Mitigating Supply Chain Risk
In a time of crisis, when speed and flexibility are most valuable, businesses rely heavily on the transparency, efficiency, and adaptability of their supply chain. Near-term investments in alternate sources, with a focus on domestic producers, will help companies mitigate the risk of supply shocks. Long-term investments in supply chain simplification and transparency will enable businesses to adapt to rapidly-evolving situations, like the coronavirus pandemic, in the future.
Immediate Challenge: Sourcing and Inventory
As a result of coronavirus-induced shutdowns, U.S. businesses are experiencing significant immediate disruptions in their supply chain, including higher lead times and reduced manufacturing capacity.
Companies with alternate suppliers are better positioned than their competition. Alternate suppliers are like backup systems - when a primary supplier experiences a disruption, businesses can secure the supply they need from alternate manufacturers. The search for alternate suppliers presents an opportunity to diversify and reduce risk in the supply chain. Alternate sources that are identified today should be integrated into the supply chain to reduce risk and switching costs in the future.
Businesses should expect near-term costs to increase, with premiums charged for overtime and expedited shipping, and higher materials costs. Inventory costs will also rise as businesses are forced to temporarily abandon just-in-time inventory models. However, the integration of alternate sources into the supply chain can mitigate future supply costs and allow businesses to reduce reliance on a specific geography.
Building Resilience: Diversificaiton
Once companies are able to secure supply in the near-term, they should shift focus to building long-term resiliency in the supply chain. One important aspect to resilience is diversity - both on the supply and demand sides.
Crises like the coronavirus have brought to light the risks of a geographically-concentrated supply chain. Businesses can strengthen their adaptability in the future by sourcing supply from a variety of locations, including some close to home.
In a recent survey, 53% of businesses indicated they had difficulty getting information from overseas suppliers. Companies like American Giant, a U.S.-based apparel brand, have found that domestic supply chains allow for quicker, more reliable communication and better relationships. The strong relationships that commonly result from domestically-based supply chains allow for greater flexibility in order modification, delays, and cancellations when necessary. In the case of American Giant, founder Bayard Withrop has found the virus has brought out “connected-community ideals” among suppliers and customers looking to help each other in times of need.
Channel diversity is also important on the demand side, to ensure customers have a variety of ways of reaching the product or service. Investments in web-based distribution or building new distribution channels can help businesses stabilize their supply chains.
Building Resilience: Simplification
Simplifying and streamlining the end-to-end supply chain can help businesses gain a fuller understanding of their production processes and more easily adapt to shocks. Diversification and simplification can be hard to do at the same time, but can be achieved when companies focus on making their supply chain as efficient as possible (simplification) while mitigating risk (diversification).
Companies with domestically-based supply chains have an advantage in this arena; they will be able to more easily identify critical components and their origins, and make production adjustments on the fly. Companies in more globalized industries or those that are heavily dependent on complex international supply chains will find it more difficult to cut out middlemen, source more locally, and manufacture closer to home. For these companies, consolidating processes while building in backups will help create a more efficient, transparent supply chain. For all companies, investing in mapping the supply chain for greater transparency will be essential moving forward.
As a social impact initiative, Rem and Company also offers free consulting services and resources to small businesses and nonprofits impacted by COVID-19. Our pro-bono consulting teams provide small businesses with the opportunity to identify and prioritize issues facing their business, propose innovative strategies, and facilitate execution. If you are a small business or nonprofit in need of assistance, learn more about how we can help.