While the supply chain industry is mature, it has also become tremendously complex with globalization and multiple geographic options for sourcing components, sub-assembly and assembly, and final delivery. A car’s transmission is manufactured in one country, the chassis in another, and the final assembly line somewhere else. Service development and provisioning is similar: a clinical trial for a drug will need coordination between a patient at one location, drugs to be sent from another location, and devices necessary for conducting the trial and recording the data to be sent from somewhere else, may be a distribution center or durable mechanical equipment supplier, who in turn, sources it from somewhere else locally or globally. In other words, there are many-to-many relationships that have to be managed efficiently and effectively for a successful product or service delivery.
Traditional supply chains dependent on a single end-point sole source or sole sourcing at any tier of the supply chain, have always been a business risk, especially, if the source location for US businesses is very distant, such as, China or the Far East. Businesses have mitigated this risk by multiple sourcing redundancies where they source the same component from multiple suppliers. However, if all the suppliers are located in the same region, the redundancy is eliminated due to uncontrollable factors, natural or man-made, such as earthquakes, wars, or disease. For US businesses, the main reason for far flung suppliers is primarily cost and scale. Nobody can provide manufactured goods as cheaply, quickly, and massively, as China. While there are ways businesses can develop resilience and cope with a catastrophe, a breakage in the supply chain due to such events is very disruptive for the business and takes a long time to repair.
The Coronavirus catastrophe is the latest example of the devastating impact of a highly constrained supplier base. The entire world’s technology and other manufactured supply chain has been deeply shaken by the event. Production of Apple’s iphone at the FoxConn factories have stopped; Robert Bosch GmBH, Honda, Toyota, and others have closed factories, and Nike and Starbucks have closed thousands of stores. Global businesses have been severely impacted. The Chinese Lunar holidays were extended and it is unknown when and how the virus will be contained and normalcy restored. How significant is the business, financial and operational, impact on companies and what is the expected magnitude of the global GDP loss due to this event? It is reported that the business impact is likely to be much higher than the SARS event with a global GDP loss predicted to be about -1%.
What can be done to mitigate highly scaled single source production and provisioning risks? Business risk planning is the critical first step. Businesses need to further enhance their risk planning and analysis with uncontrolled factor and constraints considerations. Before supply chain selection, one key consideration must be to simulate and estimate the business impact of such events, with event likelihood and severity and how much would be cost and customer experience differential for such events.
Technology and digital transformation is the next lever. Businesses must innovate and digitally transform their business processes to enable cost competitive localizing at scale. They must use technologies such as 3D for design-to-make flexibly, automate the design-demand planning-order management-manufacturing-replenishment-and distribution streams to enable high-scale local manufacturing. They must work with suppliers to train them and uplift the skill and technology levels to meet the needs. And this must be supported by the public and government policies as well. Since it has taken about 30 years for China to become the world’s supplier, it will take about that to reverse to multi-sourcing or in-sourcing.
However, in-sourcing may not always be problem free. For example, if a business were to in-source 100% and a natural calamity like an earthquake, hit the source area, the impact would be the same as with Coronavirus now. So it critical, even for in-sourcing, to consider a risk based approach to supply chain location and selection at various tiers for components, assemblies, and materials. This is quite complex but with today’s technology and data processing, eminently doable. Businesses must enhance safe-guarding supply chains and plan for single source supply disruptions globally.