5 Supply Chain Truths for a Post-COVID-19 World
By Richard Howells and Stephanie Overby
While the average American may still think of Detroit as the “Motor City,” those who work in the global automotive supply chain know that Wuhan has quietly become the Detroit of China. Home to manufacturing operations for General Motors, Honda, Nissan, and other major car makers, hundreds of auto parts suppliers, and around 50% of vehicle production in China, the Motor City of the East was also ground zero for COVID-19.
Having offshored manufacturing to low-cost countries – sourcing up to two-thirds or more of their parts from China – global car makers saw their production lines screech to a halt as the pandemic took hold. Massive shutdowns, then slowdowns, rocked the industry. Meanwhile, consumer demand for new automobiles plummeted as unemployment and economic uncertainty grew. The industry took a one-two punch of unprecedented supply chain disruption and demand depression.
Automakers were not the only – or even the hardest hit – manufacturers. Indeed, many automotive companies, having learned some hard lessons from the last recession, were able to shore up their financials enough to survive multiple quarters of lower production and demand. Many also turned their attention to producing lifesaving products like ventilators and personal protection equipment (PPE). But they are emblematic of what went wrong with the global supply chain in early 2020.
Their devotion to cost, efficiency, and speed – while it made them profitable – left them vulnerable to extreme supply and demand shocks.
“Before the pandemic, companies had been very successful at cutting costs dramatically from the supply chain with practices like lean manufacturing, outsourcing, and consolidation,” says David Simchi-Levi, professor of engineering systems, Massachusetts Institute of Technology (MIT) and director, MIT Data Science Lab. “All these strategies allowed them to reduce cost but dramatically increased their exposure to risk.”
It’s not that companies were completely ignorant of danger. They had experienced serious supply chain disruptions: a tsunami in Japan, floods in Thailand, a volcanic eruption in Iceland. Companies were able to minimize the effects of those disruptions because they fit the pattern that has guided supply chain design for decades: the breakdowns were localized, temporary, and fixable.
But COVID-19 hit everywhere, all at once, and the unimagined happened: borders closed, plants shut down, transportation halted, workers went on lockdown, and companies were unable to ship goods. The global supply chain broke. And as it is repaired, the rules that seemed inviolate – the drive for the lowest production costs, the prioritization of tier-one suppliers, the concentration of suppliers in one region or location, a reliance on historical data to predict demand, and distribution by the pallet-load – will fall away.
Managing risk has never been a high priority. Now it must be, because resource depletion and the climate crisis promise broader and more frequent global shocks over the next decade and beyond.
The pandemic has also changed consumer buying patterns – probably forever. During 2020, consumers engaged in extremes: they shopped online when they couldn’t go out, and they bought local to support their communities. While these behaviors will likely come into greater balance once the danger from COVID-19 subsides, many consumers have discovered new preferences that will endure. Everyone who manufactures, transports, and sells goods and services will need to understand the new mindsets and habits of their customers and adjust their supply chains accordingly.
The fate of global supply chains is now a topic of discussion in boardrooms, in government updates, and at dining room tables. Companies have an opportunity to not only make them stronger but to improve their competitive stance.
What we learned when the world shut down
The development of global supply chains has been an enormous success for optimization, cost reduction, and coordination. Lean manufacturing, outsourcing, geographic consolidation, technology, and process standardization all combined to create long, efficient, and cost-effective supply chains in every industry.
“All of those things worked really well in a stable environment. And over the last 30 years, the world has been relatively stable, with GDP growth and no major demand or supply shocks,” says Jonathan Wright, global leader and vice president of supply chain consulting, IBM Global Business Services.
The panic-buying of everything from disinfectant to dumbbells showed us just how unprepared we were for sudden, dramatic shifts in demand and supply. Demand spiked to levels never before seen, particularly for commodity products like household cleaners and coffee, while purchases of discretionary items, like luxury goods, cosmetics, sun care, and apparel, saw double-digit declines, according to J. P. Morgan Research. Meanwhile, supply lines froze.
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The normal rules did not – and could not – apply.
And they never will again.
COVID-19 isn’t a one-off; this is no 500-year flood. Thanks to the interconnected nature of our world, global disruptions – not only from climate change but from cyberterrorism, new pandemics, and more – will become more prevalent and persistent, and they are likely to have exponentially greater impacts, says Bob Johansen, a veteran applied futurist and distinguished fellow at the Institute for the Future in Palo Alto, California.
What’s more, there will be few clear patterns to the upheavals, according to Johansen’s forecasts. Most people – business executives included – are not prepared for the extreme dilemmas they will face in the years ahead. For example, the Carbon Disclosure Project, a nonprofit sustainability data clearinghouse, found that 125 large corporate suppliers face a combined US$1 trillion of potential financial impact from environmental risks: $906 billion at risk from climate change, $78 billion due to potential water security risks, and $16 billion at risk from deforestation.
