Supply Chain

Is the supply chain as bad as everyone says? Depends who you ask...

Recent supply-chain disruptions are changing organizations’ strategic calculations.
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· 5 min read

Unless you are an economist being paid to make the call, deciding whether we are in a recession or not is a bit like winning a grammar argument on the internet: You might be right but that doesn’t change anything IRL.

Since the start of the pandemic, the global supply chain has been FUBAR, and challenges abound. Whipsawing supply and demand surges, continuing COVID-19 shutdowns in China, a protracted war in Ukraine, and ongoing natural disasters are highlighting the complexity, and fragility, of the global supply chain.

To cope with the volatility roiling the global supply chain, organizations the world over are changing their strategic supply-chain calculations and beginning to implement new supply-chain strategies.

“It’s going to continue to be tough for financial folks to think that they ever have a crystal ball again, because of all the impact of all of this,” said Dawn Tiura, president and CEO of sourcing industry group SIG, which represents sourcing, procurement, and risk professionals in Fortune 500 companies and other major enterprises. “It’s not a black swan event any longer. We have flocks of black swans.”

Not quite as bad. Barring new wars or significant natural disasters, supply-chain problems do seem to be easing a bit, according to the July Global Supply Chain Pressure Index (GSCPI), produced by the New York Fed.

However, that doesn’t mean you can sleep on the supply chain just yet. Global supply-chain pressures continue to be at historically high levels, according to the GSCPI. The automotive industry, the energy sector, and food suppliers are under particular pressure because of supply-chain disruptions.

And even for organizations that have prioritized their supply chains, piercing the multilayered, opaque tiers of supplier relationships can be very difficult according to Willy Shih, professor of management practice in business administration at Harvard Business School.

“One of the big surprises was [if you] went several layers down in the supply chain, how often you’d end up at a common supplier,” Shih said. “The other big surprise, I would say, and what a lot of people still don’t understand, is that it’s very hard to get a big picture of what’s going on in the supply chain.”

The China problem. A major revelation to come out of the recent supply-chain turmoil is a risky over-dependence on China, Tiura said. Many companies discovered that, while they had thought they had diversified their supply chains, many of their suppliers were dependent on Chinese manufacturing.

“You thought you had built some resiliency in your supply chain by having two different locations that you sourced from,” she said. “We never thought about the fact that both of those suppliers that you’re sourcing from are sourcing a lot of their componentry from, sometimes, even the same factory within China.”

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To cope with that risk, companies are now looking to diversify supplier bases in a more meaningful way, to move beyond a dependence on China, according to Jason Miller, interim chairperson of the department of supply-chain management at Michigan State University.

“We’ll see, I think, an increased focus on sourcing from multiple suppliers across multiple countries,” said Miller.

The EY Industrial Supply Chain Survey found that to be true; 57% of companies it surveyed in 2022 said that they had established new operations in one or more countries to “increase geographic diversity and reduce risk” and 53% were planning to do so within the next two years.

Companies are slowly starting to shift away from Chinese manufacturing. Apple is now manufacturing some of its iPhones in India, and part of the production for Google’s newest Pixel phones will take place in Vietnam, according to the New York Times. And Reuters reports that Honda is weighing building a second supply chain outside of China.

Up next: Reshoring. There is also a move to “reshore” supply chains by bringing critical supply manufacturing back to North America. General Motors announced earlier this year that it was reshoring its electric vehicle and battery production to Michigan, investing $7 billion in a new plant. Micron Technology is investing $40 billion to build new chip-manufacturing plants in the US.

It’s a trend that is picking up steam. The 2021 Reshoring Index, produced by management consulting firm Kearney, found that while companies are still heavily dependent on Asia for manufacturing goods, nearly 80% of executives surveyed who have operations in China “have considered reshoring or have already reshored operations to the United States.”

“I think we will see a transition of where that production is going to be—away from building a new plant in Asia towards building a new plant in the US or Mexico,” Miller said.

Companies are also moving away from “just in time” inventory management and increasing inventories, according to a recent McKinsey report. Although that strategy can be risky; retailers Target and Walmart have both seen their earnings fall this year because of excess inventory.

These moves to address supply-chain disruption are likely to continue evolving because the pace of disruption isn’t likely to change, Tiura said.

“When people say, ‘I feel like I’m drinking out of a firehose,’ then my advice to you is: You need to swallow faster, get a bigger mouth, figure out a way to control it, because it’s not going to stop,” Tiura said.—DA

News built for finance pros

The latest news and insights corporate finance professionals need to know to keep up with their constantly evolving industry.