Post-Pandemic Impermanence Actions!

Post-pandemic

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Post-pandemic article and permission to publish here provided by Joe Carson, CEO of Spend Strategies, LLC.

Several months into the COVID-19 pandemic the talk of a settled “new normal” gives us hope for stability and a return to what was before. But for whatever sense of past normalcy we aspire to this experience equally conjures up our sense of impermanence – or that our lives are constantly in a state of flux to which we must sense and adapt.

For supply chain professionals, supply chains and our underlying assumptions will certainly need to adapt. In many critical supply areas, such as biopharma, the now famous PPE, and high technology medical devices, not just calls, but screams for re-examining supply lines and explicitly, our reliance on China.

This reliance began decades before for reasons that made sense then, but those assumptions and rationale have come into question now. The topic is high on the agenda of supply chain professionals as they plot the course forward.

With calls to shorten our supply lines and to become less reliant on China, comes tough questions. Supply Chains do not move easily, and transitions are not inexpensive. Factories, labor forces, and technical expertise do not pack easily in an envelope. Also, China will not sit still and let all their years of investment in supply chain infrastructure go to waste. They will find a way to resist this move and hold on to their relevance. With all these pieces in motion, the way forward will be complex and convoluted.

We are beginning to hear news of China factories coming back online and production is resuming. Likewise, as local businesses slowly find ways to open and we begin to emerge from our quarantines, the lure of normalcy will numb our memories. The default will be to leave things status quo, including supply chains. But between new proposed legislation, public sentiment and tariffs, responsible supply chain leaders will have to consider if and how they will want to alter their supply lines.

Not so fast…

The move from China, even if to other more reliable-in-a-crisis countries like India, Mexico or Singapore, will come at considerable cost. Not only might new factories need to be established, but equipment will have to either be moved out of China or new equipment bought at the new location. Additionally, expertise at the new location will have to be built over time.

Most, but not all companies, have ensured that their manufacturing know-how and secret sauce have remained inside their American engineering teams, but some may have had to relinquish control and exposure to those important day-to-day production details. Loss of manufacturing know-how is a loss of leverage.

Moves back to the U.S. has advantages but also obstacles. For sure, relocation back to U.S. would prove more reliable in the cases where foreign governments are uncooperative in times of crisis. Additionally, we would enjoy the mitigation of what now seem like more mundane risks – port labor strikes, international air travel limitations, typhons, etc. But labor costs are still considerably higher in the U.S. than in other parts of the world.

Just last year, some States voted for a $15/hour minimum wage to begin over the next few years. Although China has recently upped is hourly wage rate, Chinese workers are a comparative bargain at less than $3.50 / hour. For some areas, factory automation could be leveraged to replace line worker costs. States with lower minimum wage levels could be chosen.

More skilled American jobs would run the automation equipment and oversee operations. Tax incentives, whether for capital equipment or labor cost differences could certainly decrease the gap, and those incentives will be at least partially returned to their States through increase tax receipts for those higher end jobs.

In the end, companies will undertake a detailed Landed Cost Analysis – a comparison of the cost at the point of entrance into the U.S., or where the product “lands”,  whether made in the U.S. originally or made elsewhere and then shipped into the U.S. in transit to American customers.

China’s impermanence

Chinese policy-making will also affect the calculus of exiting. As they manage the supply and demand equation of their own labor markets, they are able to lower labor costs as low as they need to in order to offset domestic U.S. automation advantages. Decades of government investments in hard assets such as land, buildings, and technology, will certainly drive decision-making to keep their labor costs as low as necessary. Communist countries have that ability.

Post-pandemic

As relationships with the U.S. become more strained, Chinese leaders may be even less willing to accommodate American’s concern for the living wage of the Chinese worker. We recall the Conflict Mineral legislation that discouraged the use of child labor in nine countries in Africa. Consumers could likewise insist upon more transparency of the living conditions and treatment of the workforce in China.

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It remains to be seen if consumers are willing to reward China with their spending dollars, irrespective of the impact of global commerce on the Chinese worker.

Regionalization and complexity

China is more than a point of manufacture; they are also a large global consumer. Companies that sell to the immense Chinese market will be reluctant to pull all their manufacturing out of the Region. Regionalized models, where production is decentralized and parsed out to a few strategic locations including back to the U.S., is a partial answer.

This strategy will play a role but is also not a panacea. Moving an entire factory once and in its entirety is difficult. That difficulty is compounded when supply chains are operated from different locations. Multiple regional locations increase the complexity when planning global purchases or the delivery of those materials to each of the new various nodes.

In the world of supply chain operations, complexity equals costs. So, in totality, newly formed regional models will have their advantages of being able to hedge supply chain bets over different parts of the globe but will also have limitations in their higher cost profiles than centralization.

The Supply Chain Agenda

As barbershops and small businesses look to open, we will begin to think about how we both get back to work AND keep ourselves and loved ones safe. Will we hope that the past few months were only a nightmare or will we see this entire scenario as a warning sign of a need for more assured self-reliance. Our natural desire for consistency will make it quite easy to pick right up where we left off.

