The rapid reorientation of supply chains
In a year of big shocks, those that have been able to adapt have been those best placed to weather the storm
In an age of lean supply chains and highly-specialised production, a sudden disruption can mean disaster. Against this background of fragility, the immediate shock of the COVID-19 pandemic has been the strongest and deepest experienced in the post-war environment. Demand across a wide suite of products cratered as economic activity was curtailed by lockdowns. Factory doors were shuttered in key production areas, first in one of China’s industrial heartlands, and then in an increasing number of locations around the world. Transport links that ran like clockwork suddenly melted away, most notably air freight, and products were stranded in overstretched ports.
The depth and breadth of these issues required creativity and adaptability to make the most out of the situation. From switching production lines to new products, reconfiguring inventory, and searching for new modes of transportation, those that were able to see past those scary numbers and look for the best approach to reconfiguring their supply chains have been those moving out of survival mode and looking forward to a return to strong business results in the last quarter of 2020.
The big issue sitting at the heart of supply chains
The competitive pressures but relative stability of the post-Cold War era, combined with globalisation on a massive scale, pushed manufacturing and supply chains to focus on profitability above all else.
You can develop an effective, integrated supply chain, but the more effective it is and the more the more profit orientated, [then] the more extra-network risk that sits beyond it outside your control
“What has tended to happen is companies are focusing on price reduction and optimisation of the supply chain,” says Professor John Bryson, Chair in Enterprise and Economic Geography at Birmingham University’s Department of Strategy and International Business. “So, the primary focus is driving enhanced profitability by minimising expenditure without focusing on risk…. Now, one of the things that's happened is the nature of risk has changed because we've had a convergence of a whole series of technical systems and a whole series of other systems that's partly linked to globalisation and partly produces globalisation. The world is becoming more interconnected, and as we're getting more interconnections and more convergence, that's producing what I've labelled in my one of our most recent papers as ‘extra-network risk’.
“This means you can develop an effective, integrated supply chain, but the more effective it is and the more the more profit orientated, [then] the more extra-network risk that sits beyond it outside your control. When that extra network risk impacts [your supply chain], in this case COVID-19 occurs, you have a major supply chain outage.”
Even though we were moving out of China and you're producing in other countries, we learnt very quickly that many of the materials that we were using were still coming from China: The leather; the shoelaces; the yarns; the fabrics; the zippers; the buttons; raw materials [were all] still coming from China
Nate Herman, SVP Supply Chain of the American Apparel & Footwear Association, who was speaking at the Reuters Retail Supply Chain USA 2020 summit, found this occurred across his networks almost as soon as the pandemic began in China. “We had the supply chain shock that started at the beginning of this year. Even though we were moving out of China and you're producing in other countries, we learnt very quickly that many of the materials that we were using were still coming from China: The leather; the shoelaces; the yarns; the fabrics; the zippers; the buttons; raw materials [were all] still coming from China. So even though we are producing in other countries, we still had to shut down production because we couldn't get the materials.”
Whilst interconnectedness and large-scale sourcing from nations with competitive advantages in their relative labour costs was advantageous in more stable times, that suddenly became a major issue in the midst of the pandemic.
What's going wrong with supply chains is companies failing to learn and failing to learn at the right time
This stretched across nearly all industries, not just apparel, as everyone from high-tech electronics manufacturers and heavy machinery makers down to the meatpacking industry found that their mix of low-cost sourcing and highly centralised production facilities could be left completely vulnerable in the event of a major incident.
“What's going wrong with supply chains is companies failing to learn and failing to learn at the right time,” comments Bryson. “Supply chain adjustments should have occurred from around 2003 with the disruptions that occurred related to SARS, and a whole series of other potential other disruptions that occurred over the last 20 years, and there's been very limited response to significant disruptions within supply chains.”
“So what have we learned from this crisis?” asks Herman. “The first lesson that we have learned is that we should get out of China,” reflecting a major acceleration in attitudes present before this crisis as companies awoke to the vulnerabilities as a result of the US-China trade war.
The second lesson we learned is that we don't put all of our eggs in one basket
“The second lesson we learned is that we don't put all of our eggs in one basket. Our industry already made that mistake with China,” notes Herman. However, the garment industry, along with many others is finding that relocating comes with its own complexities and challenges. “The issue is many companies have decided okay, we'll move all of our production, or much of our production, out of China and put in another country, and now we're seeing the potential downsides of that. India has experienced in shutdowns across many states in the country because of Coronavirus,” illustrating that there isn’t a silver bullet to this crisis.
