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SUPPLY CHAIN MANAGEMENT Supply chain management: Resilient, robust & futuristic!

Aug 23, 2021

Rajashree Rao, Head of AI Innovation Hub & Partnerships & Ecosystem (APAC) for R2 Data Labs, Rolls Royce - The economic turmoil caused by the COVID-19 pandemic has exposed much vulnerability in supply chains. At the same time, with the pandemic and other disruptions, supply chain leaders have to balance resilience & competence to protect their networks. In the foreseeable future, manufacturers will face pressure to reduce dependencies on risky sourcing and just-in-time replenishment in their home countries. The Cover Story addresses the burning need for rethinking, restructuring and rebalancing the risk & building a resilient supply chain management without sacrificing competitiveness.

The United States-China trade-war and the supply and demand shocks brought on by the COVID-19 crisis have forced manufacturers to reassess their supply chains. In the foreseeable future, the manufacturers will face pressure to increase domestic production, reduce dependencies on risky sourcing, rethink strategies of lean inventories, just-in-time replenishment and grow employment in their home countries, which will impede when material shortages arise. The risk facing any particular industry value chain reflects its level of exposure to different types of shocks and the underlying vulnerabilities of a specific organisation or in the entire value chain.

Global supply chains in a post-pandemic era

In the post-pandemic era, once the COVID-19 virus subsides, the world will look remarkably different. The supply shock that began in China in February 2019 and the demand shock that followed as the global economy shut down, exposed the vulnerabilities in the organisation’s production strategies and supply chains of firms everywhere. In addition, temporary trade restrictions, shortages of critical medical supplies, pharmaceuticals and other products highlighted their weaknesses. Combined with the US-China trade war, these developments have triggered a rise in ‘Economic Nationalism.’ Consequently, the manufacturers globally are under tremendous competitive and political pressure to rethink manufacturing strategies to minimise the inventory held in their global supply chains.

Despite all these challenges, things will not change because consumers will continue to want low prices (especially in a recession). Companies will not charge more because they manufacture in higher-cost home markets. The competition will ensure that. Additionally, the pressure to operate efficiently, use capital and manufacturing capacity frugally will become unrelenting. The organisations will face the challenge to make their supply chain more resilient without weakening their competitiveness. To achieve the challenge, managers first should understand their vulnerabilities and consider taking several steps, some of which should have been taken long before the pandemic hit the world.

Supply chain resilience

Supply chain resilience depends on two complementary factors:

  • Resistance capacity – This refers to the avoidance and containment capabilities of a supply chain system

  • Recovery capacity – This indicates the capability of a supply chain system to return to functionality after the disruption

For achieving resistance and recovery capacity, supply chains need to develop three critical components –

  • Visibility and end-to-end shipment tracking across all touchpoints

  • Velocity with the real-time flow of information

  • Responsiveness to quickly act on the insights provided by the data

Addressing and uncovering the hidden risks

Modern or latest products often incorporate sophisticated materials or critical components that require specialised technological capabilities to develop. It is highly challenging for a single organisation to possess the breadth and depth of the capabilities needed to produce everything in-house. For example, consider the ever-growing electronic components in modern vehicles. Auto manufacturers aren’t equipped to build the touchscreen display in the infotainment and navigation systems or the countless microprocessors that control the steering, engine & functions, such as lighting and power windows. In another arcane, e.g., a group of chemicals known as nucleoside phosphoramidites and the related reagents are used in developing the RNA and DNA sequences, which are essential for companies developing the RNA or DNA based COVID-19 vaccines and DNA-based drug therapies. But many of the critical materials come from China and South Korea.

However, manufacturers in many industries have turned to suppliers and subcontractors who focus on one area alone and these specialists have to rely on many others. This kind of arrangement offers benefits like there is a lot of flexibility in what goes in the product and will incorporate the latest technologies. However, one will be left vulnerable when there is dependency on a single supplier, somewhere deep in the network for a critical material or component. If that supplier manufactures it in only one country or plant, then the disruption risks are even more significant.

Identification of vulnerabilities

Mapping where the organisation’s risks lie could protect itself, which entails going beyond tier 1 & tier 2 and mapping the complete supply chain, including the transportation, logistics and distribution hubs. Even though this is an expensive and time-consuming effort, it will explain why the major organisations have focused their attention only on strategic direct suppliers that account for the large value of their expenditures. However, a disruption like the pandemic surprised and brought the entire business to a halt which has been pricier than a deep look into the organisation’s supply chain.

The goal of the mapping process should be to categorise suppliers as low, medium or high-risk. To do that, experts from the supply chain vertical recommend applying metrics, such as the impact on revenues if a specific source is lost, the time it would take for a particular supplier’s factory to recover from a disruption and the availability of alternate sources. It is vital to ascertain how long the companies will come out of the supply shock without shutting down and how rapidly an incapacitated node could recover or replace alternate sites when an entire industry faces a disruption relating to a shortage.

