Brexit, the U.S.-China trade war, a general geopolitical trend toward nationalization — and lately the COVID-19 pandemic — have changed the priorities of many supply chain leaders. They now need to balance cost and operational efficiency with greater supply chain resilience.
In a recent Gartner survey, only 21% of respondents stated that they have a highly resilient network today, meaning good visibility and the agility to shift sourcing, manufacturing and distribution activities around fairly rapidly. It suggests that increasing resilience will be a priority for many as they emerge from the current crisis. More than half expect to be highly resilient within two to three years.
The cost of retaining multiple supply locations must be seen more as a cost of doing business, rather than an inefficiency
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“Most supply chain leaders recognize that becoming more resilient is a necessity in the current environment,” says Geraint John, VP Analyst at Gartner. “However, measures such as alternative factories, dual sourcing and more generous safety stocks go against the well-versed philosophy of lean supply chains that has prevailed in recent decades.”
The rebalancing of efficiency and resiliency will not be easy. In most cases, increased resilience comes with additional costs. But the cost of doing nothing can also be significant. Supply chain leaders can pursue six major strategies to build greater resilience into their networks.
Strategy No. 1: Inventory and capacity buffers
Buffer capacity is the most straightforward way to enhance resilience, whether in the form of underutilized production facilities or inventory in excess of safety stock requirements. The challenge is that buffers are expensive, and supply chain leaders may have a hard time justifying them to the C-suite.
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Leading companies use buffers in the form of surge capacity for new product launches or expansions into new growth areas. Organizations can also create buffer capacity by using contract manufacturers strategically for their surge needs.
Strategy No. 2: Manufacturing network diversification
In response to the U.S.-China trade war, many companies have begun to diversify their sourcing or manufacturing bases. For some, this has meant switching to new suppliers outside China, or asking existing partners to supply them from elsewhere in Asia or in countries such as Mexico.
“Disruptions to supply chain operations have intensified in the past few years. This means that the cost of retaining multiple supply locations must be seen more as a cost of doing business, rather than an inefficiency,” John says.
Strategy No. 3: Multisourcing
In 2011, major natural disasters in Japan and Thailand disrupted supply chains across the world and exposed companies’ reliance on single sources of supply. In the automotive industry, nearly finished cars could not be shipped to customers because of missing, and often inexpensive, components. Multisourcing is an obvious way to mitigate this risk.
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To craft a multisourcing strategy, supply chain leaders must know their supplier networks in detail and be able to categorize suppliers not just by spend, but also by revenue impact if a disruptive event occurs. Diversification can be achieved by awarding business to additional suppliers or working with an existing single- or sole-source supplier that is able to produce out of several locations.
Strategy No. 4: Nearshoring
Beyond multisourcing, some companies want to reduce geographic dependence in their global networks and shorten cycle times for finished products. Regional or local supply chains can be more expensive, because they add more players and complexity to the ecosystem, but they allow for more control over inventory and move the product closer to the end consumer.
Strategy No. 5: Platform, product or plant harmonization
The more regionalized the network, the more harmonized plant technology has to be to allow products to move seamlessly across the network. The use of common vehicle platforms for a variety of models in the automotive industry is one well-established example of such harmonization.
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Standardizing components across multiple products — particularly those that are not visible or important to the customer — is another form of harmonization. This simplifies sourcing policies and creates opportunities to place higher volumes among multiple suppliers, which in turn enhances resiliency.
Strategy No. 6: Ecosystem partnerships
The COVID-19 crisis has shown the need to have a diversified approach to sourcing. At the same time, however, collaboration with strategic raw material suppliers and external service partners is also vital to ensure better preparedness and resilience for the future. For companies without the scale to support multiple locations on their own, strong relationships with contract manufacturers and global 3PLs can be vital in diversifying production and distribution to different countries.
Gartner survey data shows that around half of supply chain organizations are either using external manufacturers or exploring how they can support product moves, with a similar proportion engaging logistics partners for this purpose.