The COVID pandemic starting in early 2020 was an inflection point in the practice of supply chains.
It was an odd scenario. Many people – including me – expected the virus and related lockdowns of stores and factories to devastate the economy.
And it did to an extent. But the impact was uneven. Traffic at restaurants, for example, plummeted, and non-essential retailers such as apparel were largely closed, many surviving only thanks to the new “curbside pick-up.”
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| But leaving China and adopting multi-sourcing strategies almost surely increase supply chain costs – is it worth it? |
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But the overall economy didn’t feel that broken. Employment outside of some service sectors remained strong, with workers and companies adjusting to the new concept of working at home.
And while GDP did tank for a quarter or two, what developed soon after was not great surpluses of inventories due to tanking demand, but rather inventory shortages and supply disruptions. Those disruptions – meaning manufacturers and others could not get the components and other inputs they needed in a timely way – were the result of a combination of factors, including factory closures in China, worker shortages there and in other areas, cancelled sailings by ocean container carriers that reversed the supply-demand equation, and soaring demand in certain areas due to a change in consumer behavior.
Now, more than three years later, we are getting back to normal. Indeed, in February the Federal Reserve Bank of New York described its Global Supply Chain Pressure Index as “back to normal.”
But it is a “new normal.” That is an overused phrase, but it seems quite appropriate here. Things have changed or are continuing to change.
The Wall Street Journal’s Paul Page recently wrote an article on this very topic, and I thought I would share some highlights, including quotes from various supply chain pundits.
That starts with diversifying away from China sourcing. Long talked about but far less often executed, companies do seem to be actually finding new supply sources outside China. Citing some examples of such moves by Apple, Mattel and others, Page writes that we are in the midst of enduring changes “that will more broadly affect how companies get their raw materials and parts, where they produce goods and how they ship finished products to consumers.”
He adds that taken together, “the changes mark the biggest shift in how supply chains are managed since China’s entry into the World Trade Organization in 2001 ushered in a new era of globalization.“
Those important changes include the embrace of regional manufacturing strategies, where souring is spread across the globe to be closer to customers. Related to that are duel or even multi-vendor sourcing techniques. Both are designed to reduce the risk of the types of supply chain disruption seen over the last nearly three years.
 “They have been moving away from a model built on scale, where everything is engineered to get the best financial impact from the greatest economies of scale, to a model where there is plenty of redundancy in the network,” Patrick Van den Bossche, global analytics practice leader at consulting firm Kearney, told the Journal.
He further observed that ““The move away from China, to rewire supply chains to where you have multiple local supply chains, is really just starting. Companies are still trying to figure out how this works.”
The key question of course is whether this time will companies really follow through on the strategy this time, where many have turned away from the plan in the end in recent years.
But leaving China and adopting multi-sourcing strategies almost surely increase supply chain costs – is it worth it?
The Journal quotes Rick Gabrielson, a former transportation executive at Target and Lowe’s, as saying companies have to balance those costs against the potential for future disruptions.
“You have to ask yourself, which do you want?,” Gabrielson adds. “Are we going to minimize risk for shareholders and customers or are we going to minimize costs? This is the conversation that is taking place, but the change doesn’t happen overnight.”
Government regulations around the environment are also changing supply chains. The SEC, for example, is advancing plans to require that companies disclose not only their own carbon emissions but those of their suppliers, and their suppliers’ suppliers, known as Scope 3 emissions.
That would add further cost and complexity, but seems to be unstoppable.
But the biggest change, Page says, may be the pullback in Lean inventory practices. He notes companies such as Nissan and PepsiCo have said the focus on hyper-efficient supply chains may be ebbing, as more companies recognize the value in buffer stock.
While some firms may decide they don’t need all the safety stock they have been adding, “You will not see the pendulum pull all the way back” to a just-in-time focus, Gabrielson told the Journal.
So net it all out: the Journal says after the experience of the past few years that companies are really focused on building supply chain resilience, and are doing so by reducing dependence on China, using multi-vendor sourcing strategies, and pulling back from strict Lean inventory practices.
They are also adding robots. Lots and lots of robots, Page notes.
That is the new normal for sure.
What is your reaction to these supply chain trends? Let us know your thought at the Feedback section below.
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