What COVID-19 has taught us about supply chain risks and how companies need to rethink their approach

​The pandemic has not only taken a personal toll on nearly everyone in the world, it has also rocked global economies to its core causing financial strain across industries, including healthcare, retail and automotive, among other sectors. In addition to the huge strains on our lives and the economy, COVID-19 also brought unprecedented disruption to today’s modern global supply chains, exposing pre-existing risks and weak links. Outside of COVID -19, other major events in the past have shed light on the nature of the risks supply chains face. Those events range from large natural disasters to national crises such as 9/11. Despite this, most organizations continue to be reactive to threats instead of being proactive.

In today’s supply chains, there is a heavy dependence on China across industry verticals, which has created a single-source risk for companies. Specific industry examples of this include, China’s dominance in consumer electronics manufacturing, the 21.4 million motor vehicles that were produced in China in 2019 and the approximately 80% of active pharmaceutical ingredient supply that comes from China and India.

Due to the size of the country and its position as a global manufacturing hub, China remains a dominant single-source for several critical components. For many organizations, the goal of cost reduction and margin expansion has driven their supply chains towards China as well as other lower cost sources. Current events are exposing these weak links in supply chains – especially in essential sectors such as food and healthcare - forcing governments to rethink their position in regulating supply chains.

Global Supply Chains Will Always Exist

While shortening supply chains can potentially reduce geo-temporal risks to an extent, there are still valid reasons why supply chains will remain global for the foreseeable future. For example, a smartphone has about 70 different elements within it, including cobalt, gold, copper, nickel, and rare earths. The variety of products that are in demand gives an edge to countries with vast geographies and access to natural resources. In addition to material availability, manufacturing capacity and access to skilled labor also tend to deter companies to regionalize their supply chains. With a collective consumer base of 2.75 billion people in China and India, mass relocation to local supply chains remains nearly impossible for global companies.

In cases where Western companies and industries initiated moves away from China, they tend to gravitate to countries such as Vietnam, India, Bangladesh, and Thailand, as opposed to nearshoring. An example of this is while U.S. imports of apparel are still dominated by China, Vietnam is rising as a strong alternate source for the US. From 2010 – 2019 Vietnam’s share of apparel imports to the U.S. by country jumped eight percent, and they now hold 16% of the imports.

Mitigating Supply Chain Risk

Complete regionalization of supply chains remains impractical. What business leaders can do to mitigate risks in their supply chain is by first acknowledging that managing supply chains can no longer solely be about the cost to service trade-off model, instead risk will need to be included as a third, and important factor. Leaders will need to review the current design of their value chain to gain a better understanding of known risks that can be mitigated. Consideration should extend beyond their immediate suppliers and into suppliers across multiple tiers. Additionally, optionality including secondary and tertiary alternates, need to be built into supply chains to combat risk because having multiple sources of supply, manufacturing centers, distribution points, and modes of transportation in reaching the market will ensure that business is continual and will not be disrupted as easily.

Implementing optionality would require significant cross-functional collaboration between various business functions. Business leaders will need to drive change by breaking the silos that exist in many organizations to foster such cross-functional efforts. Organizations will need to be thoughtful and deliberate in identifying potential options and prioritize them. This calls for making the necessary investments in building the supply chain capability, exactly at a time when organizations will be increasingly pressured to reduce costs.

Leaders will need to think through how to adapt and evolve to a new digital decisioning paradigm that integrates strategies, tactics, and operations. Rather than starting from scratch and erasing decades of investments, leaders will need to utilize emerging technologies combined with legacy investments to enable a digital twin of their supply chain to simulate future disruptive events and ensure robustness.

Rethinking the Supply Chain to Evolve

It’ll behoove organizations to pay attention to the shifts the pandemic has created and not view it as a fleeting crisis, so they can evolve their business. The retail industry is a good example of this. Typically, retailers go bankrupt because they built decades of multi-tiered supply chain competence in catering to the brick-and-mortar store format. However, as COVID-19 began to spread rapidly and governments forced stay-at-home-regulations, consumers shifted to online shopping, accelerating trends in e-commerce. In the U.S. alone, the online sales of food grew by 69.5% year-over-year from 2019 for a comparable period, followed by 57.5% for household care items.

This quick boost in e-commerce resulted in many retailers and distributors trying to play catch up. A major need today for retailers and distributors is the conscious design of the supply chain accounting for last-mile delivery and associated costs, as they need to accelerate their omnichannel models.

Every crisis presents an opportunity to advance. The pandemic has shown organizations that leaders need to embrace nimble approaches, analyze historical data and patterns and implement advanced analytics to stay competitive. It is no longer acceptable to use the rules and policies that drive supply chain decision making today including the “set once and forget” strategy for their models. Leaders need to take these lessons learned in the pandemic to evolve their strategies to be more agile and adaptable in future times of uncertainty.

Getting external assistance can kick-start building competency in dynamically aligning supply chain design to enable the business strategy. However, leaders cannot use outsourcing as a way to get out of the problem entirely. A better solution is that organizations need to build and exercise their muscle for the design of supply chains and the policies that guide them right from the start, so they can remain relevant and be far more dynamic than before.

Editor’s note: Dr. Madhav Durbha is the group vice president of Industry Strategy at LLamasoft, where his team helps customers solve various supply chain challenges. Prior to his role at LLamasoft, Dr. Durbha held positions at Kinaxis, JDA Software and i2 Technologies, Inc. With more than 20 years in the supply chain industry, Dr. Durbha has broad experience in strategy and process consulting, supply chain software, program management, software application development and deployment, machine learning and data science. Dr. Durbha received his Ph.D. in chemical engineering from the University of Florida and his bachelor’s degree in chemical engineering from the Indian Institute of Technology at Madras.