In the past decades in supply chain management, the increased globalization of business has created a supply chain that has become both intensely interdependent and interconnected. But, disruptive events like the Coronavirus disease (COVID-19) pandemic are different. A global crisis at this scale must prompt more than just reflection over what’s working and what’s not. Companies must act deliberately in response to the problems and weaknesses revealed by this once-in-a-lifetime event and change the status quo approach for managing supply chain continuity.
The business of identifying and obtaining the most cost-efficient parts is not done in isolation, but bundled into processes which consider risk tolerance, decision speed, and as we see today, even concerns for threats to human life. As the COVID-19 pandemic makes its assault on the world, we learn not just how different companies and industries respond, but also how regions and governments do as well.
Effective supply chain management works to balance risk with cost, optimally through leverage of an intelligence platform to help drive actionable decisions. Strategically elastic, proactive and responsive supply chains are by nature agnostic to the impetus of their disruption. Earthquake, tariff, fire, or pandemic – it doesn't matter because supply chains that are built to be risk tolerant will remain true to form and react appropriately.
Here are some action items for supply chain partners looking to maintain stability and improve operations amidst today’s challenging markets.
1. Diversify geographically
For years, sourcing teams have scouted diverse geographies for new suppliers around the world while also relying on domestic suppliers in the United States with the objective of balancing cost, risk and technological capability. Some companies intentionally have supplier overlap across and within geographies on most, if not all commodities. For instance, there are sheet metal suppliers in North America, Europe, and Asia. There are metal machining, injection molding, cable manufacturing and PCBA manufacturing in all regions. Where it becomes riskier is single-sourced suppliers in advanced technologies, where the answer to managing risk is positioning inventory in multiple regions.
Take for example, this disruption—the Japan Tsunami. On March 11, 2011, a magnitude-9 earthquake shook northeastern Japan, unleashing a savage tsunami. It remains the costliest natural disaster in history. It revealed an important lesson for supply chain managers. Even though some companies had been strategic, stocking products in anticipation of sudden and potentially disruptive demand, their preparation was undone simply by having too many technologies coming from single-source suppliers or from within the same geography. A single event removed both nodes of the supply chain – resulting in no manufacturing or inventory to rebuild that capability. Pivot to COVID-19. As challenging as things have been, they could have been much worse. Even with entire regions and nodes of capability being shut down, companies transferring backend demand between countries and regions have succeeded keeping parts moving. If you consider ventilator parts as a case for analysis, the companies entering 2020 with globally structured supply chains had shorter recovery time, produced more ventilators, and most importantly, they saved lives.
2. Avoid end-of-life disruption
Over just a few decades, there has been a steady and accelerating ramp of digital technology into all aspects of our lives--how we work and play, communicate and participate in society. We are in the midst of the “digitalization of everything,” which means no industry is immune to the hyper-fast evolutions of the technologies added into our products. It's not just fancy new phones, but cars, home appliances, toilets and toothbrushes. In other words, industries that traditionally have had longer, more static product life cycles, now need to keep pace with the speed of technology.
Managing product lifecycles in this environment requires even more vigilance—not just for what lies ahead but also behind. What legacy components are in your product that are about to go end of life (EOL)? The divergence is particularly noticeable in healthcare, particularly during the current global crisis. First, no matter where in the world a part or material is produced, if it has gone EOL, your supply chain is now critically exposed. Whether it’s a new technology like continuous glucose monitoring for diabetes patients or other technologies built from EOL components that won’t be able to be sourced, poor planning might prevent or delay the production of critical lifesaving products. Our goal in this environment is to guide our partners and help them build a plan for technologies throughout the supply chain and product lifecycle.
Using the balance sheet to cover EOL component risk is short sighted, particularly with products that are well into ten years of use. Technology moves as fast in healthcare as with less vital consumer products. The risk of being hostage to penny parts isn’t simply disruptive to sales; it could prevent a life from being saved. Far too often, it is the EOL “last-time buy” that falls short of demand with little to no activity taken in the design effort to solve the problem. There are products today that could be part of the answer to the COVID-19 outbreak but they depend on parts that went EOL as much as five years ago. Cases like this reveal what should have been a known issue included in a product roadmap. Addressing technology misalignment in product lifecycles is an opportunity to eliminate unexpected disruption. It may be more complicated financially, but there are better supply chain solutions than the last time buy. On the other hand, if you are using today’s technology, chances are that means you have a way to buy it, now.
