Pundits have been talking about supply chain transformation for years. The coronavirus pandemic reinvigorated these discussions. For example, Jim Vinoski (@JimVinoski), a former CPG executive, writes, “There has been a lot of discussion as the novel coronavirus crisis progressed about the need to make drastic changes to the U.S. industrial supply chain. We’re going to decouple completely from China, dramatically cut back on sourcing from other countries, and bring manufacturing back to America, right?”[1] Inu Manak (@inumanak) and Logan Kolas (@Logan_Kolas), researchers from the Cato Institute, write, “Among the many issues the COVID-19 pandemic has amplified in trade policy circles, ‘supply chain fragility’ and ‘resilience’ seem to be major talking points.”[2] George Stelling (@GeorgeStelling), Founder of Quadrillion Partners, adds, “This year will likely go down in the history books as a major inflection point for the U.S. economy and American society. … As business owners, you can count on two fundamental trends to continue: Namely, your supply chain will continue to evolve, and your online engagement with customers will remain critically important.”[3]
Just-in-time or just-in-case?
Rich Weissman (@weissman_rich), a supply chain practitioner turned college professor, insists, “Today’s supply chains are too lean. The COVID-19 pandemic has highlighted the dangers of just-in-time principles.”[4] He notes Just-In-Time (JIT) manufacturing is “a Japanese operations management technique based on the Toyota Production System, used to eliminate waste, align production to demand and have suppliers deliver smaller amounts of materials more frequently.” He continues, “Fast forward to today, JIT has morphed into lean manufacturing with its resulting organizational streamlining. Global supply chains have been over-developed and increasingly synchronized, and S&OP strains to reach phantom equilibrium between supply and demand. … But here we are today, dealing with the COVID-19 pandemic and all bets are off. We have discovered that our supply chains were not robust at all and far too finely tuned with the traditional workarounds failing. No matter the supplier relationship or contract, we have learned how fragile the process is in a global pandemic.”
Bob Hormats, former U.S. Undersecretary of State for Economic Growth, Energy and the Environment, and now Managing Director at Tiedemann Advisors, has stated, “Even prior to the coronavirus crisis, there was beginning to be a reassessment in boardrooms and in Washington about our supply chain reliance on certain countries. American companies … were already reconsidering certain supplier relationships. And more broadly, some were beginning to question whether they had become too dependent on one of their decades-old supply models — Just in Time deliveries of key components and products — that led to less need to keep large amounts of inventories, even in critical items, and a concentration of reliance on China and numerous other countries that had proved to be very efficient and quick suppliers for a multitude of items in the past.”[5] Lauren Pittelli, founder and Principal of Baker Logistics Consulting Services, insists it’s time for companies to transform just-in-time supply chains to just-in-case supply chains. He explains, “In pursuit of ever-greater efficiency, many businesses de-emphasized supply chain flexibility and resilience. Today’s situation calls for rebalancing priorities. … To withstand a crisis, or better yet to come out of it stronger, balance the low cost and efficiency of the JIT model with the need to be nimble and agile in reacting to market changes.”[6] He lists five components of a just-in-case supply chain. They are:
1. Simplicity. Pittelli explains, “Simplifying the supply chain will allow you to focus on adapting to changing dynamics. … Outsource activities that aren’t core to your business, so management’s time and attention are devoted to activity that supports business continuity. … Simplify the task by distilling the number of suppliers to those most critical.” Distilling the number of suppliers a company has to the “most critical” suppliers runs counter to resilience arguments favoring supplier redundancy. Be wise when making such decisions.
2. Collaboration. The pandemic has resulted in a chorus of voices suggesting more supply chain collaboration is needed. Pittelli writes, “Prioritize partners who have skills, tools and knowledge that will enhance your company’s capabilities and minimize your risk.”
3. Resilience. Supply chain resilience is the leading argument against JIT strategies. Pittelli writes, “Consider producing closer to the selling market, holding a larger inventory of sensitive items or double sourcing key products.”
4. Redundancy. As noted above, resilience and redundancy are travelling companions. Pittelli explains, “To reduce risk, build your Plan Bs. … To protect your business from disruption and to combat price volatility, design — and put into action — a Plan B for each of your main supply chain providers.”
5. Innovation. Pittelli writes, “The risk of change goes way down in a crisis. If something’s not working today, there is little risk in trying something new. … To paraphrase Rahm Emanuel, don’t let a serious crisis go to waste. It’s an opportunity to do things that you never thought possible.”
Pursuing a JIT or a JIC supply chain strategy requires a lot of careful thought and planning. As I see it, all of the components discussed above impact either strategy. Journalist Alan Beattie (@alanbeattie) notes, “A lot of intellectual momentum is building behind the idea that the Covid-19 pandemic has revealed the foolishness of corporate executives in extending their supply chains without properly assessing the risks. Companies have been thinking of ‘just-in-time’ when they need to be thinking about ‘just-in-case’.”[7]
The way ahead
Beattie believes some companies may make the wrong decision as they emerge from the pandemic. He writes, “It is time to wheel out the old saying of the American humorist and newspaperman H.L. Mencken: for every complex problem there is an answer that is clear, simple, and wrong. If the problem is ‘What to do with supply chains after Covid-19?’ and the answer is to reshore — or diversify — anything that moves, then we have a good example of the phenomenon.”[7] He adds, “The reality is complex, and — a crucial point — differs with each industry. … Nonetheless, the principle is quite simple. The role of diversifying is to insure against shocks that might happen to one supplier, or to one economy or region, and not to another. There are several examples of how, in retrospect, companies had underpriced that risk.”
Manak and Kolas agree with Beattie that diversification should be the starting place for most global supply chain strategies. They explain, “The response should … not be turning inwards, but rather greater diversification and planning for disruptions — all things that companies can do on their own without government intervention. It’s also worth mentioning that even if we were able to move some production home, it would do nothing to alleviate the challenges posed by prolonged lockdowns on supply disruptions.” They conclude, “Instead of pushing for policies that would further disrupt supply chains, the United States should prioritize an economic environment conducive to trade and investment. Businesses know their supply chains better than government[s] ever can, and allowing them the space to learn from the current pandemic and respond in kind is a better approach than trying to force sourcing decisions on them.”
Footnotes
[1] Jim Vinoski, “Post-COVID Supply Chain Changes Probably Won’t Be What You Think,” Forbes 17 June 2020.
[2] Inu Manak and Logan Kolas, “Supply Chains and Interdependence: Is this Really a Problem that Needs Solving?” Cato Institute, 17 June 2020.
[3] George Stelling, “Leverage The Inflection Point: Repositioning Your Supply Chain In 2020,” Forbes, 28 April 2020.
[4] Rich Weissman, “Today’s supply chains are too lean,” Supply Chain Dive, 24 March 2020.
[5] Ibid.
[6] Lauren Pittelli, “Moving from Just in Time to Just in Case,” IndustryWeek, 27 May 2020.
[7] Alan Beattie, “Be wary of scapegoating ‘just-in-time’ supply chains,” Financial Times, 28 may 2020.
