a plan to mitigate risk to fulfill customer needs and demand. Product manufacturers must rethink supply chain strategies in the long term to focus on value and risks and not just cost. Lean manufacturing was based on the key concept of minimal inventory that can be pulled from suppliers that are located nearby. However, companies soon realized that they could reduce costs by moving to suppliers around the globe while still maintaining minimal inventory. However, these longer lead times significantly increase supply chain risk, as we have seen during the pandemic.
Additionally, we continue to see manufacturing specialization overseas to improve efficiency and reduce cost. Ultimately, these lead to several tiers of suppliers, which further increases the complexity of the supply chain network. As we move forward, supply chain executives must stop taking a transactional view where decisions are made solely on price. They need to evaluate tradeoff between cost, risk, and responsiveness of its network.
Breaking the Black Swan Cycle
Let’s reverse the scenario. Instead of long lead times from overseas suppliers, a company could benefit from an agile supply chain that is capable of quickly responding to changes in market demand with a shorter lead time. Value of responsiveness from this is much harder to estimate, which drives companies to just focus on cost. Supply chain agility allows companies to deploy new capabilities and products faster enabling first-to-market advantage in some cases. It creates a culture of innovation by enabling experimentation and testing that not only shortens the learning curve but is certain to delight customers, improving the lifetime value of the customer. If all of the disruptions in the last decade have taught us anything, it’s that speed to market and responsiveness are going to be much more important for companies as we move forward.
Customization and personalization of products is leading to proliferations of SKUs which further leads to demand volatility. Dual sourcing can significantly help mitigate risk for such scenarios, especially in the face of disruption. Product demand can be divided into base demand that is easy to forecast and variable demand. Research indicates that product manufacturers should select two suppliers. One can be overseas to serve the base demand and is focused on per-part price. Meanwhile, the variable demand is served by a local or regional supplier that can respond to the peaks and valleys of the demand volatility.
Supply Chain Fragility and Hidden Costs
As discussed above the tiers of supply chain greatly increase the complexity and fragility of the network. Companies need to map the supply chain network past the first tier and look at geographical balancing of their suppliers to reduce exposure to climate, disease, economic, or geopolitical risks. They should also evaluate opportunities to move production/suppliers closer to the point of consumption. For overseas suppliers, beyond part-price, supply chain executives need to account for all hidden outlays including inventory, storage, and potential scrap. In addition to cost, localizing the suppliers also enables companies’ commitment to sustainability as it reduces pollution and fossil fuel consumption inherent in transportation across oceans.
Today’s Landscape, Tomorrow’s Digital Manufacturing Solutions
Many traditional suppliers in the U.S. continue to lag behind due to lack of digitization and sunk cost tied to obsolete plants and equipment. As companies evaluate the opportunity to localize production, they need to look for partners that adopt new process technologies and automation to enable shorter lead times and quick ramp for high mix-low volume to address demand volatility. Automation further reduces labor dependency, enabling the supplier to respond to any future disruptions while artificial intelligence and predictive modeling enables supplier to optimize designs and get parts right the first time.
It is not a question of if but rather when will the next black swan event hit the globalized supply chain. And it is critical that companies learn from the last couple of years and develop an agile supply chain network that delivers value, reduces risk, and is not just driven by cost.