What may be more important he says “Is that the industry needs to be nimble,” especially as “people are buying differently.… They're not buying things they used to buy. They're not buying business clothes or business shoes, dress shoes, they're buying casual, comfortable, and we're also seeing a dramatic rise in e-commerce,” requiring shifts in product lines and more responsiveness to demand shifts.
Being closer to the client, being closer to the market and staying closer to market demand cuts out some of the costs within your supply chain, but it also cuts down some of the risks within that supply chain
Bryson agrees that companies are “going to have to be more agile and more flexible,” especially as there is an increasing recognition of the “value related to speed and proximity. Being closer to the client, being closer to the market and staying closer to market demand cuts out some of the costs within your supply chain, but it also cuts down some of the risks within that supply chain.
This is causing “A tendency now towards value chain integration, which is about bringing that dispersed value chain back into something that looks a lot more integrated and a lot more localized.”
Herman’s sentiment on nimbleness of production has also been seen in a range of industries, where companies have moved into related or adjacent businesses, producing new goods from existing production capacity. This has stretched from perfume production lines making alcohol gel, to car companies building ventilators, to textile manufacturers switching from industrial fabrics to making PPE.
While these kind of efforts did not result in major, long-term sustainable revenue streams, and are by no means an attempt to shift from core businesses in the long term, they represent a way to keep production lines open and to stabilise operations to some degree.
There's a lot of additional issues and complexity that you have to deal with when you expand to raise countries, but this is where we're going. This is the trend
The World Economic Forum suggests a five-point process to evaluating and setting up alternative production lines: “Review existing solutions, define requirements, design product and supply chain, develop product, and ramp up production.” They note that “risk management activities, cross-functional expertise, and single decision-making authority are crucial.”
Herman similarly warns that you need to do the groundwork when looking to diversify and make your supply chain more resilient. “Do you know the country? Do you know the factory? Does your auditor or testing lab operate there so you can ensure product safety and social compliance? Can you pre-certify the factory onboard the factory? What happens if the factory has issues?” He also notes transportation can be a key headache as often only small ports serve newer destinations supply chains are targeting “so you're going have to consolidate in another country…. There's a lot of additional issues and complexity that you have to deal with when you expand to raise countries, but this is where we're going. This is the trend.”
An agile approach to inventory
“Speed, agility and sustainability are our primary focus,” said Liz O'Neill, EVP & President, Product, Innovation and Supply Chain for Levi Strauss & Co at the Retail Supply Chain USA 2020 event. “Because of the trends that are accelerating across the industry, and across the world, frankly, we're also having to accelerate our transformation,” she noted. A large part of this is “Really looking deeply at our planning and inventory management.” This has involved building in AI to help across different phases, including “leveraging AI to give us what we call a ‘Smart Start’ from a forecast perspective,” which has improved accuracy over human-only demand forecasting. “We feel like as we feed it more information, it's just going to get better and better, so we're we are looking at the whole go to market process,” she noted.
Our business did a hard shift to being 100% digital
Alexis DePree, Chief Supply Chain Officer for Nordstrom, also noted at the summit that the COVID crisis had accelerated the need for agility in their inventory management and distribution. “Our business did a hard shift to being 100% digital,” causing them to suddenly reorient their stores to from a point of fulfilling 20% of their daily orders from in-store teams, to then “drive that store fulfilment percentage up over 50%.”
This was “a great capability for us to unlock, but it required a new level of partnership and integration between supply chain inventory management and stores,” meaning upping the levels of “partnership, transparency, [and] unified planning,” including building in their “off-price stores, our rack stores, [which] did not have store fulfilment capabilities coming into this year.”
What that alternative team should be doing is imagining failures
The lesson is to be able to adjust rapidly and have the planning capacity in place to consider the worst and react accordingly.
Bryson emphasises the importance of this planning capacity, as he thinks as a result of the crisis “The first learning mode would be that if you are a company with a set of supply chains, what you should have is have an alternative team that is exploring your supply chains, but one that is not fully linked into the actual management and the operational design and configuration of the design of that supply chain. What that alternative team should be doing is imagining failures,” as “we need more scenario planning to identify disruptions to supply chains to try and work out resilience investments that would need to be made now, rather than during that particular moment of crisis.”
If you want to make supply chains that consider risks and build in resiliency and adaptability, then listen to how experts from Mondelez, DHL, Ryder and Intel are doing just that at Supply Chain USA Virtual next month!