Building Robust Supply Chain Resiliency Considering the COVID 19 Experience-Part B

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Introduction

In Part A of this series, we have seen the basic differences between Flexibility, Robustness and Resiliency characteristics of a Supply Chain ecosystem and how different supply chain entities are trying to be Resilient by adopting some short, medium, and long-term strategies. In Part B, we will try to identify the answer to the question which we put forth in Part A; i.e. that if we can really call them a Resilient approach? And, if yes, then how practical they are to put into a real time supply chain system?

We have seen “Robustness” meaning how quickly a Supply Chain can ensure the liquidity flow in the chain by adopting the given means of Part A. “Resiliency” means how quickly the chain returns to the state before disruption levels. The key of success lies when a Value chain ensures cash flow (liquidity) in the supply chain during disruption while simultaneously planning & implementing the measures to return back to the whole chain to the pre-disruption model as quickly as possible.

 

The Fallacy of “Robustness” Strategies with respect to Covid-19 when both Demand and Supply were disrupted

  1. The main strategies adopted in favor of this (as mentioned in Part A) are Flexibility to switching Resource (Produce Mask/PPE instead of garments) and Collaboration with other companies to find new Product mix (e.g. Ford and GE collaborated to make ventilators) or Alternate Services using current resources (e.g. Swingy and Zomato collaboration). If you look closely you will see all policies are aimed to Fulfill the Demand by leveraging the existing manufacturing resources or by adjusting the logistics chain but not both. In this COVID situation the Demand was existing for either Basic needs (food, grocery, toilet papers) or healthcare related products (Mask, Sanitizer, PPE, Ventilators). Still we found that except for basic food products and grocery there were shortages of the other mentioned products.

There were introduced low quality, very high price masks, PPE, and harmful Sanitizers to flood in the market which did not get the people’s acceptance. If you deep dive, you will find the companies which adjusted their manufacturing facilities, could not build/arrange logistics facilities to distribute them properly (there was a huge scarcity of transport resources). Both the objectives (Manufacturing and Logistics) were achieved by few companies only. India is the second largest producer of PPE now, still the prices are very high, not available in every place, and many complaints are coming related to quality of PPE.

  1. Even if we neglect the bottlenecks mentioned in the above point, still another important fact remains open that the manufacturing units which can switch product lines which have already established manufacturing processes identical to those products which are in Demand during COVID. For example, ventilators are basically pumps. The automobile industry which has competency in pump manufacturing can adjust the process to manufacture ventilators. What about other supply chains like electronics components manufacturer, process manufactuers, travel industry or aviation supply chains?

The basic problem is that we are looking “Robustness” in silos rather than looking at it from a holistic Supply Chain point of view. We should use the term “Flexibility” not “Robustness”.

 

The below diagrams depict the above example- Figure 1

 

Discussion topics to achieve a  Resilient Supply chain

If you follow the current literature, the major talking points for the supply chain of the future related to resiliency are as below:

  1. Relook/change “Just in time”/Lean Inventory strategy
  2. Reduce the geographical vulnerability by procuring from different regions
  3. Adopting more “Reshoring”
  4. Adopting Industry 4.0 and Business 4.0 strategy and technologies
  5. Merger/Acquisition is a common economical strategy, especially with a distressed market created by a disruption. Can actually increase proactive “Win-Win” combinations/consolidation.

 

Time to look back

While the COVID-19 pandemic is the biggest disruption in the global supply chain after WW2, there are many more disruptions that happened in the recent past which very badly disrupted the global Supply Chain. After each disruption one or more of the above three points are in discussion; but, we can observe the actions taken to be “Resilient” rarely considered the above points. You can see below examples:

  1. SARS-2003: This was an early indication of global supply chain disruption by a natural cause. Though the severity is not comparable as COVID19, at that time, China was having only 5 %-6% stake in global manufacturing. If you see China now, it is contributing at least 50% of global manufacturing. So, it prevented the supply chain leaders/companies to think differently even if the above points were very much featured in most articles of Supply Chain at that time.
  2. September 21, 2015: More recently, the massive chemical warehouse explosion in Tianjin, China, which killed 173 people, became China’s worst industrial disaster in years and crippled supply chains worldwide. Today, China is the largest chemical exporter in the world.
  3. The Japan Tsunami and Nuclear Disaster 2011: This is the most devastating disruption of a global supply chain in the recent past. Automotive manufacturers, Aerospace & Defense manufacturers and electronics supply chains were heavily impacted worldwide. Mostly hit companies were Toyota, Nissan, Boeing, General Motors, Caterpillar – not only in Japan but their factories outside Japan too. Toyota, known as father of “Just in Time” philosophy not only in theory but in application as well, was in question. Standing today, this is one concept every company is trying to achieve in the planning tool implementation. You can also see the exports from Japan for those industries were little reduced in 2011-2012, but again gained momentum from 2013 onwards.

