Supply Chain Resilience in the Age of Impermanence

Several months into the pandemic there was talk of a settled “new normal”. We had hoped for stability and a return to what was before. But to whatever sense of normalcy we had aspired, current events make it clear that we are not out of the woods. Severe labor shortages, threats against Taiwan’s sovereignty, inventory imbalances especially in semiconductors, and elements of our previous supply chain that did not survive the pandemic translates to significant interruptions that will not soon go away. This experience should make us keenly aware of our sense of impermanence – or that our lives are constantly in a state of flux to which we must sense and adjust. For supply chain professionals, supply chains and our underlying assumptions will certainly need to evolve. In many critical supply areas, such as biopharma, rare earth components, and high technology medical devices, not just calls, but screams for re-examining supply lines and explicitly, our reliance on China. This dependence began decades before, for reasons that made sense then. But those assumptions and rationale have come into question now. Supply Chain professionals, and specifically those managing sourcing strategy and risk must take action to keep up and remain in control of the ever-changing landscape.

Becoming less reliant on China, brings about 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.

Even as COVID caseloads drop in the US and most of Europe, supply chain woes continue or are getting worse. Port backlogs, fuel costs, and labor issues remind us that restarting an economy back from zero is not easy. Supply chains are most efficient when movement within them is steady. Companies invest heavily in planning tools to optimize momentum and keep things moving. But these latest hurdles only help to illustrate why extending our supply lines, beyond our point of visibility, foretells trouble for on time deliveries. Near-shoring, on-shoring, re-sourcing away from Asia, specifically China is seen, in at least part of the answer.

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. 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. 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 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 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-COVID, 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 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 COVID19 memories and our resolve not to repeat them.

Joe Carson

CEO of Spend Strategies, LLC.

Former Chief Procurement Officer at Lucent Technologies and at Micron Technologies as well as additional roles as a Vice-President Supply Chain Management, Operational Excellence Executive, and Chief Strategy Officer. Joe earned his bachelor’s in electrical engineering at the Georgia Institute of Technology, and his MBA from Duke’s Fuqua School of Business. Joe can be reached at [email protected] or through his LinkedIn profile.

#supplymanagement #strategicsourcing #supplychain #supplychainstandardofcare #tradewar #madeintheusa #riskmanagement #globaltrade