While conventional supply chain design efforts can minimize operational costs, their focus on leveraging economies of scale can result in over-concentrated resources. These solutions remain optimal so long as nothing changes, but are incredibly fragile in the face of exceptions or unforeseen events.
The best-laid plans of mice and supply chain designers often hit the wall of reality
Traditional approaches to supply chain design minimize uncertainty and variability. Yet, today’s news feeds clearly show that even the most well-conceived supply chains, designed to extract maximum value from investments in production and distribution, are more vulnerable than we would like to believe. Case in point: witness the threat posed to the economies of entire nations by the COVID-19 viral infection. Stock markets fall in reaction to panicked multinational tweetstorms, and they rise after rapid responses from the world’s central banks. Some wonder why the collective “we” didn’t see this coming. SARS, Fukushima, and the 2008 global financial crisis are some of the many warnings that have gone unheeded.
If nothing else, the ongoing coronavirus outbreak should cement the need for robust analytical risk management as part of a supply chain strategy.”
So how can organizations avoid potentially catastrophic events? They must manage risks, not ignore them. Without a data-driven approach to risk management, supply chain leaders will continue to make decisions based purely on cost minimization or with only a superficial assessment of risk that serves to bolster the best-case scenario. If nothing else, the ongoing coronavirus outbreak should help cement the need for robust analytical risk management as part of an effective supply chain strategy.
Leveraging economies of scale by concentrating operations is generally a smart thing to do. However, reducing costs by over-concentrating resources in a particular location, with a specific organization, or through a single flow presents the most significant potential risk of failure to a supply chain. While shifting production or distribution to one centralized location may reduce facility and inventory costs, it increases a firm’s exposure to catastrophic events.
The potential perils of the over-concentration of suppliers
Today’s coronavirus situation is an example of what can happen when an entire industry single-sources most of its supply and a large amount of its demand from one country – China. Let’s take one company as an example. Like most multinational corporations, Apple has taken advantage of China’s low manufacturing costs and ample production capacity. As a result, Chinese factories make the overwhelming majority of Apple’s iPhones. (Taiwan and India are also home to some iPhone production.) Also, Apple has seen a great deal of demand for the iPhone from the Chinese market. So, Apple finds itself in the unfortunate situation of being squeezed on two sides of its business. “Apple has issues on the supply side as Foxconn – Apple’s primary supplier – can’t produce without labor or parts,” relates MIT professor Yossi Sheffi. “It’s also choked on the demand side with many [Chinese] consumers who are sick or otherwise discouraged by the current situation from buying products.”
(You can listen to Dr. Sheffi’s entire discussion on the Freightvine podcast or read the recap here.)
The coronavirus isn’t unique. Similar stories are heralded in business classrooms every day. Concentration in any one customer, supplier, labor union, carrier, country, or even a firm’s own operation increases the risk of supply chain failure. A dependency on a single source at any point in the supply chain can result in the inability to deliver finished goods and service demand.
- 1997: One of Toyota parts supplier Aisin Seiki’s plants, the single source location for a $5 anti-lock braking system part, burns to the ground. Toyota eventually shut down 20 automotive plants, halting the production of 14,000 cars per day.
- 2002: Poultry producer Pilgrim’s Pride’s Franconia, Pennsylvania plant shut down for over a month following a bacterial outbreak. The infection at the sole location for the processing of ready-to-eat chicken and turkey products results in the biggest meat recall in U.S. history at the time.
- 2018: Another fire, this time at one of Ford’s suppliers of automotive interior components, leads to the temporary idling of two F-150 light truck assembly plants. The shutdowns resulted in the layoff of 7,600 workers and a $1.2 billion revenue loss in a single quarter.
Securing your supply chain against these kinds of threats and disruptions requires ongoing evaluation. Your supply chain is a dynamic entity, and keeping tabs on it is a demanding process. Fortunately, today there are a host of technologies that make assessing the health of your operations and their impact on the broader corporate strategy possible. Building confidence with these technologies requires deep experience and they can be challenging to internalize. Chainalytics’ Supply Chain Network Design offerings endow your organization with investment-grade network design capabilities and continuous analysis without the need for additional headcount. Staying ahead of the curve has never been this cost-effective.
The coronavirus outbreak is an event in progress, but its lessons on supply chain dynamics are already manifest. The best time to develop a risk-adjusted supply chain strategy is now. Combining risk management and cost minimization with powerful analytical tools and a robust approach to scenario analysis will allow firms to make optimal decisions that are robust enough to withstand the current crisis and the uncertainties to come.
Chainalytics accelerates fact-based transformation for supply chain leaders around the globe, including 18 of Gartner’s Top 25 supply chains. We bring unparalleled passion to our core purpose: to help leaders realize maximum value from their supply chains. Our combination of top supply chain talent, proven methodologies, and proprietary market intelligence delivers actionable insight and measurable outcomes. Reach out to us and see how Chainalytics can help transform the efficiency and reliability of your supply chain.
Steve Ellet leads the Supply Chain Design practice at Chainalytics as Senior Vice President. With more than 20 years of experience, he is a trusted adviser for organizations looking to optimize their supply chain strategy.