An end to the old rules
Supply chain resilience – the capability to be prepared for unexpected risks – is more important than ever. About one in five companies (21%) think they have a highly resilient supply chain network today, according to a recent Gartner survey.
“As we move through the recovery phase of this crisis, people are stepping back and reflecting on new strategies for supply chains based on the vulnerabilities exposed by this crisis,” says Jim Kilpatrick, global supply chain & network operations leader for Deloitte Consulting. Rebuilding the supply chain for a volatile and uncertain future while maintaining profitability will be a delicate balancing act.
One overarching principle is emerging, however. Companies that have focused on lean, just-in-time models for years are realizing the value of just-in-case. The details will vary by company, geography, and industry – but there are several big shifts in thinking about supply chain design that are coalescing as directives for the future.
Here are five things that will change forever:
1. Cost of production will be dethroned.
Too few organizations gave a second thought to the single-minded pursuit of cost containment in supply chains until the strategy suddenly and dramatically backfired. “It’s human nature to only look at things when we have to,” says Christopher Woods, partner, PwC. “Supply chain and procurement have always been a cost play.”
The cost of making a product will continue to be an important factor, but companies will need to focus on their total costs – from acquiring raw material through production, packaging, and distribution and all the way to the end customer, in some cases. There are costs associated with missing a delivery date, not being able to produce a product, and losing customers to more agile or resilient competitors. To calculate these costs, Simchi-Levi recommends mapping each node in the supply chain as a vital step. Supply chain mapping will enable the firm to develop a digital twin and conduct stress tests to identify the level of resiliency of their supply chain.
Simchi-Levi advocates quantifying two measures. The first is time to recover: the time it would take for each node – a supplier facility, a distribution center, or a transportation hub – to be fully functional after a disruption. By removing a facility from the supply chain for the duration of time to recover, the firm can estimate lost sales, revenue, or margin. The second is time to survive: the maximum duration that the supply can meet demand after a node is disrupted.
The relationship between the two measures helps identify hidden risk. For example, if the time to recover for a given facility is greater than the time to survive, the supply chain will not be able to meet demand without a backup plan. Companies can use a digital twin to simulate disruptions and identify potential problems, enabling them to quantify the cost of disruptions and prepare mitigation plans for the most critical parts of the supply chain.
2. Tier-one suppliers won’t have all the answers.
The COVID-19 crisis revealed how few organizations have end-to-end supply chain visibility. “You have your own network and then you have your network’s network. Stronger collaboration is required to manage that,” says Divya Prakash, strategic supply chain engineer, Intel. “Companies have tended to operate in silos, looking only at their first-level suppliers when the second-level supplier’s product is, in some cases, more important.”
It turns out that the vast majority of the Fortune 1000 was sourcing supplies from the sprawling capital of China’s Hubei province. More than 200 of the Fortune Global 500 firms had a presence directly in Wuhan, according to Deloitte. In addition, 163 of the Fortune 1000 have tier-one suppliers in the area, and 938 have one or more tier-two suppliers there, according to Dun & Bradstreet. But many companies didn’t realize the extent of their dependence. Even organizations that had worked hard to diversify their suppliers more broadly to southeast Asia didn’t know that those suppliers were China-dependent, according to Kilpatrick.
“Risk is hidden in unexpected places,” Simchi-Levi agrees. Major automotive manufacturers were taken down because low-cost components were suddenly unavailable, Simchi-Levi says. If they had data on those suppliers and appropriate analytics to understand their importance, he argues, they would have seen that those were their most risky suppliers. Indeed, a resiliency analysis done at a large automotive company revealed that the highest-risk supplier was a company producing sensors that cost about 10 cents, according to Simchi-Levi.
To create more visibility beyond tier-one suppliers, companies will accelerate their efforts to digitize more data about their supply chains. Kilpatrick points to control towers as one solution to increase visibility, demand sensing, and predictability. Deloitte defines a supply chain control tower as a set of tools and techniques that allows executives to proactively manage their end-to-end supply chains in real time and achieve new efficiencies through connected visibility, proactive exception management, and predictive insights. “It’s important to have the best signals of demand so we can ensure supply chains are synchronized,” Kilpatrick says.
Analysts working in control towers can take real-time information across the entire supply chain (such as demand, capacity orders, inventory, and shipments) and show decision-makers what is happening across the ecosystem. They can also use analytics to explain a trend, predict what might happen next, or suggest what the impact of a disruption (or solution to one) will be.
