COVID-19’s effect on the supply chain could have been lessened
Loftware’s interview with Harvard Business School Professor Willi Shih points out weak links in the supply chain—weak links that should have been seen sooner
Loftware President and CEO Robert O’Connor spoke with Harvard Business School Professor Willi Shih in a live on-line Webinar entitled “COVID-19, Labeling, and Supply Chain Continuity,” to look at some lessons learned in the supply chain during the COVID-19 outbreak, which, of course, isn’t over yet.
Willy Shih is the Robert and Jane Cizik Professor of Management Practice in Business Administration at the Harvard Business School. He is part of the Technology and Operations Management Unit, and he teaches in the MBA and Executive Education Programs. His expertise is in manufacturing and product development, and he has written or co-authored numerous cases and teaching materials in industries ranging from semiconductors, information technology, consumer electronics, aerospace, transportation equipment, manufacturing processes and tools, and intellectual property.
In the Q&A, O’Connor asked Shih, What are the most significant impacts that you believe the COVID-19 pandemic is having on global supply chains?
“We’re really at a very interesting time; the pandemic manifested its impact in several ways,” says Shih. “In the beginning—if you start around February or March—we had the supply shock where a lot of people found out how dependent we were on China in particular for the manufacture of all sorts of goods—both intermediate goods as well as in particular personal protective equipment, masks and so on. But we had the supply shock to start with, which we then faced a demand shock, which was out of synch with the supply shock because as China got back to work, then we saw this pandemic spread around the rest of the world.
“This raised a whole bunch of questions in a lot of peoples’ minds because—I describe it as like we suddenly lowered the level of the ocean and exposed all the rocks,” says Shih. “We exposed all the interdependencies; we exposed our dependency on obscure suppliers somewhere deep in the tier of my supply chain. Which raised the question: How come supply chains are so complicated? How come they are tiered so much? That’s really a function of the specialization that modern technology forces us to have as we go through [supplier] specialists who make one subassembly somewhere.
“It’s been an education for a lot of people in terms of how complicated the supply chains are,” says Shih. “We’ve also exposed the heavy dependence on logistics, which many people take for granted. Many people think, ‘I have this supplier somewhere around the world and I have dependable logistics that I can count on via container shipping or air cargo.’
“But with the combination of these shocks, we’ve had some very unexpected outcomes. For example, the container lines have had a lot of blank sailings, which is the way they describe ‘we didn’t have any cargo so we cancelled that shipment,’ or ‘we cancelled that sailing.’ So that’s sharply reduced container capacity and at the same time—this is probably a surprise to a lot of people who aren’t plugged into how this works. The complete shutdown of commercial air travel between the population centers of the world and the grounding of, in some cases 95% of some carriers’ passenger fleets, has really contracted air cargo capacity, which meant air cargo [shipments] had suddenly [decreased], and that’s because 60-plus percent of it goes in the bellies of passenger flights. So suddenly, there was a shortage of air cargo,” says Shih.
“All of a sudden those dependable logistics that we had relied on for just-in-time manufacturing suddenly went away. So all of those things exposed the complexity and interdependencies at a global level. For a lot of people, that was quite a surprise,” says Shih.
“Now as the world goes through this restart, not everything restarts at the same rate and pace,” says Shih. So what we will see is like a big complicated machine with all the interlocking gears trying to start up at different rates. We’ll get a lot of gnashing of gears.
Besides exposing all the interdependencies, the geopolitical environment has become much more complicated at the same time, says Shih. So there’s a big push towards the rise of the “economic nationalism.” This makes the whole supply chain and interdependency question really complicated at present.
Adjustments to the supply chain issues
Some decades ago engineers learned to develop trusting relationships with suppliers who were close by and not to depend or retain sole-source suppliers. Shih thinks companies are learning a lesson perhaps forgotten. “People are saying, OK, maybe I need to regionalize manufacturing or maybe I need to go more towards having multiple suppliers,” says Shih. “Spinning these things up is not so easy, especially when you have critical components that are very capital intensive.” For example, if you’re a Detroit automaker and need the LCD screen for an entertainment or navigation system, those only come from a few suppliers in East Asia…Developing those alternate sources of supply is going to take some amount of time, adds Shih.
“I think the thing that has been most exposed through this whole pandemic is this notion of being able to do just-in-time manufacturing across a globally dispersed supply chain,” says Shih. You think back to how Toyota set things up when they taught the world about lean manufacturing and just-in-time, and you realize they had supplier parks not that far away—a couple of hours at most, so it was easy for Toyota to manage its suppliers.
“I think over the last decade in particular, we’ve built global supply chains where I might pull parts from China or from Europe or from Southeast Asia and integrate them on an assembly line in Mexico, and ship it to the North American market on the assumption that I have reliable, predictable logistics,” says Shih.
The financial pressure has always been to have lean inventories because of the risk of obsolescence or inventory carrying costs. So it might be necessary to have buffer or safety stocks of those critical components, especially when a manufacturer only has a single source, says Shih. Unfortunately, many companies don’t even know if they have single sources, because the fact has been masked by multiple tiers in the supply chain.
Shih, suggests that manufacturers may try to increase buffer stocks, but that will cause them to pass along these costs to cover large inventories—but consumers won’t be willing to pay the extra costs, so that’s a major dilemma to overcome.
Other looming issues
While re-shoring sounds good, it’s not likely to happen any time soon because as companies begin to build electronics here, costs will go up for awhile. Shih suggested that consumers may not likely be willing to pay $2000 for $3000 for an iPhone.
Another issue is SKU proliferation. For example, does a grocery store really need 60 SKUs on toilet paper. That makes it hard to forecast. Shih sees questions arising as to whether a store should have this needless variety of goods, which has been pushed by marketers as a way of capturing more shelf share.
Another question is about the concentration of factories, says Shih. “Am I better off having a few, for example, large meat packing plants as opposed to where we used to have a much more distributed, smaller scale. That is mostly driven by scale efficiency, scale economies. That’s why I go to the giant facility. But then, what we find out is when you take one of those [large plants] off line, you really don’t have a lot of robustness anymore. So I think a lot of people are starting to ask questions. Can I get more interchangeability between institutional and commercial channels—institutional vs. consumer channels, for example, or better ability to forecast?”
Could these supply chain problems have been foreseen in the early stages of the pandemic? Answering his own question, Shih said yes, because you could already see early on what was happening with the large number of factory closures in China and the number of ships leaving China. Shih suggests people weren’t paying attention, and a large part of the problem is the complexity of supply chains and logistic networks and what the impacts to them were caused by COVID-19 interruptions.
For more on this interview and a link to watch it, visit Loftware’s Web site.