Shock proofing your supply chain – A global approach
Pandemic impacts demand and supply, exemplifying the need for stronger supply chains
All supply chains face risks caused by unpredictable events, such as trade wars, natural disasters and data breaches, that often lead to multiple disruptions. Most recently, the COVID-19 pandemic has had a large-scale impact on both demand and supply, exemplifying the need for stronger supply chains.
A second wave could result in further global widespread disruption, making supply chain resiliency even more crucial. Despite this, a recent Gartner survey showed that only 21% of respondents stated they have a highly resilient network today, which includes the ability to shift sourcing and manufacturing activities around quickly.
In order to successfully accomplish a resilient supply chain, sourcing components from various suppliers and geographically diversifying stages of the production is key. Though supply chain diversification is vital in protecting manufacturers against shocks, its importance is usually only reminded when weaknesses start to show.
Factory shutdowns caused by force majeures
According to PwC, CFOs expecting to change the breadth of their supply chains went from 30% to 42% from the beginning of March compared to the end of the month. This correlates with the spike in factory shutdowns caused by force majeures put in place by governments around the globe.
Paul Romano, COO at Fusion Worldwide, acknowledges “Companies normally look to introduce secondary suppliers to their supply chains during chaotic events, such as the MLCC shortage in 2018, but quickly forget the necessity once the issue is resolved. With the pandemic, companies will also need to also geographically diversify their supply chains to lessen their dependence on a single location.”
Geographical diversification is a long-term solution due to the amount of time and investment required. Despite this, it is a powerful step in securing supply chains. By strategically placing and outspreading where product is produced, procured and stored, companies are more able to safeguard against unexpected future catastrophe.
China investing in India
China, for instance, is already considered one of the fastest growing sources of foreign direct investment in India. In 2019, Sany, a Chinese multinational manufacturing company, announced the $140 million USD expansion of its Pune facility. Tsingshan, a top Chinese stainless-steel producer, also disclosed its $1 billion USD investment into the construction of an India plant.
In the shorter term, companies can diversify their vendor base and products. In a time of escalating disruption, it is important to start improving strategic sourcing strategies as soon as possible. Vetting processes, especially, need to be conducted without delay to ensure that new suppliers are compliant and reliable.
Tobey Gonnerman, EVP of trade at Fusion Worldwide, states “Strong vendor partnership with open market suppliers are critical to an OEM’s ability to deal with supply chain adversity. Those who wait until the shortages occur to interact with these suppliers are the ones most severely impacted; both in terms of the over-cost they are faced with and from a quality assurance perspective.”
Risk mitigation strategies
To ensure adaptability against shocks, such as a resurgence in COVID-19, below are some risk mitigation strategies:
- Establish alternative sources with the ability to supply components normally produced by a single source. Those who depend on a single source will face massive supply chain disruptions if their component source experiences a supply issue.
- Expand the allowable number of manufacturers, or AVL. This allows companies to gain more options when supply chain disruptions occur. A company with a large AVL will have the ability to easily solve component shortage issues and is more able to leverage these suppliers to maintain supply.
- Understand what critical links in the supply chain are vulnerable to unpredictable events, then promptly set up risk management and contingency plans. It is important that companies have complete awareness of what will be affected in their supply chain, the gravity of the impact and how prepared they are to deal with it. Companies that are more heavily hit by shocks are those who did not set up a resilient supply chain before there was an issue affecting it.
- Utilize sources for market intelligence. By closely monitoring market events and the status of their supply chains in relation to it, companies are equipped to take proactive actions and immediately react.
- Geographically diversify. With manufacturers of certain components condensed in one region, one type of product will be greatly affected by political events and natural disasters. By spreading out factory and supplier location, companies will be more protected against condensed shocks.
By diversifying vendors and locations, manufacturers are not only increasing their ability to be flexible but are also more able to adapt to a constantly changing market. This results in their supply chains being less affected by shocks and gives them a competitive advantage in the availability of materials.