Supply chain pivots can support organization resiliency

Over the past few years, manufacturers of all types have faced disruptions in their supply chains related to tariffs, trade agreements, natural disasters and now a pandemic. With supply chain turmoil becoming more frequent in volume and more significant in impact, manufacturing and distribution companies have to become increasingly nimble and knowledgeable about their supply chains, not just to thrive and grow – but often, to survive.

The pandemic was initially so disruptive to supply chains in large part because the global economy shut down so quickly that most companies did not have time to lock in alternate sources for key supplies. The pandemic was disruptive to supply chains for a variety of reasons – dependency on China, the shutdown of ports, the just-in-time philosophy for supply management – but largely because many companies had little insight into how interlocked the different tiers of their supply chain are.

Prior to the pandemic, however, manufacturers were already looking for alternatives to China for key supplies, primarily due to tariffs. According to the U.S. Census Bureau, from 2018 to 2019, imports of manufactured goods from China declined by about $90 billion, a 17% drop. U.S. manufacturing imports from Mexico increased by $13 billion.

There is certainly a maturity spectrum for supply chain disruption preparedness. Regardless of where your organization is on the maturity spectrum, organization leaders should be prepared to consider provocative strategies for their suppliers, their management and work forces, and their data systems, and they should be prepared to act.

Supply chain yoga – inject flexibility

When supplies and trade with China shut down at the onset of the pandemic, supply chains – which traditionally have difficulty pivoting – proved they could shift more dramatically than anticipated. That being said, this was mainly true for manufacturers that had already started their pivot away from China because of tariffs and trade wars.

For example, a manufacturer of machined metal parts for the U.S. market sourced most of their supply from China. Their business had been hurt by tariffs, but when the pandemic started it accelerated their search for suppliers in India, Vietnam, Eastern Europe and Mexico to provide them not only with redundancy in the near term, but also potentially an alternative source in the long term.

Prior to the pandemic, many companies were attempting this search for alternate suppliers on their own, but they struggled due to language barriers, cultural barriers and lack of contacts in different countries. They also were proceeding in this search in a somewhat casual way, until the pandemic severely disrupted supply chains. An alternative approach is for companies to seek assistance from firms with experience in quickly breaking down these barriers and with the right connections to help find alternatives for key suppliers.

Companies have to seriously consider what their supply chain of the future is going to look like, and have the organizational structure in place to pivot as necessary regardless of disruption.

Questions to consider:

• If the pandemic constrained access to a key China or Asia-based supply, were you able to pivot your business in the last several months?
• Have you accelerated a redesign and created alternative supply chains to propel growth during these times?
• Have you been able to plan for and create new strategies to deal with ever-changing issues within your supply chain?
• Tariffs, trade wars and the pandemic all led to supply chain disruptions. With disruption common, is your company prepared to handle it?

To onshore or not onshore – consider the question and find the answer specific to your company

Organizations should deconstruct operations, which may lead to entertaining reshoring, or moving the supply chain away from Asia and closer to the U.S. While reshoring is not for everyone, a 2020 study from Foley & Lardner noted that 70% of manufacturing executives agree that because of the pandemic, companies will reduce their focus on sourcing from the lowest-cost supplier in favor of higher supply chain resiliency.

Organizations first have to do the work to truly understand all the tiers of their supply chain, as well as the key data for their business. The challenge is that not every company has the ability to get the data they need from their own systems to make sense of the truth, nor do they have a good process through which they can look at supplier options and make a thoughtful assessment of what they should do.

In general, key supplies are freight-, capital- or labor-intensive. Freight-intensive products are usually heavy and expensive to export, and usually produced close to where they are consumed. For example, the costs of reshoring a car frame that could be built inexpensively in China and shipped to the U.S. would be prohibitive, just looking at the cost of freight alone. These types of products are generally already made in the Americas, so there is no business to “shift.”

Capital-intensive products use high-precision machine operations and automation, with a small amount of manual labor. Examples would be manufacturing a car’s drive train and steering system. Many of these types of products have been made in low-wage countries for many years, but interest is skyrocketing in reshoring or near-shoring these operations. Why? Because serious supply chain disruption makes the decision to rely on a supplier in a low-wage country suddenly look like an expensive decision. It therefore makes sense to consider reshoring or near-shoring manufacturing of these types of products, even when moving this manufacturing may be difficult and expensive in the short term from an operations perspective.

Labor-intensive industries include agriculture, mining, hospitality and food service production. Automation investments to replace human labor in these industries often do not make business sense. Many of these types of products are still made in China or other Asian countries. As the price of labor increases in these countries, however, the appeal of moving production closer to the U.S. increases – assuming a business can find a capable operator for a site and the right equipment, and find, hire and train the right people from local populations.

Ultimately, a company will launch a facility in the place where it can get the greatest benefit and the lowest risk of supply chain disruption.

As part of their reshoring research, organizers likely will also re-evaluate just-in-time (JIT) inventory policies and hold more supplies closer to their main offices or plants. The Foley & Lardner study noted that 62% of manufacturing executives said they will decrease their focus on JIT manufacturing models.

