It’s Time to De-risk the Supply Chain by Onshoring Production, Right? Wrong.

Aug 3 · 2 min read  · Written by Tyler Long

COVID interrupted supply chains that relied heavily on Chinese manufacturing and export capabilities. That means it’s time to de-risk the supply chain by onshoring production, right?

Wrong. The bedrock of a resilient, competitive supply chain is maximizing core competencies throughout the value chain irrespective of their location.  That logic hasn’t changed.

https://www.statista.com/chart/20858/top-10-countries-by-share-of-global-manufacturing-output/

https://www.statista.com/chart/20858/top-10-countries-by-share-of-global-manufacturing-output/

Picture this: You’re a manufacturer of highly-specialized airplane parts – e.g.,  turbine blades.- designed to deliver the best turbine blades possible to your customers.   It’s what you do and you do it well.  You design and build blades; you don’t deliver them to customers.  Such delivery is performed by someone else with their own core competency – in this case, of transportation.   Why don’t you do it also? Because transportation would draw resources away from the core competency of what makes you great.  The implication? Carefully choose a transportation/delivery partner who meets or exceeds the partner selection criteria laid out by your business.  In short, you perform *a* role within the broader supply chain process, not the entire process from design through delivery.  Pretty basic.

China leads the world in many areas of manufacturing; metals, chemicals, automotive, electronics, and semiconductors to name a few.  One of the country’s core competency is manufacturing products for export. The highest functioning supply chains derive economic value and corporate competitive advantages by forging and leveraging strong partnerships with supply chain participants. Those partnerships and participants complement a company’s core competency and build supply chain strength where there would otherwise be weakness. The greatest benefits in the pursuit to build the supply chain are realized when the selected partners are best-in-class in a competency the buying company lacks.

https://www.interactanalysis.com/chinas-manufacturing-industry-in-2018/

But wait, we haven’t talked about COVID…

COVID is a black swan event, the definition of which is that it is UN-PREDICT-ABLE. Yes, many companies became acutely and starkly aware of their reliance on Chinese exports. A sobering realization for some. But being in this position is not a problem to be solved. In contrast, it indicates that the company has likely chosen supply chain partners whose core competencies complement theirs. Now is not the time to crumple up the sourcing strategy and start again, solving for the next COVID. Being stocked out of many inventory items in mid-April was not a supply chain strategy mistake. It was a symptom of the greatest supply chain disruption the modern business era has ever seen. Given that it was unpredictable and the first time we’ve such an event, the thing to do now is to remain calm and double back on assessing the supply chain risk profile.

Uncertainty and risk in the supply chain are hedged with redundancy. It’s leaders’ responsibility to know when the time has come to call on the redundant / secondary supply chain partner. It’s the execution team’s job to work with those partners to deliver on customer expectations and corporate plans.

For the sake of this discussion, let’s consider two types of supplier redundancy: one where a secondary supplier is based in the same region and another where the secondary supplier is geographically unique. If a company, hamstrung by COVID supply interruptions, lacked geographic supply redundancy the failure was here. If this is not the case, but the execution team was not able to collaboratively solve supply challenges with the secondary supplier, there’s more to be investigated here.

In conclusion, relocating production to solve for COVID has a net impact on the supply chain risk profile of exactly zero because the COVID reflects a black swan event. The way to ensure supply interruptions don’t result in catastrophic failure is to ensure multiple forms of supply redundancy, thereby reducing the risk profile of a company’s supply chain.

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Content Author: Tyler Long

 

Tyler Long

Tyler Long
Passionate, analytical consultant leader with 15 years’ experience in multiple industries and advanced education in data-driven business transformation. Guest lecturer at NYU, Black Belt – Six Sigma, DMAIC & Caterpillar Production System (CPS), CPIM – Certified in Production & Inventory Management | APICS, CSCP – Certified Supply Chain Professional | APICS.

Monday, Aug. 3rd, 2020 9:03 EST

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