The answers depend on whether the organisation’s manufacturing capacity is flexible and can be reconfigured and redeployed as needs evolve (as is the case for many manuals or semi-automated assembly operations) or whether it consists of highly specialised and difficult-to-replicate procedures. Examples of the latter include production of the most advanced smartphone chips, which is concentrated in three facilities in Taiwan owned by the Taiwan Semiconductor Manufacturing Company (TSMC); fabrication of exotic sensors & components, which happens mainly in highly specialised facilities in a handful of countries, including Japan, Germany and the United States; and refining of neodymium for the magnets in AirPods and electric vehicle motors, almost all of which is done in China. Therefore, once the risks are identified in the company’s supply chain, they can use that information to address them by either diversifying their sources or stockpiling critical materials or items.

Diversification of supply chain source

The way to address heavy dependence on the medium or high-risk source (a supplier, single risk factory or region) is to add sources at locations not vulnerable to the same risk factors. The USA-China trade war has motivated many organisations to shift to a ‘China plus one’ strategy of spreading the production between Southeast Asian countries, such as Indonesia, Thailand or Vietnam and China. However, the region-wide challenges, like the 1997 Asian Financial Crisis or the 2004 Tsunami, challenge for broader geographic diversification.

The organisations should consider developing a regional strategy of producing a substantial proportion of critical goods within the region where they are consumed. For example, North America could potentially be served by shifting the labour-intensive work to Central America and Mexico from China. To supply Western Europe with the components used there, the firms could increase their reliance on the Eastern European Union countries like Ukraine and Turkey. Chinese companies which want to protect their global market share have already started establishing their footprints into Kenya, Egypt, Ethiopia, Sri Lanka and Myanmar for labour-intensive and low-tech production. Besides, how would an organisation address this sudden shift which is impacting the socio-economic aspects of that region?

Reducing the dependency

Reducing the dependency on China will be easier for some products than others. For example, things like clothing, furniture and household goods will be relatively easy to obtain elsewhere or manufacture in the home country because the basic materials, such as fabrics, plastics, lumber and others can be sourced locally. However, it won’t be easy to find alternative sources for sophisticated electronics, machinery and other products that incorporate components, such as electronic displays, precision castings or high-density interconnect circuit boards.

Let us take the case of global lithium production – the demand for the metal continues to grow, and the worldwide market will be more than double by 2024. Some of the largest lithium mining companies have grown in stature in recent years, as the demand for silvery-white metals grows in tandem with the demand for electric vehicles and consumer electronics whose rechargeable batteries it powers. Besides its use in lithium-ion batteries, the highly flammable and reactive alkali mineral, also referred to as ‘white gold’ – is also used in ceramics, glass, lubricating greases, polymer production and air treatment. According to the US Geological Survey, with eight million tonnes, Chile has the world’s largest known lithium reserves. This puts the South American country ahead of Australia (2.7 million tonnes), Argentina (2 million tonnes) and China (1 million tonnes). With 51,000 tonnes, Australia was by far the most important supplier of Lithium in 2018 – ahead of Chile (16,000 tonnes), China (8000 tonnes) and Argentina (6200 tonnes).

But for China, the Jiangxi Ganfeng Lithium, founded in 2000, is the world’s largest lithium mining company with a market capitalisation of $27.38 billion. It brought in $767.5 million in revenue in 2019. Although headquartered in Xinyu, China, the firm also holds lithium resources in Australia, Argentina and Mexico. Moreover, it claims to be the only company in the industry that has the commercial scale technologies to extract lithium from brine, ore and recycled materials. Besides, the other challenge lies in how does one protect the natural reserves of such a rare metal? According to the Handbook of Lithium and Natural Calcium, “Lithium is a comparatively rare element, although it is found in many rocks and some brines, but always in low concentrations. As a result, there are many lithium mineral and brine deposits, but only a comparatively few of them are of actual or potential commercial value. Many are very small; others are too low in grade.”

Embedding sustainability while developing strategies

Another major environmental challenge is caused by excessive mining of the mineral. The manufacturing processes of lithium, including the solvent and mining waste, present significant environmental and health hazards. Lithium extraction can be fatal to aquatic life due to water pollution. It is known to cause surface water contamination, drinking water contamination, respiratory problems, ecosystem degradation and landscape damage. It also leads to unsustainable water consumption in arid regions (1.9 million litres per tonne of lithium). Massive by-product generation of lithium extraction also presents unsolved problems, such as large amounts of magnesium & lime waste.

In the United States, there is active competition between environmentally catastrophic open-pit mining, mountaintop removal mining and less damaging brine extraction mining to expand domestic lithium mining capacity drastically. Environmental concerns include wildlife habitat degradation, potable water pollution, including arsenic and antimony contamination, unsustainable water table reduction, & massive mining waste, including radioactive uranium by-product & sulfuric acid discharge. Therefore, while the organisations are exploring to diversify their supply chain, they need to consider many factors and embed sustainability in developing their strategy, which will benefit all – the people, organisation, country & society overall.

Safety stock or holding intermediate inventory

In case of unavailability of alternate suppliers, an organisation should determine the additional stock required to hold in the interim, in what form and where along the value chain. Like any other inventories, the safety stock carries the risk of obsolescence and blocks up cash. Therefore, it runs counter to the most popular practice of just-in-time replenishment and lean inventories. However, the savings from these practices have to be measured against all the costs of disruptions, including lost revenues, the higher prices that would have to be paid for materials that suddenly might be in short supply and the effort and time required to secure them.

