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How To Build Resilient Supply Chains
European School of Management and Technology
– Berlin
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Dec 7, 2021, 03:44am EST
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By Catalina Stefanescu-Cuntze, ESMT Berlin
Leaders in supply chain management have a wide scope of tasks and responsibilities. The
minutiae of daily operations, logistics, and the performance evaluation of diverse and
dispersed suppliers must be managed alongside implementing visionary strategies that
address trends, threats, and opportunities in fast-paced and complex marketplaces. Until
the disruption of the COVID pandemic, supply chains appeared to generally run at peak
efficiency. Globally dispersed suppliers provided B2B and B2C consumers with goods
across all industries and at speed.
Aerial view of fully loaded container ship GETTY
Efficiency has been a cornerstone concept for industry for decades. But it was the very
structure of the efficiency-driven industry model that contributed to supply chain failures
under the pandemic, during which COVID restrictions were merely one of several critical
factors. Geopolitics, Brexit-related regulatory restrictions, the Suez Canal obstruction,
Hurricane Ida and energy shortages – these crises crippled supply and created huge
barriers to meeting demand.
Tomorrow’s leaders must better prepare for such contingencies. But how can they
identify the causes of supply chain fragility and mitigate its effects?
Causes and effects of supply chain fragility
What manufacturers and service providers across industries learned about supply chains
during the pandemic is that supplies are often too far, in too few places, and with too little
inventory to meet unpredictable and highly variable demand.
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Too far. Sourcing supplies in far-flung locales has been a go-to solution for
manufacturers looking to lower their costs. But this requires long transportation chains
and thus increased exposure to adverse events. When the container ship Ever Given
blocked the Suez Canal for nearly a week in March, the resulting traffic jam affected
approximately 12% of global trade at a cost estimated at nearly $10 billion each day.
Shipping rates also skyrocketed – costs that were partly passed on to customers used to
lower prices on faster deliveries.
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Too few. Focusing on a single geographic region or country for supplies has further
helped some manufacturers to drive down costs, due to economies of scale and increased
specialization. But, as diverse manufacturers learned, this can mean exposure to specific
vulnerabilities in supply, while alternatives are largely absent. For instance,
semiconductor production in Taiwan and South Korea makes up 70% of the chip
manufacturing market, a fact that – under COVID restrictions in Asia – meant shortages
for automobile and electronics manufacturers relying on chips.
Too little. The just-in-time model pioneered by Toyota in the 1970s has long dominated
manufacturing. The financial advantages of having less standing inventory – meeting
only the needs of the next operation – are considerable. But as the pandemic showed, just
one major adverse event meant there was little inventory to tap into to absorb the shock.
And the shocks reverberated further throughout the supply chains creating a bullwhip
effect.
Stressed worker sits in container box at shipyard GETTY
Building resilient supply chains
Manufacturing executives can mitigate the effects of the efficiency paradigms in order to
make supply chains resilient in the face of critical threats. Three top solutions are:
Reshore production. Instead of offshoring, relocate production closer to home. Ford
recently did this – launching a new battery development center in southeast Michigan to
meet growing demand for electric vehicles without increasing reliance on overseas
suppliers.
Diversify suppliers. More inventory in still too few places will not be enough to
mitigate the risks of significant disruptions. Manufacturing executives must diversify the
suppliers they draw on to hedge global supply chain risk.
Increase inventory. Alongside just-in-time supply chains, consider what experts are
calling just-in-case solutions. This requires building inventories at critical points of the
supply chain so that they weather the storms of diverse crises.
While these strategies come at significant cost, supply chain fragility must be addressed
in order to meet demand and restore consumer confidence. We must acknowledge that
the earlier gains in efficiency undermine resilience. Sustainable business futures need
both efficiency and resilience, as well as visionary leaders ready to learn and apply the
lessons on the value of resilience.
European School of Management and Technology – Berlin
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