Operations Mar 23, 2020
The Coronavirus Has Upended Supply Chains. Here’s How Companies Can Prepare for the Next Disruption.
There are strategies that both large and small companies can implement to make their manufacturing more agile.
The COVID-19 pandemic has tested supply chains like no other event in recent history.
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With entire populations isolating and quarantining, companies are seeing demand spike for certain items and plummet for others, while their access to parts and labor from around the world is being severely disrupted.
“Weather-related supply disruptions have been much more common over the last 20–25 years,” Sunil Chopra says, “but this is the first time I have really seen a supply-disruption risk due to people not being able to go to work.”
On a societal level, this has led to shortages in products such as hand sanitizer and masks. Thankfully, hand sanitizer is simple to produce, allowing other producers, such as perfume manufacturers and distilleries, to step into the breach. Masks present a trickier problem, however, in that they are produced almost exclusively in China. Since other countries are not equipped to quickly ramp up production, shortages will likely continue.
On a company level, individual manufacturers are being hit hard.
So what can these manufacturers—both large and small—do to cope with supply-chain shocks? Chopra, a professor of operations at Kellogg, explains.
Larger Companies Can Build Regional Supply Chains
Over the decades, global companies have concentrated production geographically in order to save money.
Yet even before COVID-19, as Chopra and his coauthors argued in a 2014 article, the marginal benefits for this kind of concentration were diminishing, while the risks were increasing.
“The additional cost of a large company operating plants in different locations is often not more than the cost of having one huge plant,” Chopra says. “You may reach the limit of your economies of scale at half the size, so by running two plants, you don’t give up much in efficiency, but you gain a lot in resiliency.”
In other words, whether you have one plant that can produce a million items a week or two plants making 500,000 items each, in both cases you may be producing so many items that you are already close to achieving whatever economy of scale is possible. But the likelihood of both plants going offline at the same time decreases significantly.
“Think of it like segmentation of the supply chain by region,” Chopra says. “Say you produce face masks. China will usually be a good place to make them. But in March 2020, Vietnam or Mexico might be better.”
Even this is no guarantee of smooth sailing, however. “It’s not that all those locations cannot get disrupted at the same time. They can,” Chopra says. “Coronavirus has come as close as anything to doing that. But what you see is that different countries are going to hit peak disruption at different times.”
Creating regional supply chains is not an argument against outsourcing or globalization, Chopra explains.
“The idea is not that we are building walls, but we are building a system that is not concentrated. This allows us to be agile enough to match the appropriate supply points with the appropriate demand points as the situation continues to evolve.”
— Sunil Chopra
“The idea is not that we are building walls, but we are building a system that is not concentrated,” Chopra says. “This allows us to be agile enough to match the appropriate supply points with the appropriate demand points as the situation continues to evolve.”
A few companies are providing consumer-product manufacturers with that kind of flexibility. But, Chopra cautions, for the most part that agility still requires a lot of planning. The best option for many manufacturers is to maintain an awareness of the precise status of all their production-facility options, then to coordinate their overall network in response to the conditions as they evolve.
“The problem is that this level of awareness may be difficult to achieve for companies that don’t have good visibility into their global network of facilities,” Chopra says.
Smaller Companies Can Lean on Technology
So what can smaller companies do to gird themselves for disruptions? After all, it is much more challenging for a small company to build multiple supply chains or replicate resources while staying competitive.
In the past, smaller manufacturers might have sought to build up inventory to ride out uncertainty. But this strategy has fallen out of favor, as most have determined it to be prohibitively expensive.
Chopra sees the most forward-thinking small companies looking to technology to find the flexibility to weather supply-chain disruptions.
As one group of Italian engineers proved, one of the more promising areas for small companies to adapt to supply uncertainties is 3D printing. When the Italian startup Isinnova learned about a shortage in respirator valves, it was able to reverse-engineer a 3D-printed version of the part and begin printing it—all in a matter of days.
“Right now, companies are going to 3D printing as a backup as their operations are disrupted, but it is actually a good go-to strategy for small players looking to source a few parts,” Chopra says. “So if 3D printing takes off, what these small players will do is design the parts around 3D printing.”
In fact, Chopra is already beginning to see suppliers offer this service to clients and companies take advantage of the technology. And critically, if one 3D-printing supplier gets disrupted, it will be much easier to shift to another, since the service is relatively constant over different suppliers.
Another area where technology is catching up to small companies’ needs is warehousing, which has changed as information systems have made those warehouses more efficient at locating and picking stocked items. Currently, many small manufacturers lean on Amazon’s warehouses to keep stock. But other companies like Flexe are offering short-term warehousing space to serve companies in need of more flexibility in storage than Amazon can provide.
“Companies like Flexe did not exist even five years ago because the technology to be that flexible wasn’t there,” Chopra says.
“I don’t think we are there yet, but if you look forward, there will be a lot more of these flexible technologies in warehousing and production, which will then help the smaller guys a lot.”
Balancing Efficiency and Resilience
The COVID-19 pandemic has most companies making big adjustments to their current supply-chain needs. The longer-term question is what lessons they will draw from the disruptions.
“There is a human tendency to basically think bad things will not happen if they have not happened for a while,” Chopra says. “So if it has been a year or two since the last rare event, we start thinking, ‘Oh, that’ll never happen.’ But the biggest mistake that we can make is to severely underestimate the probability of it happening.”
The problem with trying to get your company ready for a shock is that preparation is expensive—and the shock may never come. So, explaining to stakeholders why you are dedicating capital to building a new plant in Croatia when your current plant in China has been humming along uninterrupted, can be difficult.
“Both underestimating and overestimating can cost me,” Chopra says. “When you underestimate, you don’t spend now, but then you pay a bigger price later. When you overestimate, you spend more now, but you pay a lower price later. Real pressures often push us to under-act for the future. Whereas, in general, slight overestimation is a much better course of action.”
Fred Schmalz is the business and art editor of Kellogg Insight.
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