Adoption of process innovations

With the disruptions in the supply chain caused by the pandemic and other factors, the organisations are relocating parts of their supply chain. Some companies ask their suppliers to move with them or bring some of the production back in-house. Either way, setting up a new production line or transplanting a production line is an opportunity for making significant improvements since it is the right time for any organisation to unfreeze routines and revisit design assumptions underpinning the original process. The one major challenge for organisations with existing production lines is when those assets are fully depreciated, the management might be tempted to retain them rather than invest in the latest, technologically advanced and more competitive equipment & manufacturing units.

However, since the depreciation expense is no longer factored into the cost of production and the marginal cost of boosting production at the plant with idle capacity is lower. For example, a new Chinese factory of a major American high-tech industrial equipment manufacturing organisation, while establishing, started with the designs of its Japanese and US factories and then enhanced them by bringing in the latest equipment & methods of working. The outcome was a streamlined operation that was much more efficient than those in Japan and the USA. When the firm built its following new factories, it repeated the process of adapting the Chinese factory model as a starting point. Another example is that organisations often moved their smaller assembly lines to another part of the same building or to another facility when productivity increased. During every move, the employees redesigned methods to use less labour, space and boost productivity.

Using technology for reducing costs

The advancements in technologies enable organisations to reduce their costs or shift more flexibly among the products they manufacture and render obsolete installed bases of incumbent suppliers or competitors. Moreover, many of such advancements present a huge opportunity to develop factories that are environmentally sustainable.

Some of these could be as follows –

  • Automation: There is a decline in the cost of automation, and the companies have experienced that robots can operate safely & efficiently alongside humans. The pandemic has made automation even more adaptable because social distancing in the factories has become a necessity or the new norm. As a result of such developments, returning to off-shore production to higher-cost countries is becoming more practical. For example, robotic palletizers can reduce the need for labour in preparing products for shipping. They will pay for themselves quickly, likewise the automated optical inspection systems for quality controls.

  • New processing technologies: Adopting advanced chemical manufacturing equipment that consumes less energy and solvents, produces less waste, is not capital-intensive and has lower operational costs. Likewise, the latest compact bioreactors could enable biopharmaceuticals and vaccines to make smaller batch sizes economically.

  • Manufacturing with the continuous flow: This innovation could significantly help boost the supply chain resilience for generic small-molecule drugs by reducing the manufacturer’s dependency on active imported pharmaceutical ingredients. The USA Defence Advanced Research Projects Agency (DARPA) has funded an initiative in this space to develop miniaturised flexible manufacturing platforms & methodologies for producing multiple APIs from shelf-stable precursors when specific medical needs arise.

  • Additive Manufacturing: This manufacturing method, also known as 3D Printing, has enabled a drastic reduction in the number of the processes required to produce the complex metal shapes. It can also reduce the dependence on distant machinery and tools suppliers needed for the injection moulding of plastics. In addition, rapid advances in 3D Printing make it economically viable to produce an ever-expanding array of things in much larger quantities.

Reconsidering supply chain networks

As mentioned above, next-gen technologies promise to upend the traditional strategy of seeking economies of scale by concentrating production in a few extensive facilities in many industries. Instead, they will allow companies to replace large plants that serve global markets with a network of smaller, geographically distributed factories that are more resistant to disruption. Besides, organisations need to revisit the trade-off between capacity flexibility and product variety. During the pandemic, the surge in demand in many product categories made it difficult for manufacturers to shift the supply from one market segment to another or produce one kind of product. For example, in many countries’ grocery markets, the organisations had difficulty adjusting to the plunge in demand from restaurants & cafeterias and increased consumer demand. SKU proliferation and the addition of different kinds of the same product to serve broad market segments were partly responsible. However, the solution lies in organisations reconsidering the pros & cons of manufacturing variations of numerous products.

To summarise, the economic turmoil caused by the pandemic has exposed many vulnerabilities in supply chains and has raised doubts about globalisation. Therefore, organisations globally should use the crisis to reconsider their supply chain networks and take measures to understand their growing vulnerabilities, which will help the companies take action and put preventive measures to improve robustness. Companies have already started to move away from globalisation. This is causing massive disruption and impacting the socio-economic development of these countries. The leaders should adopt a new vision aligning with the post-pandemic era’s realities, one that leverages the capabilities globally and develops resilience and minimises the risks from the future disruptions that are certain to occur.

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  • The organisations will face the challenge to make their supply chain more resilient without weakening their competitiveness

  • Organisations should consider developing a regional strategy of producing a substantial proportion of critical goods within the region where they are consumed

  • Next-gen technologies promise to upend the traditional strategy of seeking economies of scale by concentrating production in a few extensive facilities in many industries

  • Organisations globally should use the crisis to reconsider their supply chain networks and take measures to understand their growing vulnerabilities

  • Rajashree Rao

    Head of AI Innovation Hub & Partnerships & Ecosystem (APAC) for R2 Data Labs

    Rolls Royce

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