Questions to consider:

• Has the global pandemic accelerated a desire for your organization to create alternative supply chains and supply bases?
  - If so, how have you acted upon such need – such as evaluating the business case for near-shoring, or executing analytics to better understand how (and when) to take action?
  - If not, what specific measures are you taking to insulate your supply chain from its current footprint structure?
• Have you been able to establish alternative locations closer to home?
• How do geopolitical considerations factor into your reshoring strategy, and which response to specific outcome scenarios gives you the greatest supply chain resilience?

Revitalization of product, market and client mix

Supply chain disruption gives organizations an opportunity to think about new sources of revenue, which could be through new product development, partnering with other businesses or moving into new markets.

The pandemic has created an environment where products or services can come together in ways that organizations would not have contemplated prior to the pandemic. A “contact-free” economy, with an increase in e-commerce, telemedicine, online education, and automation throughout the organization will create opportunities for new delivery models and new ways for organizations to meet customer demands.

Questions to consider:

• Has your organization embraced business model reinvention?
• As part of your enterprise strategy, have you identified new product development partnerships?
• Have you identified new markets to penetrate with new or existing product mixes?
• Does your overall product strategy need to shift to accommodate for supply chain shifts?
• What have your competitors done to change focus?
• What strategic partnerships are possible in your area?

X-ray vision meets truth serum – increased visibility and transparency

A more transparent supply chain can help organizations move from being merely responsive to understanding, anticipating and becoming fully proactive. Part of this is just understanding the important data a business needs to operate. Sometimes the data doesn’t exist in a useable format, but often the data is hidden and siloed within different divisions of a company, in programs that are not easily assimilated with each other.

Visibility is not just about data, however. It’s also about organizational culture. The manner in which an organization behaves – with one another in the organization or with the market – sets the course for organizational development that outshines industry peers. Vulnerability and psychological safety among organization members plays a major role in breaking down silos and making it easier for team members to act quickly in a time of crisis, like the pandemic.

Questions to consider:

• How well do you know the tiers of your supply chain beyond the first tier?
• Do you have access to real-time data that creates supply chain visibility, spend and sourcing analysis, and logistics support to create necessary insights?
• Is your organizational culture one of brutal (but kind) honesty and transparency, where team members – irrespective of seniority or experience – raise issues, discuss solutions and address challenges openly?
• How does your organization’s technology strategy tie into your overall enterprise strategy? For example, has there been a movement from on-premise data storage to cloud storage?

Decentralize and empower

While many companies may prefer to execute many organizational functions – accounting, technology, human resources, marketing – in house, times of rapid, significant disruption expose the perils of vertically integrating non-core operational activities. Organizations need to focus on core things that, as a business, they need to keep in-house because if they don’t, the business doesn't move forward.

When it comes to staying on top of the supply chain, training and retraining your global trade management people might not make sense if they can't stay current enough with the pace of change. Strategic supply chain decisions may be better managed with help from external specialists. Top supply chain operators recognize this and demonstrate world-class performance in ways that best benefit the business.

Questions to consider:

• Have you assessed organizational/team capability considering the pace of external change and knowledge requirements and made choices about re-skilling, new hires or outsourcing functions to support organizational success?
• Have you comprehensively evaluated all your organizational processes and systems?
• Have you examined shared services which can support rapid recovery capabilities to help you operate smoothly and equip decentralized teams to respond well in a crisis?

Put the unknowns to work

Great organization leaders never let a good crisis go to waste. Leaders will discover team qualities they otherwise would not know if it were not for a crisis. Some teams form a sense of unity and defy the odds and do something spectacular for the business. How can executive leaders leverage the perfect storm of supply chain disruptions during periods of increased trade tensions and business disruption due to a pandemic? 

For example, in 2006, Ford Motor Company pledged its famous Ford blue logo along with its headquarters, factories and other assets to qualify for $23.5 billion in loans so it would not have to get a bailout loan from the federal government. Ford’s business stabilized and grew, and in 2012, it was able to “buy” its assets back. Collateralizing assets is outside-the-box thinking that can manifest if an organization has the right culture where risky ideas can be freely discussed.

Questions to consider:

• Does your organization have the right culture for creative team engagement during times of crisis or ambiguity?
• Have you maximized the impact of dynamic strategic planning in clarifying organizational priorities and unearthing untapped capabilities? 
• Do you know how to leverage the impact of uncertainty to supercharge team performance and unlock unknown organizational abilities?
• Do you have a culture of “psychological safety” so key team members can safely offer ideas during a pandemic or other uncertain time?
• Do you have adequate cash flow or access to debt or other financing to ride out disruption until normalcy or a pivot happens?

The impact of the pandemic likely will continue well into 2021. Organizations that leverage their visibility and insight into their supply chains will accelerate the transition to more responsive business operations. Decentralizing and empowering decision-making will help an organization become more proactive and make decisions that will enable a more streamlined and resilient manufacturing and distribution process.

Baker Tilly’s supply chain professionals are equipped to help your business, for more information on this topic or to learn how we can help, contact our team.