As governments and health care agencies work to stop the spread of Covid-19 and to treat those who are infected, manufacturers in more than a dozen industries are struggling to manage the epidemic’s growing impact on their supply chains. Unfortunately, many are facing a supply crisis that stems from weaknesses in their sourcing strategies that could have been corrected years ago.
Just how extensive the crisis is can be seen in data released by Resilinc, a supply-chain-mapping and risk-monitoring company, which shows the number of sites of industries located in the quarantined areas of China, South Korea, and Italy, and the number of items sourced from the quarantined regions of China.
Learning Painful Lessons … Again
After the March 2011 earthquake and tsunami in Fukushima, Japan, many multinationals learned painful lessons about the hidden weaknesses in their supply chains — weaknesses that resulted in loss of revenue, and in some cases, market cap. While most companies could quickly assess the impacts that Fukushima had on their direct suppliers, they were blindsided by the impacts on second- and third-tier suppliers in the affected region.
Almost nine years later, it seems the lessons of Fukushima must be learned anew as many companies worldwide scramble to identify which of their “invisible” lower-tier suppliers — those with whom they don’t directly deal — are based in the affected regions of China.
Many companies are probably also regretting their reliance on a single company for items they directly purchase. Supply-chain managers know the risks of single sourcing, but they do it anyway in order to secure their supply or meet a cost target. Often, they have limited options to choose from, and increasingly those options are only in China.
Commodities Sourced from Quarantined Areas of China
| U.S. and European companies | |
| Life sciences, health care, pharmaceutical, and medical devices industries | High tech, semiconductor, and consumer electronics industries |
| Commodity (total) | Commodity (total) |
| Packaging: 64Active ingredients: 13Optical components: 10Personal protection: 8Battery components: 5Medical dispensers: 2Sterilized dressing pads: 2Cables: 1 | Resistors: 590Capacitors: 199Thermal: 60Printed circuit board assemblies: 53Plastics and resins: 50Integrated circuits: 44Sheet metal: 32Audio devices: 30Memory: 25Hardware: 20Battery components: 22Cables: 16Electrical components: 10Crystals and oscillators: 7Switches: 4Paints: 3 |
| Note: As of March 2, 2020 | |
| Source: Resilinc | © HBR.org |
In many cases, the roots of this current supply-chain crisis stem from decisions made far upstream — for example, sourcing a common plastic resin that is vital to several industries from one supplier or one region. Such decisions cascade down through supply chains, even impacting companies who themselves don’t directly source materials or products from China but whose suppliers do.
Risk management principles should be applied, at a minimum, to tiers 1 and 2 in company supply chains. Beyond tier 2, the risks should at least be understood.
In some cases, it will not be possible to find multiple sources for certain parts or materials. For example, a supplier may possess unique intellectual property; sometimes volumes aren’t sufficient to justify two sources; or multiple sources are simply not available. In these cases, companies need to supplement their traditional sourcing practices with new sources of data and new approaches to understand and mitigate the risks they take on.
Monitoring and Mapping
At a bare minimum, companies should invest in 24 x 7 monitoring of their global suppliers. New technologies, such as artificial intelligence and natural-language processing, have made extensive supplier monitoring affordable and readily accessible. Just like we wouldn’t drive our car without insurance, we cannot run a globally dispersed supply chain in today’s fast-changing world without being in the know about everyday news that could cause disruptions in the coming days.
Some companies, such as General Motors, have gone beyond that and spent many years extensively mapping their supply chains. Mapping involves engaging suppliers to understand their global sites and subcontractors, as well as knowing which parts originate or pass through those sites. Companies who invest in this type of effort benefit when disruptions happen, because they are able to triangulate within minutes or hours how their supply chain could be impacted in the days, weeks, months to come. When companies have advance knowledge of where the disruption will come from and which products will be impacted, they have lead time to execute avoidance and mitigation strategies immediately — like shaping demand by offering discounts on substitutes, buying up inventory, booking capacity at alternate sites, controlling inventory allocations, and so on.
Of course, there are costs associated with being proactive in this fashion. For example, multiple sourcing requires qualifying suppliers and sites in different countries. But such costs can usually be offset by reducing the share of business allocated to the higher-cost supplier and country. The advantages to being able to rapidly shift production among suppliers, factories, and countries will typically provide ample return on investment to justify these costs. The cost of mapping and monitoring has dropped in the last decade. Today, this investment is easily offset by savings in the form of reduced reliance on inventory, manual processes, and people — and a fast, responsive, and agile supply chain that remains operational, despite all the things that go wrong every few weeks.
In the first few weeks of January 2020, companies that had mapped their supply chain already knew which parts and raw materials were originating in the Wuhan and Hubei areas and, as a result, could bypass the frantic hunt for information and fast-track their responses.
The coronavirus epidemic teaches us — once again — that a robust supplier-monitoring system that maps sub-tier dependencies is a basic requirement for today’s supply chain and sourcing professionals.
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Tom Linton is a senior adviser to Flex, an electronics manufacturer, and Resilinc, a provider of supply-chain-mapping services and risk-monitoring data. He previously served as chief procurement officer of Flex, LG Electronics, Agere Systems, and Freescale Semiconductor.
Bindiya Vakil is CEO and founder of Resilinc, a provider of supply-chain-mapping services and risk-monitoring data. She is a founding member of the Global Supply Chain Resiliency Council and sits on the Advisory Board of the MIT Center for Transportation and Logistics.
Originally posted at Harvard Business Review
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