WHAT IS NEXT FOR SUPPLY CHAINS? --Realigning Supply Chains--

Depending on where you are in the world, you have experienced China-US trade issues, the global pandemic, and Russia's attacking Ukraine. Manufacturers, retailers, and wholesalers/distributors are dealing with high ocean rates, delivery delays, and sourcing changes that have impacted inventory/product availability, procurement, and more. Also, behind much of the freight rates and operations issues is high demand that created volumes exceeding the capacity of logistics providers to handle it.

Recognition has arisen that we are in a time of continuous supply chain disruption. Add in climate change, geopolitical concerns, and other issues that can affect business continuity.

The awareness that supply chains are strategic and critical has firms asking themselves how they can build resilience or risk mitigation. There are different approaches to doing this. One is to reduce the products they carry, SKU rationalization. Another is to carry more inventory, even overstock. Given all the items a firm may carry, this may challenge warehouse capacity, throughput, and inventory turns, sometimes called inventory rich and cash poor.

Another way is moving closer to end markets where customers are. This means discussions about potential procurement, sourcing, manufacturing, and supply chain changes and shifts. This has become the reshore question

Companies are asking themselves about what they make and/or buy and where it should be done.  The challenges that companies have experienced go against traditional risk aversion with change.

Some talk in terms of deglobalization as a way of building resilience. It is labeled as reshore, onshore, nearshore, and same shore.  It raises the question whether decades of low-cost products will be undone by two years of supply chain disruptions?  Also, will a firm's changes will be an all-or-nothing? Or is there a hybrid path? 

No matter, what we are talking about is not shifts.  No matter the terminology, it is realigning supply chains. This includes sourcing, production, procurement, and end-to-end supply chain management.

The above sets the stage for what comes next—what to do and how to do it.  There are two parts to a realignment project:

Step 1. Call it Phase 0. This is what you are thinking as to reshoring. Do you want to move it onshore, nearshore, or stay same shore? There are points to consider which can vary by industry, market sector, or type of business—manufacturing, retail, wholesaler/distributor. These can include:

·       How critical your products are. This showed early in the pandemic with PPE, personal protective equipment.  Much of these items were made in Asia which had shutdowns. That had serious implications.

·       How valuable your products are. There are costs to making changes. Generating a return on investment, or ROI, reflects the value of what you want to shift. In turn, this dynamic has a different standing with low-value items.

·       A classic battle. Somewhere in all this will be the labor vs capital issue. The labor reflects wages, training, education, supply of employees, and related topics. Where do you put your money? Capital ties to manufacturing and to building resilience through technology as compared to engaging people.

·       The length of your end-to-end supply chain. The shorter it is, the easier it may be to adjust to events. Length is also a factor in the nonlinear, complex supply chain.

Step 1.5. There may be less complicated options. These involve your suppliers.

Diversify. This can be defined as a type of reshore. Look at your suppliers and transport/logistics providers, especially the ones that are very important.  Can you reduce your use and dependence on them? That can mean you pay higher prices by reducing your volume commitments. But it will also spread your risk and improve resilience.

Relationships. A takeaway from the last two years is to create supplier relationships that go beyond price and traditional buyer-seller connections. This can be easier said than done. But continuous supply chain disruptions have shown the need for it.

Step 2.  This is your analysis or assessment. It presents an opportunity to see and understand your end-to-end supply chain—its size and complexity.

You are looking at a range of options—no changes, moving production or sourcing away from certain countries, moving it closer to home, or transferring it to the home country. This also means looking across your product spectrum. It requires a strong analysis of what is required to make sound decisions.

Your work should include:

·       Recognize upstream.  The recurring challenges with the past two+ years have been primarily upstream or the inbound supply chain. That is where suppliers are and where the supply of supply chains begins.  To add to the problem, the upstream is often organizationally bifurcated as to procurement and transportation/logistics.  

For too many, supply chain management is viewed and defined as and by its transportation/logistics elements and not by upstream/downstream or other relevant designations. The two parts are also managed in separate groups in a company.  And the performance of both is often measured by costs.  

·       Say suppliers, suppliers, suppliers.  Detail what you buy from suppliers. What do you see?  What do you not see?

Supply chains have been limited by Straight Line Thinking Syndrome, aka, that supply chains are linear. Think of it as railroad tracks or the modern Flat Earth Society. Something that is an urban myth; it has never existed. 

You see many suppliers for your products, parts, assemblies, and components. Think of your bills of material. One of yours may look like this:

But there is more.

Drill deeper. 

It does not stop there.  Your suppliers have suppliers. And so on.

There is a network of suppliers with interconnectivity. What you have are tiers and layers of suppliers. The granularity of your inbound supply chain. If you are a baseball fan, think of it as seeing a triple play.

All the parts and the movements. Understanding this will prevent you from missing parts at locations that you are moving from.  That can undermine the project.

Tier suppliers as to priority. And layers of who they are, what they make, where they are, and who their suppliers are.

Defining and seeing the supply depth is something that blockchain and supply chain visibility can miss. You cannot with your realignment.

Map your complete supplier network. This enables you to see the size and complexity of your nonlinear supply chain. It also presents a view of what you must understand and assess.

Prioritize Products. Companies can have many products and parts made outside of their home country.  So what do you move? 

Not all your products, like your suppliers, are the same.  You should prioritize your items for the assessment and changes you may make.  Moving everything at once can mean cost and operations chaos which can negatively affect your business.

Even more, you may decide that you do not want to move every product or part. As with inventory, there are A, B, and C items whether based on sales, profit margins, supplier alternatives, or other criteria.  This is important to your project.

Crunch the Numbers.

This is where everything leads. What does supply chain realignment mean to your product costs and margins? 

Landed cost is the best cost to use. This is your buy price from suppliers, shipping, customs, port, insurance, and related costs. An even better number is the landed cost delivered. You should have the data to do the analyses.

Two notes. Presently, you likely have contracts with suppliers and transportation carriers. Changes may mean using non-contract prices and rates for the study. To some extent, it creates apples and oranges. Be careful.

Also, understand the quantity and quality of suppliers and transportation/logistics services and providers. This is important to product availability and the movement of your goods along the end-to-end supply chain.

Odds and Ends.

·       Are similar products or parts moving from alternate ports? Do some research. There may be import data on your products.  This is good for understanding if others are sourcing from wherever there is located. 

·       Time—you need to recognize it to do a thorough study. You need it to implement supply chain realignment. Remember, where we are took decades to happen. Changes and all the inherent details are not overnight adjustments. Ask yourself if your realignment is dislocate or relocate. The answer brings different challenges.

Conclusion. What does the future hold for your supply chain, procurement, and supply chain management?  Will it be framed around reshore, onshore, nearshore, or same shore? Will it be about globalization, regionalization, or global regionalization?

If you are considering supply chain realignment, you have two choices. Just do it. Call it a knee-jerk reaction. Or do a thorough analysis. Choose the latter to gain an understanding of your supply chain, minimize risks, and improve any implementation.