As shortages, delays and congestion can damage their bottom line, many companies that have not been in a hurry during the pandemic are rethinking their supply chains and making changes to make them more resilient.
As a supply chain expert, I have observed three major changes in how companies manage their supply chains – changes that will affect both consumers and businesses.
1. Bringing the supply chain home
One of the main disadvantages of having a globally distributed supply chain is that it is more vulnerable to problems outside the company’s control, such as an earthquake that strikes a key supplier or a city lockout that shuts down a factory.
That’s why companies in every industry are trying to move their suppliers and production facilities closer to home or spread them geographically so that they are not dependent on one country or region. The goal is to ensure that it can withstand disruptions and maintain business continuity.
The pace of reshoring – the process of moving production and manufacturing to domestic locations from overseas factories – has increased in recent years. More than 60% of European and US manufacturing companies expect a share of Asian production in the next three years, according to a survey conducted in early 2022.
A more recent survey found that U.S. transportation and manufacturing will generate about 350,000 jobs in 2022, a 25% increase from the previous year.
This trend not only has the support of government subsidies but also retailers. Walmart, one of the world’s largest retailers, has committed to helping reshore suppliers by increasing its purchases of US-made products to US$350 billion over the next decade. In the UK, a survey of 750 small businesses found that 2 in 5 are considering switching to domestic manufacturers to avoid the disruption of COVID-19 and high shipping costs.
At the same time, other companies are trying different sources of supply, often far away from China, which has so far locked down entire cities to maintain the zero COVID-19 policy that has now ended. India and Vietnam are popular destinations.
US-based Apple, for example, frustrated by product delays in China, where 98% of iPhones are made, recently started producing models in India. In addition, Foxconn, the largest supplier, agreed to expand production in Vietnam. Overall, US manufacturing orders from China fell 21% from August 2022.
In Europe, carmaker Volvo announced plans in July to open its first European plant in 60 years in Slovakia. And the leaders of the US, Mexico and Canada are meeting to discuss ways to encourage more investment in the region, which could lead to more.
2. Invest in other technologies
One of the biggest problems when the COVID-19 pandemic started is that companies often do not know what is happening with their suppliers due to poor technology. For example, before the pandemic, more than 50% of companies did not communicate or know the location of all suppliers, making it difficult to anticipate shortages.
Companies are starting to learn, if they don’t already know, that being able to see what’s happening in their supply chain is critical to avoiding and adapting to disruptions. And modern digital technology is the key to doing this.
This includes everything from advanced software for better communication with suppliers to cloud computing for efficient data storage, artificial intelligence tools for better decision making and robotics for automated processes. Implementing these new technologies is the biggest global company priority for 2022, according to strategic consultancy Hackett Group.
3. From ‘just-in-time’ to ‘just-in-case’
One of the great supply chain advances of the last decade is the Japanese management philosophy known as “just-in-time.”
When the essence of the philosophy is to remove waste, the business is reduced just-in-time to the idea of having less or even zero inventory. This means carrying smaller items in the warehouse to reduce storage costs, maximize efficiency and generate higher profits. As long as there is no interference, the system works.
However, just-in-time business is susceptible to even small disruptions. The company’s super-lean supply chain means that disruptions caused by pandemics – and others – are increasing, even causing disruptions that could become major problems.
Companies now fear shortages that continue to bring more inventory. Since the pandemic began, many have switched from just-in-time to a “just-in-time” model. While having more inventory will keep the company from experiencing shortages, it is also more expensive because it can cause a lot of excess stock and products to become obsolete before they can be sold.
But this trend, like the others, is unlikely to change anytime soon despite the costs involved. That is, companies learn that the cost of empty shelves is higher than the cost of some inefficiencies. In some cases, those costs will be passed on to consumers in the form of higher prices — which could be bad news for inflation-weary consumers.
This article is part of Global Economy 2023, our series on the challenges facing the world in the coming year. You may also like our Global Economy Newsletter, which you can subscribe to here.
Nada R. Sanders is Distinguished Professor of Supply Chain Management, Northeastern University.
This article is republished from The Conversation under a Creative Commons license. Read the original article.
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