Globalised Supply Chains – the Straw that Broke the Camel’s Back? Part 2 – LogiSYM May/June 2020
In Part 1 – We looked at China as the “the world’s factory” and highlighted concerns of many being too highly dependent on a single source country. In part 2, we will address the imperatives that supply chain leaders need to drive and take the learnings from current pandemic.
Financial impact of corona virus on global economies
There is a saying in Asia “when local supply chains sneeze, global processes catch a cold”!!! Unfortunately, the coronavirus pandemic has made the saying come true. The ripple effect is being felt far and wide – from travel & tourism to e-commerce. The dominoes are now beginning to fall across the global supply chain. Globally over 500 companies have called out negative impacts to their 2020 Q1 and Q2 earnings.
It is widely felt by financial experts, that industries like commercial aerospace, travel, IT/ technology, insurance, luxury products, white goods & food, which are hit hard by corona virus will drag their recovery scenario into 2021 or later.
What have we learnt from recent global crisis? What are the immediate actions supply chain leaders need to take to fix their supply networks?
In the last decade, supply chain leaders have done a great job protecting their profits and moving costs out of the business. This was achieved primarily by developing their supply network in China using LEAN and Just-In-Time principles. This phenomenon took away elasticity to market demand, so severe that there is no room to absorb any disruption, whether caused by natural disaster or pandemic event.
What options are available to supply chain leaders?
A) Distribute the risks in your supply chain to reduce the impact.
Current global supply chains are interconnected, interdependent & fragile. Companies who invested in Chinese manufacturers /suppliers, now face severe disruptions as these suppliers used single-sourcing in their value chain. A key lesson from this Pandemic is the importance of spreading Risk in your network and reduce over dependence on single source.
B) Focus aggressively on S&OP (Or IBP) to navigate thru
Aggressively focus S&OP on actualizing the demand opportunities & mitigate supply risks. Focus on identifying realistic demand and then delivering supply reliability & availability scenarios. Make your S&OP more realistic, in line with the products you manufacture and sell. Let your S&OP be the single most alignment platform for cross functional leadership to derive “consensus” forecast. Make sure that each S&OP you hold, decisions are taken & actions owners are identified with a time line for closer. Ensure that these decisions are institutionalised in day to day execution functions like manufacturing planning, procurement, new production introduction, finance, corporate planning.
C) Re-design & re-structure your supply network
As they say, we may have lost the battle, but we need to win the war. And the answer is to focus strategically on various structural scenarios. The fact remains that organisations must act now. I would strongly advocate supply chain leaders to review these available options.
1. Move supply chains out of China and re-build them elsewhere.
2. Manufacture in China for Asia markets.
3. Diversify your supply network footprint and / or develop alternate supply sources
Let us analysis these options:
1. Move supply chains out of China:
Is it possible to move your China supply network footprint and bring it back to either US or any other western world country? Remember it took China more than two decades to build this ecosystem. Just think how much time it would take now to move and re-build the whole ecosystem in your own backyard. While this may be possible for some commodities, I do not see any immediate options for auto parts, syringes, consumer electronics, engine parts, lawn mowers, washing machine, toaster, toys, sporting goods and furniture, but to remain in China.
Taking manufacturing for these commodities out of China, would mean consumers having to pay anything between 25 to 30% more. Let us not forget that the key motivation for the Western world to adopt new supply chain routes was, fundamental changes in their environment like higher costs of energy, cost and paucity of skilled labour, growth markets, suppliers, and technology ecosystem.
Japanese government announced a reserved pool of 2.0 Bil $ to incentivise Japanese companies in China to move their operations back into Japan. Another 215 million $ also set aside for Japanese companies in China to move to other countries.
2. Manufactured in China for Asia markets:
This model gives short lead time as well as it extends the benefits of trade / tariff benefits between China and ASEAN nations. Organisations can continue to manufacture low value, high volume repeatable, mass scale commodities in China and export globally
China’s ability to produce at much lower cost, at greater speed, at good quality levels supported by extensive logistics and freight networks, helps to export the product out at great consistency and frequency.
When it comes to manufacturing capabilities, China has few distinct advantages
a. Significant and surplus Capacity which is unmatched by any other country in Asia.
b. Capability and Technology – China’s ability to adopt and evolve technology is proven to be of high class.
c. Skill Sets and infrastructure – Many companies acknowledge that it is remarkably easy to navigate on your own in China. There are countless people
out there who are super knowledgeable and willing to help you in setting up manufacturing capabilities.
3. Diversify your supply network to increase your supply ability & capability.
Use supply base development analysis to understand supply chain risks and map the locations and status of their second and third suppliers. Develop & re-design multiple scenarios to simulate new supply lanes and understand their impacts to freight, total lead times, compliance requirements etc. As part of this exercise, also consider advanced technology as a viable option (e.g. robotics, 3D printing, additive manufacturing). These technologies will allow you to scale some of the production capacities in off-shore locations at relatively cheaper price and at quicker pace without having to stock up for large durations. Few available scenarios explained below:
Re-shoring means moving your activities from another / far distanced country back into your own country. Many companies in US have already started to move their supply base out of China in order to reduce shipping costs, reduce logistics lead time, produce better quality and less rejections as compared to manufacturing in China. Examples of such products are chemicals, metals & fashion apparels.
Near shoring means, moving your activities within your geographical region including cross-border in a nearby foreign country. It offers optimized advantages like same time zone, similar cultural ethos, fast & relatively cheaper cost structure. Many companies in US have already started to move their supply base from China into Mexico or Brazil.
On-shoring means moving your activities within same country/ national borders near to a main customer. It is also called country for country model. Guiding principles behind this strategy are focused factory (as OEM) and Just-In-Time supply to your principle manufacturer.
Off-shoring means, moving your activities to another country including a far distanced country. Single most objective is to reduce cost in a country which is much cheaper to operate v/s your own country. There are many countries like Vietnam, Indonesia, Malaysia which are gaining traction as a replacement location moving out of China. Off-shoring is one of the reasons for the current state of global supply chains (fragile, complex, overdependent on single source).
Amidst the corona virus pandemic, understandably we are short on patience. However, there is no quick fix available. If you are planning to move manufacturing out of China, there is no simple alternative of countries to move production to. Be aware that China may not be the only country facing additional tariffs in the future!!! Possible that US may slap additional tariffs on countries like India/ SEA, for other reasons.
Before embarking to de-scaling your operations in one country and setting it up in another, several factors need to be reviewed very carefully on the back-drop of “as is” vs “to be” location. A few important elements must be studied (e.g. – barriers to workforce, availability or paucity of skilled workforce, domestic/ international logistics & transportation capabilities, regulatory & compliance scenarios, total end to end lead time, cargo shipping frequency, port capacities & charges, trade & tariffs scenarios, local environmental & waste disposal policies etc. These factors can increase or decrease the efficiency of your supply chain.
While it is possible to de-couple large number of products and commodities like Intellectual Property protected products, plus there are products with high selling price and high margins that have the capacity to absorb impact of higher costs. Other category of products which fall under “essential commodities or services” could be moved out of China.
It is not just about moving out of China, it is about creating a supply network which is diverse, agile, and robust enough to sustain & continue to operate during disrupting situations. It is about developing supplier diversity, visibility, and transparency in our supply network.
It is our objective not to depend on one source but create a dual sourcing model which will increase the ability to provide consistent supply even in adverse situations. Hence, we must think through all the “what-if scenarios”, so we are not caught off guard after we have de-scaled the operations.