Three Lessons on Supply Chain Risk Management from the Pandemic

The events from the past two years highlighted the vulnerabilities of global supply chains. They also mark a shift toward a climate dominated by volatility and risk.

As disruption transitions from isolated episodes to the status quo, it’s essential that firms transform the hard-learned lessons from the pandemic into more adaptable business models and improved supply chain risk management approaches.

The good news is that the crisis is already catalyzing innovation and long-overdue change. The pandemic’s stress test has generated an unprecedented appetite for change—from the C-suite to the halls of government. But turning short-term fixes into systemic change will require firms to reimagine their supply chains for a global landscape that, for now, promises to be reliably unreliable.

Evolving just-in-time

For the past three decades, lean manufacturing methods—where inventories are kept low and supplier contracts short and flexible—have helped manufacturers reduce costs and maximize efficiency. Automakers, in particular, favored this approach and perfected it into hyper-efficient, multinational supply chains. Unfortunately, once the pandemic hit, they crashed head-first into the vulnerabilities of a process that sacrificed reliability for efficiency.

Following the relaxation of lockdown measures and vaccinations, automakers found themselves scrambling to meet an unexpected spike in demand for new cars in the face of component shortages. While semiconductors are currently experiencing the most acute shortages, disruptions in the supply chains of materials such as steel, resin, and glass mean that many other parts are not making it to assembly stations on time.

Now, automakers such as Toyota—which pioneered the ‘just-in-time’ approach—are learning the value of ‘just-in-case’ and stocking up on critical components. There is a growing consensus that just-in-time needs to evolve into a more resilient concept that balances flexibility with sound supply chain risk management.

Breaking up with single sourcing

Before the pandemic, many supply chains relied on narrow supplier bases for commodity goods. Suppliers leveraged cheap labor and economies of scale to produce more for less and passed on the savings to firms. But, while single-sourcing optimizes for costs when things are running smoothly, it undermines flexibility to respond when they’re not.

The onset of the pandemic brought manufacturers of active pharmaceutical ingredients and personal protective equipment (PPE) face-to-face with the perils of single sourcing. Supply chains for these products are highly reliant on single sources in Asia. As lockdowns led to factory closures throughout the continent and China banned mask exports, countries in Europe and the Americas faced PPE and medicine shortages.

But, while images of healthcare workers repurposing trash bags as PPE drove many to call for reshoring the production of these items, that alone will not solve the problem. Narrow supply chains can create problems anywhere. Take the case of ethylene and propylene—two critical components in everything from cars and furniture to heart valves. Nearly 70% of America’s production of these resins is concentrated in Texas’ petrochemical hubs. Last year, closures and disruptions in that region prompted by back-to-back, record-breaking storms caused resin prices to jump and further strain already battered supply chains.

Reliable supply chains are diverse—not only in the number of suppliers they include but on the locations of those suppliers. Moving toward multiple flexible sourcing arrangements where orders are divided among various suppliers can help lessen the blow of disruptions—and provide firms with trustworthy alternatives that can step in whenever a supplier in their network runs into trouble.

Keeping it local

Part of the problem with just-in-time approaches and single sourcing is pairing these with long, multinational supply chains adds another layer of risk to operations. Long supply chains extending to countries with low labor costs made financial sense when things were running smoothly and transportation costs—especially for ocean freight—were at record lows. But the pandemic’s disruptions and skyrocketing transportation prices have dampened offshore sourcing and production benefits for many firms.

American automakers were some of the first companies to announce that they were taking steps to shorten their supply chains in the pandemic’s aftermath. In some cases, this has involved exchanging overseas production in China, where renewed geopolitical tensions have started making firms uneasy, to countries such as Mexico that are closer, friendlier, and still offer savings on labor costs. In the case of more complex and critical components—such as batteries and chips—some are opting to fully reshore production to the United States.

In a world where shutdowns, delays, crowded ports, labor shortages, surging prices, and worsening geopolitical tensions are becoming mainstays, long supply chains have transitioned from cost-saving machines to costly liabilities for many firms. Managing disruptions effectively is much more complicated when products and components are half a world away from where they’re needed. While balancing shorter supply chains with remaining profitable may be difficult for many firms, those whose competitive edge rests on securing supplies will benefit from rethinking their approach.

Building resiliency through visibility

A more robust supply chain starts with improved visibility. Providing decision-makers with the real-time metrics and tools to forecast and respond to disruptions is the key to effective supply chain risk management.

CTSI-Global’s Honeybee TMS™ allows shippers full visibility of their supply chains to make better decisions, no matter the situation. Contact us and get the tools you need to transform your supply chain.