Take for example, the disruption of old technology. Companies need to plan for and continually update product roadmaps throughout a product’s lifecycle or risk massive exposure. Simply hoping to have enough supply of old technology to last until the product is EOL is a risky gambit. As we expedite fast-turn digital parts today, the old technology components rise to the top very fast. They require significant effort to solve, and much of this effort could have been avoided by identifying and addressing the problem much earlier in the roadmap.
These thoughts around technology have been a huge focus for the healthcare industry. In the diabetes market, for instance, there’s been a disruptive capability of technology with Continuous Glucose Monitoring (CGM) displacing Blood Glucose Monitoring (BGM). And, now we’re seeing it with ventilators. The parts for “old technology” solutions – parts that may not have been produced for more than a decade – eventually become part of a complex supply chain or are simply unavailable to buy – leading to production delays, leading to loss of sales. What’s been revealed by the COVID-19 crisis is that there’s a consequence to being behind the beat with product lifecycle management, one measured in lives, not sales.
3. Balance risk vs. return
Thinking outside the box is crucial in the current environment. What motivates me to think differently about the supply chain is not just my customers, but also my customers’ customers. In the healthcare business, the term ‘patient safety’ is thrown around liberally—and with good intentions—much like the term ‘risk management’ in supply chain. To truly reduce exposure requires financial investment and thoughtful forecasting, yet this is often where it falls apart. Partnerships exist where the expectation is that we all drive exposure to the lowest common denominator, but that often creates multiple exposed nodes with a large misalignment between risk and return. Suppliers with lower profits may lower the risk to themselves but end up increasing risk for the rest of the supply chain. The impact could be in how they position inventories, both in raw and finished goods. For supply chains to work well, partnerships must be aligned along with the financials. Any good supply chain manager realizes that leverage and partnerships are critical to limited risk and exposure.
Take for example, the disruption of return on investment and inventory exposure. If an industry makes 10% gross profit and has customers that make 40% or 50% gross profit, carrying 60 days of inventory will cost roughly 3% of profit in carry costs. Who should bear that cost? It is a simple answer theoretically. If the chewing gum at the counter makes 50% gross margin, then I never want to run out of gum. That is, if I am the gum guy. If I am the paper wrapper guy, maybe I don’t care as much – and yet, my materials can just as equally affect the operation of the supply chain. All of these factors need to be considered in the product roadmap.
Conventional wisdom might dictate balancing spend across different geographies and countries, but this can sometimes create more complexity. A common initial reaction will be to move products and supply chains into the consuming region. Having complete supply chains in the consuming regions will create duplicate supply chains that can be exercised to sell components or products to different regions of the world. That’s why we have significant overlap across critical commodities in all regions. Where we do not, such as with high-end semiconductors, we would require safety stock to be put into play. That has a cost. The question of who bears responsibility for that cost is related to the financial return for all members of the supply chain and whether it is balanced to the risk they are carrying.
4. Conduct data-driven risk analysis
The best antidote to risk is knowledge. With the complexity of a technology dependent, global supply chain, it is critical to work from data and statistical modeling to better understand the volatility of demand and the potential risk for both suppliers and unforeseen events. Your supply chain experts must analyze the probability of failure of each “node” to decide the following:
● What abnormal situations might occur?
● How many single points of failure exist in the supply chain?
● How long will it take to recover, or to launch a different node?
● What investment in inventory is needed, at what product state, and where it should exist geographically?
● What is the product lifecycle plan, and what time should be considered in the solution?
In reality, fluctuation in normal demand is an old science and is often deployed today. Adding a bit of actuarial science related to risk in supply still requires human intelligence and the more data, the better. It requires understanding a number of factors about your supply base, supplier leverage, and where you fit in their customer hierarchy:
● How important is the industry to the supplier?
● How important are you to the supplier?
● Does it require hard tooling or soft tooling?
● Is this product a regulated device?
● Where are the components in lifecycle?
● Where are the parts and components manufactured, stored?
Thorough analysis is the best recipe for defining how much financial investment is made—and by whom.
