With entire populations isolated and quarantined, companies see demand for some items spike and plummet for others, while their access to parts and labor from around the world is severely disrupted.
“Weather-related supply disruptions have been much more common over the past 20-25 years,” says Sunil Chopra, “but this is the first time I’ve really seen a risk of supply disruptions because people can’t go at work .”
On a societal level, this has led to shortages of products such as hand sanitizer and masks. Fortunately, hand sanitizer is simple to produce, allowing other producers such as perfume manufacturers and distilleries, to enter the breach. However, masks present a more difficult problem, as they are produced almost exclusively in China. Since other countries are not equipped to quickly increase production, shortages will likely continue.
At the corporate level, individual manufacturers are being hit hard.
So what can these manufacturers—large and small—do to deal with supply chain shocks? Chopraa manipulation professor at Kellogg, explains.
Larger companies can establish regional supply chains
Over the decades, global companies have concentrated production geographically to save money.
However, even before COVID-19, as Chopra and his colleagues argued 2014 articlethe marginal benefits for this type of concentration were decreasing, while the risks were increasing.
“The incremental cost of a large company operating factories in different locations is often no more than the cost of having one huge factory,” says Chopra. “You might reach the limit of your economies of scale at half the size, so by running two factories, you don’t lose much in efficiency, but you gain a lot in durability.”
In other words, whether you have one factory that can make a million items a week or two plants that make 500,000 items each, in either case you may be producing so many items that you’re already close to achieving whatever economies of scale are possible . But the chance of both plants going offline at the same time is greatly reduced.
“Think of it as segmenting the supply chain by region,” says Chopra. “Say you produce face masks. China will usually be a good place to make them. But in March 2020, Vietnam or Mexico might be better.”
However, even this is no guarantee of smooth sailing. “It’s not like all these locations can’t be disrupted at the same time. They can,” says Chopra. “Coronavirus has come as close as anything to that. But what you see is that different countries are going to peak unrest at different times.”
Creating regional supply chains is not an argument against outsourcing or globalization, Chopra explains.
“The idea is not that we’re building walls, but building a system that’s not centralized,” says Chopra. “This allows us to be flexible enough to match the appropriate supply points with the appropriate demand points as the situation continues to evolve.”
ONE few companies provide consumer product manufacturers with this type of flexibility. But Chopra cautions, for the most part, agility still requires a lot of planning. The best option for many manufacturers is to maintain awareness of the exact status of all their manufacturing facility options and then tune their overall network as conditions evolve.
“The problem is that this level of awareness can be difficult to achieve for companies that don’t have good visibility into their global network of facilities,” says Chopra.
Smaller companies can rely on technology
So what can smaller companies do to protect themselves from disruption? After all, it’s much harder for a small company to build multiple supply chains or replicate resources while remaining competitive.
In the past, smaller manufacturers may have tried to build inventory to overcome uncertainty. But this strategy fell out of favor as most found it to be prohibitively expensive.
Chopra sees more long-term small companies looking to technology to find flexibility in supply chain weather disruptions.
As a group of Italian engineers proved, one of the most promising areas for small companies to adapt to supply uncertainties is 3D printing. When Italian startup Isinnova learned of a shortage of ventilator valves, it was able to reverse engineer a 3D-printed version of the part and start printing it — all in a matter of days.
“Right now, companies are going into 3D printing as a backup as their operations are disrupted, but it’s actually a good strategy for small players who want to source some parts,” says Chopra. “So if 3D printing takes off, what these small players will do is design the parts around 3D printing.”
In fact, Chopra is already starting to see vendors offer this service to customers and companies benefit of technology. And crucially, if one 3D printing vendor is disrupted, it will be much easier to switch to another, as the service is relatively stable across vendors.
Another area where technology meets the needs of small companies is warehousing, which has changed as information systems have made these warehouses more efficient at locating and collecting stored items. Currently, many small manufacturers rely on Amazon warehouses to maintain inventory. But other companies like Flexe offer short-term storage to serve companies that need more storage flexibility than Amazon can offer.
“Companies like Flexe didn’t exist even five years ago because the technology to be this flexible didn’t exist,” says Chopra.
“I don’t think we’re there yet, but if you look ahead, there’s going to be a lot more of these flexible technologies in storage and production, which will then help the younger kids a lot.”
Balancing efficiency and durability
The COVID-19 pandemic is causing most companies to make major adjustments to their current supply chain needs. The long-term question is what lessons will be learned from the turmoil.
“There’s a human tendency to think that bad things won’t happen if they haven’t for a while,” says Chopra. “So if it’s been a year or two since the last rare event, we start thinking, ‘Oh, that’s never going to happen.’ But the biggest mistake we can make is to seriously underestimate the likelihood of it happening.”
The problem with trying to prepare your company for a shock is that preparation is expensive — and the shock may never come. So it can be difficult to explain to stakeholders why you’re devoting capital to building a new factory in Croatia when your current factory in China is humming along non-stop.
“Both underestimating and overestimating can cost me,” says Chopra. “When you discount, you don’t spend now, but then pay a higher price later. When you overprice, you spend more now but pay a lower price later. Real pressures often cause us to underperform for the future. Whereas, in general, slightly overestimating is a much better course of action.”
