The coronavirus has highlighted the weaknesses of global supply chains. But the ubiquity of the problem should not distract from the need for tailored responses.
by Christian Zeller
The fate of our global supply chains has even occupied the tabloid press in recent weeks. As the coronavirus spread, it worried about empty supermarkets shelves, idle car factories, an entire economy on the verge of ruin. When an issue makes the leap from consultants’ presentations to, say, Germany’sBildnewspaper, the situation must be dramatic. But we shouldn’t tumble headlong into doing something – anything – to put things straight. The crisis has created different supply-chain problems for different industries, so we need different and sector-specific solutions.
“One size fits all” will not be a lesson supply-chain managers take away from this crisis – even if some big, historic trends apply to most industries. Over the past decades, many sectors kept optimizing supply chain concepts, above all pushing for efficiency gains and ever-shorter input, manufacturing and distribution cycles. Companies reduced costs at all stages of their supply chains – but in return they also accepted risk. Single sourcing, just in time and just in sequence, end-to-end interlinking of production chains, maximum-possible inventory reduction, use of common parts – these approaches were efficient, but they also made manufacturing more vulnerable.
The opportunities and constraints of globalization drove a worldwide division of labor. New globally structured, interlinked value-adding structures brought advantages – and huge cluster risks that mostly didn’t deserve mention until the free flow of parts and end products recently came to a standstill almost overnight. The trade dispute between the USA and China had already led to some disruptions. Supply-chain experts had seen new risks building up, but had mostly considered them manageable because foreseeable. But they are now grappling with problems of a different magnitude, largely because they cannot as yet foresee the course of the global economy.
And the problems come in great variety. Over the last 25 years, car manufacturers, for example, have built up very different supply chains to textile companies – and textile companies have built up very different supply chains to machine-tool companies. It’s imperative to bear these differences in mind when identifying supply-chain problem areas and coming up with solutions.
In the automotive sector, the major original equipment manufacturers (OEMs), drove global production and procurement networks. Many medium-sized and large suppliers followed suit, also establishing production facilities across the world. The OEM’s desire to do away with warehousing and safety-stock levels meant that the most major suppliers had to produce close at hand. The enormous investments involved were made good by ensuing bumper capacity utilization. But without raw-material buffers or safety stocks, this giant construction was always precarious. If the smallest part is undeliverable, the OEM’s production line comes to a halt almost immediately.
The global textile industry likes to spread production to locations around the world where costs are lowest – and where environmental and welfare standards can sometimes be criminally neglected. This development was intensified by the trend for “fast fashion” – and at the same time made the trend for fast fashion possible, because the latter was predicated on low production costs. While the automotive industry calculates that a new model will keep a factory in work for six to eight years, the textile industry quantifies its production schedules in weeks – and without just-in-time concepts and with small investments, relocating textile production is extremely easy.
Unlike OEMs and textile manufacturers, machine-tool makers concentrate on bespoke or small-series production. Their supply chains are structured differently again, much less global and often with fewer suppliers than needed by OEMs. But these engineering companies have also globalized their supply chains. While initially only some simpler parts were sourced globally, more complex and strategically important components like castings are now also bought on world markets. But overall, the sector’s supply chains are less vulnerable than those of car and textile manufacturers.
The examples show that different industries have to deal with very different supply-chain problems. Are OEMs willing to continue the balancing act between just-in-time production and a factory standing still? Can textile companies really carry on switching constantly from one supplier in one low-wage country to another in the next low-wage country? Do machine-tool makers really need to purchase parts from third parties? Wouldn't it be better for them to (again) make some parts in-house, their manufacturing structure permitting?
Each question elicits a different answer. The coronavirus crisis has shown that supply-chain problems are caused by many variables – the structure of a supply-chain system, the nature of a whole sector, the idiosyncrasies of a single company. In addition to problems like dependence on individual suppliers, fragile transport chains, a lack of process consistency, poor communications and coordination, and inadequate planning, companies also have to contend with digitalization – a challenge for many of them even before the pandemic.
Many companies are currently still in emergency mode, looking to prop up supply chains and maintain in-house value creation as much as conditions allow. But once the crisis is over, they will have to review their supply chains and realign them if necessary. The companies that overcome the crisis quickly and resoundingly will be the ones that come out of economic lockdown to immediately get down to optimizing their supply chain management. Our ten-point plan allows every company to prepare itself individually for this task.
Read more in Christian Zeller's follow-up article that will appear soon: Supply Chain Realignment – a ten-point action plan