Our current supply chain concept is failing: why change has got to come in 2020

So called “Supply chain fails” happen regularly. It’s not uncommon for different businesses to experience them due to a problem with one element of the supply chain, for example a delayed delivery. One of the most memorable recent supply chain fails would have to be KFC in the UK’s situation in 2018: a fried chicken chain ran out of chicken. While from a PR standpoint KFC managed to make the disruption work, this “supply chain fail” led to an estimated loss of £1 million per day – a cost that many businesses can’t afford.

However, when there is a problem for an individual business, the cause can be easily identified and then one of two things will happen. Either a solution can be sought, or nothing will happen as the problem was a one-off and unpreventable e.g. a delivery delay due to a traffic jam.

 Yet, when the whole concept of the supply chain is failing, that’s a whole bigger problem.

Why is our current concept of supply chains “failing”?

The coronavirus pandemic has disrupted, delayed and just been a nuisance to the supply chains and supply chain professionals since the beginning of January. While COVID-19 has caused many problems for people across the world, it has highlighted just how fragile our supply chains are and there are two main reasons why.

China 

The first of the two main reasons for the fragility and subsequent failure of our supply chains is the reliance on sourcing products and materials from China.  To understand why this makes supply chains uniquely fragile, you have to understand how quickly China has become a major economic player. In 2001, China joined the World Trade Organization (WTO) and by 2010, it had surpassed the U.S. as an industrial powerhouse. During the SARS epidemic of 2002 and 2003, the most recent pandemic which the coronavirus can be compared to, China only represented 4.31 percent of worldwide GDP. In 2020, it is estimated that this is now 16 percent.

The role in which China plays varies depending on the industry. For example, the consumer electronics industry is heavily dependent on China and the U.S. automotive industry sources 15% of its components from China.

This is extremely significant. It highlights that even if the coronavirus has not been a pandemic and was purely an epidemic in China, it would have caused widespread disruption for global supply chains.

Just-in-time supply chain

The principle that underpins just-in-time supply chains is that production should be ‘pulled through’ rather than ‘pushed through’. This means that production should be for specific customer orders. In this way the production cycle starts only after a customer has placed an order with the producer. Stocks are delivered when they are needed rather than a lot of inventory being held.

While there is huge benefits, particularly cost advantages, to implementing a just-in-time supply chain, the coronavirus reiterates the fundamental flaw of just-in-time in a crisis. The problem is that firms operating with a just-in-time concept don’t hold significant levels of inventory. When their manufacturing hubs shut down, those firms do not have enough parts in order to fulfil the orders they already have booked. As a result, many factories will have to close down for a significant period of time as they were unable to source parts.

How must the supply chain change?

The coronavirus pandemic has highlighted many different ways in which our lives will need to change as we go back to the new normal. Here are two suggestions how supply chains could change.

A move towards Glocalization

Many modern supply chains are predominantly global. For this reason, it would be extremely impulsive to try reducing this global presence.  The change, which supply chains should make, is not necessarily the end of globalisation. Globalisation has brought numerous advantages to the supply chain. These include the possibility to easily access technical knowledge, learning from countries that lead the way in automation and digitalisation. However, a move towards glocalization could be the key to reduce the fragility of the supply chain.

Glocalization is the idea of thinking global but acting local. It’s not really a new thing. Multinational companies have always been compelled to adapt their production to local requests. For example, automotive manufacturers have to diversify their offer based on specific regulations, with the most obvious example being which side the steering wheel is on and whether the speedometer is in miles or kilometres per hour. 

Supply chains acting in a more “glocalized” way may also reduce their dependence on one particular country. This could be achieved by having the supply chain based in a particular region e.g. South America or Southeast Asia rather than based in an individual country. In this way if one country shuts down, it doesn’t shut down the whole supply chain.

Introduce a Stress Test

The Harvard Business Review is suggesting a supply chain stress test should be introduced similar to the bank stress test which was implemented after the financial crisis in 2008. The approach would have 2 central elements: time to recover (TTR) and time to survive (TTS). TTR is the time it would take after a disruption for a particular element of the supply chain, for example a supplier facility, a distribution centre, or a transportation hub to be restored to its original capacity and performance. TTS is the maximum duration after a facility disruption in which the supply chain can provide the supplies to meet the demand.

The stress test quantifies each measure under different scenarios. This way a business can identify its ability to recover from a disaster. For example, if the TTR for a given facility is greater than the TTS, the supply chain will not be able to provide enough supply to meet demand unless a backup plan exists. By using this approach companies would be provided with a way to financially quantify the cost of disruptions and prepare mitigation plans for the most critical parts of the supply chain. It may also change how the just-in-time supply chain operates with each business holding inventory in line with these tests.

Final Thoughts

The coronavirus pandemic will leave many take-aways but there is one thing which is already clear: In order for our supply chains to prevent this mass spread disruption from happening again, things must change.

Header Image: Eoneren – Getty Images