Organizations that have control towers can react to shifts in demand with greater insight into supply capacity, according to Prakash. “It creates that connection with the larger ecosystem: who are my suppliers, who are my carriers, who are my transportation suppliers, where is my own factory, where are my materials,” Prakash says. “It shows you what the whole ecosystem looks like.” As manufacturers integrate more advanced analytics, artificial intelligence, and automation into their control towers, they will be able to create even greater visibility, intelligence, and agility.
3. Suppliers won’t be so far from customers.
Relocating some sources of supply closer to customers or creating more redundancy by diversifying suppliers within a geography is another strategy to increase resiliency.
This may lead to a global/local strategy where an organization may source in China for the Chinese market and in other locations for North America or Europe. “There will still be a global supply chain, but much more will be done locally,” says Simchi-Levi.
The main benefit of having local suppliers is that they may be more reliable, responsive, and visible. Not only is it more feasible to develop one-on-one relationships with – and even regularly visit – local suppliers, but the tools available for collaborating are less complex. It also reduces overall risk. Companies can simulate shorter supply chains and identify where the risks of an extended global supply chain can be mitigated through increasing localization. “Companies will need to balance the two,” says Simchi-Levi.
One trend that may work in favor of shifting to local suppliers is that the labor cost advantage that companies used to find by sourcing from countries such as China has eroded. “In some cases, shifting supplier bases isn’t going to add a significant amount of cost because labor arbitrage benefits have dissipated over time,” says Kilpatrick.
Nearly half (47%) of chief procurement officers (CPOs) said they are planning to expand their overall supply base in response to the supply-side vulnerabilities exposed by COVID-19, according to Deloitte’s 2020 CPO Flash Survey. Of those seeking to expand, 31% ranked refining geographic supplier base as the number one approach followed by 24% who ranked shifting to nearshore or regional suppliers as their main tactic. These findings suggest that a majority of organizations is seeking to increase their supplier numbers, potentially to reduce overreliance, while looking to locate suppliers in closer proximity to their operations – an effort to reduce pandemic- and global trade-related risk and ensure continuity of supply, Kilpatrick says.
More than half of the 341 manufacturing and retail customers surveyed by logistics provider Toll Group said they have had problems with their production and distribution activities and have been forced to consider alternate arrangements as they plan their operations post-COVID-19. A quarter are now planning to transition some of their operations out of China in the next three years. But be careful, Simchi-Levi says. “Just moving manufacturing closer to market demand does not ensure resiliency. That’s why organizations should stress test their supply chains.”
Companies may also segment their supply chains with some products geared toward cost and efficiency and others toward resiliency, says Woods. “Some companies will find that they can source product from other lower-cost geographies, such as Mexico,” he explains. Or companies might choose regional suppliers that cost more but make that up through reduced logistics costs, and, he adds, “provide a risk mitigation against a disruption like we’ve seen with the pandemic.”
Companies serving the U.S. market, for example, could decide to shift the production of bicycles and games, which are huge exports from China now facing months-long lead times, to Mexico or South America. Mobile phones and devices, likewise, could be made in Mexico, yielding a higher labor cost for production but lower logistic costs and greater supply chain diversification. Foxconn, the $178 billion Taiwanese electronics maker, is considering building a new factory in Mexico to make the iPhone. (The company already has five factories there that are mainly making televisions and servers). As companies shift their productions to new locations, they may also see demand grow in the new countries or regions of production, Woods adds.
Could we soon be growing more strawberries for American consumers in warm U.S. climates instead of shipping them from South America in December? It’s possible. “I don’t think there will be a total shift,” says Woods, but he expects “a migration.”
New Strategy for Navigating Uncertainty
Global disruptions demand that we look beyond what's worked in the past.
4. Data about the past will not be relied on to predict the future.
Chief among the practices that need rethinking is the use of historical data to drive decision-making. “In a steady state, what you did yesterday is important,” says IBM’s Wright. “In a volatile environment, what you did yesterday is next to useless. In times of volatility or uncertainty, you need continuous intelligent planning – planning every week or even every day and not just based on yesterday.”
Demand-driven forecasting can enable companies to manage their supply chains in real time. Companies in the fast-moving consumer goods category, for example, are combining their historical data models with real-time demand sensing to improve forecast accuracy, says Wright, who is working with a number of clients in this area.
In the retail and consumer packaged goods (CPG) industries, it’s critical to accurately forecast short-term buyer demand – a couple of months or even a week out – to ensure that products are available to consumers when they need them most. Companies can combine customer mobility information, shopper sentiment, point-of-sale data, and current orders along with historical data to use machine learning to create more frequent and accurate demand forecasts.