During the pandemic, the early symptoms of the geographic complexity were felt in single-sourced lower technology components with high labor content. Things like machined metal, sheet metal, and cable assemblies that are often manufactured in China and ship to the rest of the world began to stop the global economy. This was followed by some higher technology components including semiconductors, frequency devices and power supply as the Philippines, Malaysia, and Indonesia – countries often chosen for backend processes and assembly – began to shut down factories. Next to hit was Europe and some semiconductor fabrication, then Mexico and the U.S.
The point is that supply chains for high-tech products, healthcare, automotive, consumer products, food – all of these rarely have their content dependent on one factory let alone one geography. A semiconductor could go through three geographies before being completed, as could a simple capacitor. You rarely can say, ‘I’m okay because I know I buy that part from Japan.’ Maybe the end product is from Japan, but probably not all the components and processes going into that end product. As an example, there were many Japanese-owned crystal suppliers that grow the crystal in Japan but assemble the product in Malaysia. Japan may be fine, but Malaysia may be shut down—with COVID-19, we found situations like that to be common.
The value of speed cannot be understated and simply is the most important element in any supply chain decision. Whether COVID-19 created massive opportunity to grow your business and save lives, or put you in a defensive mode, speed will determine your success. (Assuming your data is reliable!)
A product’s unique value is not due to a single unique or esoteric component, but the unique value of all the components combined – the more readily available, the better. Having a dress or tie that no one else has is fashionable but having a frequency on an oscillator that no one else has or uses can land you in a ditch. Your technology road map should be one that’s well-traveled, not out in the sticks subjected to unexpected hazards. Alternatives are more readily available when you can tap the excess of what’s current rather hunting for something that’s not there.
For instance, the disruption of global visibility. Dependency on dated EOL technology has been quite common for a substantial number of ventilator products experiencing big upticks in demand due to COVID-19. Being first – getting requirements loaded and out to the market before others seek the same – allows you to get those very limited EOL technology resources. Our network of suppliers and broad customer set enabled us to pre-alert suppliers of all the components that we buy from them that are directly impacting the fight against COVID-19. This was done even before we loaded and communicated the huge upsides in demand.
5. Emphasize collaboration
Cultures and capabilities are different between manufacturers and suppliers. Access to different levels of information and the ability to use that information to optimize the product should be shared and leveraged by all parties across the supply chain – or at least by the major players with most at risk. Partners should be honest, not allow each other to fail, and force each other take actions that lower the overall exposure of the total supply chain. It’s an interdependent relationship so the expectation should not be that you tell your suppliers what to do and they do it.
Manufacturing solutions providers need to intercede early. Investigate and challenge customers’ decisions on supply chain and technology from the start of product development. A manufacturer’s hard-earned experience with supply chain disruptions across multiple industries can benefit companies who are, rightly, more expert in their product domain.
To succeed within the electronics manufacturing services (EMS) industry, you must be wired to create and accelerate change. This requirement creates behavior not resistant to change but stimulated by it. Add a culture and structure built to be closely integrated with our customers and it creates risk-free collaboration. Understanding and intimacy with a customer directs efficient use of resources.
For instance, the disruption of lack of collaboration. The model struggles when the relationship is not collaborative. In fact, some of the biggest and most stressful issues arising during the response to the COVID-19 epidemic have resulted from unilateral decisions made without regard or input on how the supply chain would respond. Saving lives is always paramount making it even more vital that all parties' data are considered to ensure that expectations stay tethered to capabilities. In the end, no matter the original urgently made commitments, the actual number of ventilators delivered hinges on a series of connected interrelating dynamics, working together to fulfill original intentions.
A new era
What the COVID-19 pandemic has revealed about supply chain dynamics is not that different from what it has revealed about human community and vulnerability. We are not separate entities, but are closely interrelated with the behavior of one having an impact on many. After the pandemic has passed, I hope that most companies will review their own response and take action to address risks and inefficiencies that rose to the surface. For those of us steeped in the global supply chain, we know that this pandemic is just one type of disruption in a universe full of potential disruption – both natural and man-made. Something will happen again that throws a wrench into the supply chain globally, regionally, or maybe just for a single component of your product line. There are more data points available and more to consider in the future. It is not just customer and supplier, nor technology and complexity. Product domains, overlapping nodes, regulating bodies, as well as the impact and response of governments are things to be considered.