 

There are many more in the list such as Hurricane “Katrina” in April 2005, the storm devastated coastal areas across southeastern Louisiana and coastal Mississippi. Particularly hard-hit by the loss of suppliers was the chemical industry, which relies heavily on petroleum-based products. For example, companies that depended on the Dow Chemical Co.’s St. Charles Operations in Hahnville, Louisiana for polypropylene — which is used in textiles, food containers, automotive parts, lab equipment, and many other products.

The European Supply Chain was mostly cut in 2010 August due to Iceland Volcanic eruptions. The 2008-2009 Global Recession impact on global supply chain was highly disruptive. Disasters and disruptions of various magnitudes occur more frequently than people are aware as few result in the impact of a pandemic disruption.

Considering the above, we can see the effect of many disruptions are at upstream nodes/links (Supply side) and few are at downstream nodes and links (Demand side). We also observed supply side disruptions are mostly caused by the nature/fire, and Demand side disruptions are mostly caused by Government policies and the geopolitical equation of the world. But in all cases the talking points were the 3 which we mentioned. Still standing today we are adopting those and bringing them to in context to prepare a weapon to become resilient. The situation of Covid 19 is a set of disruptions in multiple industry global supply chain which affected both Demand and Supply side and was caused by both nature and policies.

Below are some questions which speak in favor of the already proven concepts and hence require much attention before altering them:

  1. Reshoring alone does not necessarily create resiliency: “Consider the recent meat shortage in the United States. This industry’s supply chain is pre-dominantly domestic. In order to reduce cost, many companies focused on consolidating manufacturing activities. The result: A relatively small number of slaughter plants now process much of the beef and pork consumed in the United States. Shutting down one plant, even for a few weeks, has a major impact throughout the country. It crushes the prices paid to farmers and leads to months of meat shortages”. Source- Harvard Business Review,“Building Resilient Supply Chains Won’t Be Easy” by David Simchi-Levi and Edith Simchi-Levi June 23, 2020
  2. Even after so many disasters why is the USA importing most of the automobile, chemical, garments from China/Japan and not from Mexico which is closest and lead time is least?
  3. Why are Japan /Taiwan/ China still the major sources of electronics components and finished goods for the whole world?
  4. Why does the whole world have to rely on China/India for medicines even after so many disasters?
  5. “Just in Time”/”Lean Inventory”: You can’t run a system that’s inefficient 19 years out of 20, just because it won’t let you down in the one year you have a major natural disaster.”- Source: The Guardian, 25 October 2011
  6. Now there is much talk to make Taiwan/Malaysia as an electronics hub instead of China. If any future pandemic happens in this region, is there any assurance these countries will be spared?
  7. Do you have enough financial safeguard to have parallel set of infrastructure and operations in other companies to respond to the disruption?

To answer above questions, we need to know why we really adopted outsourcing and “Just in time” strategies. We also need to know what provoked us to make China and to some extent Japan as a the manufacturing source of the world.  Any supply chain concept (like the above three) are driven by gaining “Competitive Advantage”. For example, adding inventories and backup suppliers reduces risk by increasing the redundancy in a supply system, hence losing competitive advantage. The most important point is:  what is stopping your competitors from taking the same actions? In that case, you are losing your competitive advantage.

 

Factors of Competitive Advantage (Drivers of decision making by the investors in favor/against of above 3 points):

  1. Total Cost of ownership to source from a supplier/region/country- China, Mexico score maximum.
  2. What type of supplier – Tier1/2/3/4?
  3. Reliability index in terms of promise vs delivery. It depends on the logistics and infrastructural index of the region/country- China, Japan, Germany, Vietnam scores maximum.
  4. Quality index- Japan scores maximum
  5. Government Policies- ease of doing business, taxation, duties, geopolitical relation, stability- China scores maximum
  6. Human resource index not only in terms of number; but, in terms of specialization also- Japan scores maximum, followed by Germany and Vietnam
  7. Quickness to respond- flexible- Japan, China score maximum
  8. Transparency
  9. Lower chances of IP theft – China is the poorest
  10. Technical know-how and ease of tracking

 

The most important overall factors on top of the above 10, which drive the strategic decisions in most cases are: –

  1. Am I only concerned to fulfill the Demand of my factory/region/country or can I make my sourcing decision as a strategic weapon to get access/penetrate my supplier markets too?
  2. Time to Market – The changes should not be outside the reasonable time limit so that the essence/profitability of the change is gone.
  3. Goverment initiative to bring back the Demand in the chain in the case of both Demand and Supply disruptions

In the future, we will consider the possible ways to achieve robustness and resiliency without sacrificing the benefits of above three.