Consider how quickly and profoundly consumers’ snack-buying patterns changed this year. Leaders at Mondelēz International – which owns the Oreo, Triscuit, and Cadbury brands, among others – realized they would need to figure out how to manage their workforce and materials in a more agile fashion to deliver the cookies, crackers, and chocolate that were disappearing more rapidly from supermarket shelves.
Orkun Ozturk, who heads the demand and supply planning team for Mondelēz in Europe, says in an August 2020 Webinar, “Going into the crisis, we thought all bets were off. There was no good historical data and no clear path forward.” Company leaders concluded that market intelligence from “eyes and ears on the ground” would be more valuable than the usual forecasting models.
It turned out that feeding real-time data into the existing statistical models provided the best of both worlds by eliminating historical biases that were baked into them. “It’s very important to have real-time data and use it quickly,” Ozturk says. “The last thing you want is to get it late or get it wrong.” Using machine learning to analyze point-of-sale data, syndicated epidemiological data, social media, and local economic and mobility information to predict changing demand patterns can enable companies to better anticipate quick shifts in demand. Today it’s the pandemic, but tomorrow it could be another sudden event.
By using such integrated capabilities along with machine learning, businesses can analyze real-time supply and demand to perform better scenario planning and optimize their supply chains on the fly. “The cost of these technologies is decreasing dramatically, making it easier to leverage intelligent automation,” Kilpatrick says. Wright has been working with companies to create intelligent workflows for demand sensing that are self-learning and self-correcting. With automation, organizations can collect and analyze in real time to provide the hyper-localized visibility necessary to expand or contract manufacturing and distribution as needed.
5. Distribution won’t be focused on the pallet-load.
The pandemic has pushed consumers to explore a wide range of new channels and methods of engagement that industry watchers say will likely persist long after the pandemic is over. There has been a huge surge in online shopping and curbside pickup, for example. In the United States, consumers spent $211.5 billion during the second quarter on e-commerce, up 31.8% over the previous quarter, according to the U.S. Census Bureau.
That has created urgency around building e-commerce and digital marketplace capabilities and creating direct-to-consumer (D2C) channels and fulfillment capabilities, according to a 2020 Accenture report. CPG companies (particularly those with larger average basket and greater purchase frequency) will find the D2C business economically viable. “Categories like pet care and non-OTC consumer health offer abundant opportunities,” McKinsey & Company says in a recent report. “For other categories, D2C propositions may still be worthwhile to acquire proprietary consumer data and create a test-and-learn opportunity.”
GoPro, noting that its “global distribution network had been negatively impacted by COVID-19,” announced that it would transition to what it says is a more efficient and profitable D2C business in 2020. Its direct business already was generating more than 20% of revenue in top European markets and nearly 20% in the United States, and it was growing more in early 2020. The company had already moved its U.S.-bound product manufacturing to Guadalajara, Mexico, in mid-2019, although production for non-U.S. orders remains in southern China.
Or consider what happened when lockdowns in the northeastern United States shuttered restaurants in March 2020. Baldor Specialty Foods, a large wholesale importer and distributor of fresh produce and specialty foods to restaurants and food-service companies, made its inventory available for at-home delivery to the 18.5 million people living within a 50-mile radius of its Bronx, New York, headquarters.
The company launched its first-ever e-commerce site. Over the succeeding months, Baldor has leveraged the combined power of its truck fleet, drivers, food-processing facilities, and large network of farms and specialty-food vendors to serve household shoppers throughout the Northeast and mid-Atlantic states.
Bedford Industries, meanwhile, had no near-term plans to embrace online commerce and certainly no D2C dreams before COVID-19. As the demand for PPE skyrocketed and supplies became short, the 55-year-old plastic fabrication manufacturer pivoted from producing plastic-coated twist ties and food labels to producing face shields. The company produced a prototype in 24 hours and an e-commerce site in a week – and quickly expanded from B2B sales to B2C.
A time for supply chains to shine
The pandemic has pushed some companies to the brink, and many are still struggling to survive. Demand for some products, like retail gasoline or office furniture, may be depressed for a while. Many businesses will be focused on understanding, then mitigating, supply and demand shifts, as well as figuring out how to return employees to safe and productive working conditions.
– Jonathan Wright, global leader and vice president of supply chain consulting, IBM Global Business Services
Those who persevere will shift from defense to offense, says Kilpatrick. “The investments they make in this crisis will be what sets them up for the future. As business restarts and supply chains resynchronize, there will be the biggest opportunities to emerge from this stronger.”
Companies that approach this challenge proactively will create a firmer foundation to effectively compete in the still uncertain months and years ahead.
“Boards and CEOs finally recognize how important supply chain is,” says Wright. Companies can “create the supply chain of the future whilst also meeting the important day-to-day challenges.”
It will be a tough time, but the opportunity is huge. The time is now for supply chain transformation.
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