China’s factories will be in full swing. Goods will be back on the shelves. Complacency will be alluring. What residual message will this COVID experience leave on us and what choices will we make as a result?

For supply chain leaders, we must plot how the impermanence of the past will foretell a new sense of purpose for the future.

What items are on our agenda?

Here are six.

1.      Supply base mapping

Most supply chains spread their expenditures over the fewest amount of their largest “strategic suppliers”. However, the smaller suppliers as well as the many sub-tier suppliers that feed the sub-component material to those strategic suppliers could be a vast number of companies and plant locations, numbering in the thousands.

Most risk management specialist will tell you that managing even the top 90% of suppliers by expenditures is an outmoded strategy. Rather, companies need to know, definitively, suppliers’ names and exact locations for the factories that manufacture 100% of components that go into their highest revenue-generating products. Even the smallest screw or inexpensive label could shut down production and irreparably harm revenue to the business. 

Map and continuously monitor 100% of the suppliers’ manufacturing locations for the top revenue-generating products.

2.      Risk monitoring and governance

During this age of impermanence much will be happening within your extended supply base. Companies around the world are suffering and adjusting their businesses in ways that cannot be easily tracked manually. Supply management teams should be on the ready to receive notices, triage event impacts on the business, and rapidly engage supplier managers to investigate causes and cures. 

Leverage available event-sensing technology and have in place a disciplined, cross-functional supply chain risk management governance structure.

3.      Supplier Management

Supplier managers and their work product – supply base sourcing strategies and cost-reduction initiatives – will have to constantly be on the lookout for events driving their suppliers’ businesses and pricing. Whether through the earlier-mentioned risk monitoring, or through their normal business reviews, supply managers should expect uncertainty in their supply base. Suppliers will be suffering.

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Some will go out of business, be bought out or experience inventory rebalancing. Component prices could experience sudden spot price decreases and fire sales. Some will be adjusting their manufacturing strategy and points of production. Supply Managers must have established communications protocols with their suppliers to ensure no end-of-quarter surprises. 

Sourcing strategies should be reviewed more frequently and be on the lookout for chess board changes and price dislocations.

4.      Manufacturing

Between tariffs and COVID, companies will be looking into moving parts of our supply chain from Asia back to the U.S. These moves will take some time but need to be contemplated in current plans. If a major semiconductor outsourcer moves to the U.S., as was announced recently, their supplier base will also adjust.

New economies of scale will emerge as entire supplier ecospheres will change. More and more companies may seek to move at least a portion of their manufacturing back to the U.S. or even near shore more of it in Latin America. Landed Cost Analyses will take constant iterations as underlying assumptions will change over time, and as suppliers and competitors make their own choices. 

Dedicate a team member to challenge assumptions and be in touch with the latest Landed Cost assumptions and math.

5.      Environmental, Sustainability and Governance (ESG)

Before Coronavirus, companies were increasingly interested in better metrics and descriptions of supply base’s actual delivered social character, and sustainability program. These efforts have added an extra dimension as country of origin questions emerge as a salient buying criterion. Companies that do not abandon the ESG efforts and that add risk and country of origin interests into their sales proposition, will be heroes with their customers. 

Develop an integrated Risk and ESG metric base and integrate into sourcing strategies.

6.      Integration with Sales & Marketing

Clearly supply chain decisions are becoming inextricably linked to the products with which they support. If reliable sourcing is an issue for customers, Sales and Marketing teams will be the first to hear it. How your company manages its supply chain will join product specifications, quality, and price as features of interest to your customers.

The unknown is how it will affect your customers buying decisions. Will customers actually pay more for Made in America, or for a well-managed supply base risk program, or highly ethical ESG performance?

Supply Chain leaders invited to customer presentations should be prepared with a professional description of efforts to manage ESG, Risk and continuity of supply, and drive for outcomes that are perceived as competitive differentiators.

Post-pandemic Impermanence

The Spanish-born American philosopher, George Santayana, is often mis-quoted. “Those who do not read history are doomed to repeat it.” As such, the quote seems like an innocuous reminder of the importance of reading history books. His actual quote is a bit more compelling and infinitely more relevant. “Those who cannot remember the past are condemned to repeat it.”

Post-pandemic, we can take it one step further. Those who cannot remember the sting of supply shortage, the fear of allowing foreign governments to control our destiny, and the loss of economic stability, are condemning all of us to what maybe something worse than a repeat pandemic performance.

Our hopes are that as consumers, we insist that those lifesaving products and medicines which we require to fight deadly disease are available by local and reliable means. And, that our business leaders support a re-think of our supply lines and resiliency model to build an infrastructure around these local and reliable means of supply.

Literally, our very lives may be dependent upon our collective COVID-19 memories and our resolve not to repeat them.

Originally published on Supply Chain Game Changer on May 27, 2020.

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