Reshaping Global Supply Chains

This is an excerpt of the original article. It was written for the March-April 2022 edition of Supply Chain Management Review. The full article is available to current subscribers.

March-April 2022

Yesterday, I hosted a webinar on the steps supply chain leaders are taking to redesign their supply chains to cope with this period of unprecedented demand. Earlier last month, I attended the Manifest conference in Las Vegas. The exhibitors featured a lineup of supply chain startups while the attendee list was dominated by venture capital firms looking to get in on the action in our booming industry. This morning, one of the lead news stories is about another disruption threatening to bring global supply chains to a halt:

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As attention to the role that supply chains play in our lives heightened during the pandemic, the organizations that operate these critical networks began rethinking some of their age-old strategies, coming up with new ways to offset current challenges and shield against future disruption.

As part of this exercise, many companies realized that risk management should always usurp cost considerations when sourcing the raw goods needed to make their end products. This placed lean manufacturing, fully offshoring production and myriad other approaches under a new level of scrutiny.

With the pandemic now two years old, companies are thinking differently about how they design and orchestrate their supply chains. With securing low-cost labor no longer the ultimate goal—and with supply chain disruptions, labor shortages and rising freight rates being the “new normal” at least for now—companies are reshoring, localizing and making goods closer to where they sell them.

They’re also placing a larger focus on environmental, governmental and social (ESG) considerations; looking for new ways to reduce their carbon footprints; and starting to use advanced technology like digital twins to achieve better business outcomes.
More contingency planning required

Tan Miller remembers a time when companies spent just one or two days per year reviewing and revising their risk management and contingency plans. That was 20 years ago, when allocating even that amount of time to the task felt burdensome. “Companies would look at their networks and distribution centers and ask themselves questions like: “What happens if there’s a fire and we lose a DC? How will we address that?’” says Miller, a former supply chain practitioner who is now a professor and director of Rider University’s Global Supply Chain Management Program.

“It took a fair amount of resources to do that type of planning, and there was always a question as to just how much a company could spend on this area, and particularly in terms of senior management’s participation,” Miller recalls. “They’d spend that time doing contingency planning and then hopefully everything just goes smoothly and they never really had to utilize it.”

Miller can’t put a number on it, but his guess is that organizations are now investing a lot more time on risk management and contingency planning than they ever did in the past. Credit pandemic-driven disruptions with creating some of that urgency, along with an overall push to design more resilient supply chains that can withstand both imminent and future shocks.

“I’m sure more firms are already willing to invest more in contingency planning than they did in the past,” says Miller. For example, the organization that spent 1% of its resources developing and honing its backup capabilities is probably now allocating 3-4%. “They’re looking at their facilities, plants, DCs and transportation network to make sure everything still makes sense for current and anticipated market demand,” says Miller, “and then making the appropriate changes.”

Make it where you sell it

Rosemary Coates, executive director at The Reshoring Institute, says the organization recently interviewed 50 different New York manufacturers about their current supply chain strategies. Of them, 98% were sourcing some—if not most—of their goods from China. When the pandemic and related supply chain challenges emerged, many of those manufacturers scrambled to find US sources due to rising logistics costs, tariff issues, production delays and other challenges.

“Most of them were able to make a pretty easy case for sourcing in the United State,” says Coates. “With the prevailing thought being, if we can find suppliers here, we can probably get the price to within about 15% of China’s or another country’s price,” she says. With the economics in their favor, a lot of manufacturers are seeking domestic sources of production as a risk mitigation tactic.

“Over the last 20 years these sourcing decisions have been based on cost, with a focus on how to get low-cost labor and low-cost operating environments,” Coates explains. “The pandemic introduced risk in a way that had never been presented before. Suddenly everyone recognizes that it’s not just about dollars and cents; it’s also about the riskiness of having lengthy and/or undependable supply chains.”

In response, some companies are procuring materials from more U.S. sources while others are reshoring their manufacturing operations. Still others are shifting focus to countries like Mexico, Malaysia or Vietnam, and all with the goal of minimizing the geographical gaps that exist between their operations and their end customers. This push for more localization finds companies “making it where they sell it” and “buying it where they make it.”

The best of both worlds

Known for its lower labor costs, open trade agreements and skilled workforce, Mexico has become a popular target for companies that want to shorten their supply chains and also avoid the adversarial political climate and trade environment that exists between the United States and China. Those that are pulling their operations out of China can face steep challenges that include (but are not limited to), the termination of existing employment contracts; whether or not they can take their machinery and IP with them when they leave; and the fact that applying for the required “permit to leave” can take 12 months to 18 months.

“Simply deciding that you’re going to move out of China isn’t enough; the process can be extremely difficult,” says Coates, who spent 15 years helping companies offshore to China and set up factories there. To circumvent some of these challenges, she says companies are moving only some of their operations closer to their markets in order to reduce their overall risk and carbon footprints while also avoiding some of the escalating logistics and transportation issues (i.e., high shipping costs, container shortages and port congestion).

“Long-term, companies are beginning to rethink their global strategies so that they are in fact manufacturing in the local environment for the local market, but also not shooting themselves in the foot by ripping everything out of Asia if they have markets there,” says Coates. “So, they just reduce their footprints in Asia while continuing to manufacture and sell trusted products in those markets.”

Getting technology in their corners

As they reimagine their supply chains and come up with new ways to improve the resiliency and agility of these global networks, companies are also investing in more technology. With the current labor constraints making it nearly impossible to simply “throw more people at the problem,” technology that optimizes supply chains, streamlines processes and minimizes the need for manual intervention is in high demand right now.

So much so that even Wall Street has awakened to the critical role that technology plays in the modern supply chain. Once overlooked, logistics technology startups in 2021 began receiving hefty cash infusions from large investment funds that are “pumping money into logistics technology at a rapid pace, driving up valuations for digital-focused ventures across freight, delivery and warehousing,” the Wall Street Journal reports.

Credit the fact that most individuals have come to appreciate the importance of a smooth-running supply chain with driving some of this activity. The rest of the credit goes to the rampant raw material shortages, ongoing labor constraints, shifting demand patterns and other forces that everyone from the individual consumer to the large, multi-national corporation has been subjected to over the last two years.

“Companies have had to manage these issues on an individual basis, but to have everything happen simultaneously is unique,” says Madhav Durbha, VP of supply chain strategy at Coupa, who sees more companies building constrained optimization models that account for a variety of different scenarios, and that prepare organizations for the unknown before it actually happens.

Stress-testing supply chains

Organizations are also using technology to stress-test their supply chains to determine these networks’ resiliency levels and then make the necessary tweaks. Durbha says companies are beginning to use digital twins for this exercise. Fed information from sensors, logistics and transportation databases, operations database, vendor data and user experiences, these virtual simulation models can be used to measure supply chain dynamics and predict process success.

“From the technology perspective, we see the idea of digital twins taking hold,” says Durbha. For example, companies can use supply chain models to simulate different conditions and subject the supply chain to shocks, or what he refers to as “stress-testing” of the supply chain. “This is becoming increasingly prominent,” he says.

The pressure to use digital twins or other stress-testing mechanisms may come from the regulatory side, where Durbha has seen more governments and agencies requiring proof of supply chain resilience before any contracts are signed or deals are made. He points to the food and beverage, agriculture, high-tech and pharmaceutical sectors as some of the industries where this is happening.

“If you’re in any of these critical industries, it behooves you to get ahead of the curve and make sure that you have digital twin models in place for stress-testing the supply chain before a regulator comes and asks.”

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