Supply Chain Disruption: Single-Sourcing Is No Longer a Solution
Managing disrupted supply chains is top of mind and has become more and more important for PPE, medical supplies, and other “essential” products. As COVID-19 cases spike around the country, the increased need for supplies will challenge supply chains again. In recent surveys, 94% of the Fortune 1000 companies have reported seeing coronavirus-driven supply chain disruptions and 56% of CFOs identified this as a key issue facing their company. Risk mitigation has become critical.
"The pandemic has been and will continue to be a major shock to global supply chains and sourcing strategies." -Harvard Business Review
When supply chains are disrupted, those who single source, in particular, suffer most. There are many examples of this especially for PPE and medical supplies. In times of shortages, most suppliers focus on their core customers. Many U.S. businesses are looking for multiple suppliers including ones in Mexico and Central America. Their proximity makes them more attractive, with lower shipping costs, no duties, and imports that aren’t on the high seas for weeks at a time. In other categories, Apple is moving a part of its supply chain to India. Indonesia has made dramatic changes to become more “business-friendly." This is what PwC and AmCham call a ‘China+1’ strategy.
In situations like a pandemic, companies need multiple suppliers, particularly for essential supplies. Spikes in demand, temporary trade restrictions, and shortages of critical supplies make consistent supply less reliable. A McKinsey survey shows that 93% of supply chain leaders are looking to improve resilience by dual sourcing (53%), increasing inventory of critical items (47%), nearshoring and increasing their supply base (40%), and regionalizing supply chains (38%).
WHERE TO START
With the COVID-19 spikes, the time to add an additional supplier is now. According to McKinsey, “Actions taken now to mitigate the impact on supply chains can also build resilience against future shocks.”
"Without data, you're just another person with an opinion." -W. Edwards Deming
To begin, businesses must identify at a granular level the items that are at high risk and develop a realistic plan going forward. It is necessary to critically review requirements to identify those that are sourced from high-risk areas and lack ready substitutes. McKinsey recommends developing a risk index for each based on the uniqueness and location of suppliers.
Once you have identified your critical items, there are several factors to consider anytime you add a supplier to your supply chain. There are companies that typically specialize in certain industries or geographies. Finding one that has a deep knowledge and experience in your industry and understands the unique challenges your company faces will help to shorten the onboarding. These companies that already know your industry have experienced staff that is technically trained so they are hyper-focused on what impacts customers.
In addition to aligning with a company already familiar with your industry, you want to partner with suppliers that diversify their own supply chains in order to provide your company with peace of mind that they can deliver the products you need. They continuously monitor critical-to-business products and practices to limit disruptions and prepare for changes. A company that can provide you with demand forecasting and reports usage information by working closely with customers and manufacturers alike help to limit challenges in the future.
PARTNERING WITH SUPPLIERS
Once you have found a reliable supplier, commit to being transparent and responsive. Suppliers that make good partners often use the same protocol for their own supply chains. Due to their position in the marketplace, they can report potential issues to customers before they can negatively impact the safety of employees or pharmaceutical production. Decision-makers and manufacturers that foster frequent and transparent communication have better outcomes.
Another good practice for both suppliers and customers is to purchase and warehouse additional inventory on items that may have emerging supply constraints. Your supplier should be able to work with you to mitigate most risk. Often is the case in shortages, COVID-19 related products have been placed on a restricted-access list and purchases of these must be cleared by senior management; priority for COVID-19 products typically goes to top customers.
SUPPLY CHAIN RESISTENCE
Most companies are assessing their supply chains and taking action to improve resilience. As a start, they are identifying the products and materials that are at high risk and developing realistic plans going forward. Gartner has identified six strategies. Some best practices include:
- Diversifying sources for critical components and materials; this includes geographic diversification, partnering with the same supplier, or using secondary sources. Those highly dependent on China are considering a China+1 strategy.
- Building higher levels of safety stock or strategic inventory reserves of, at the least, critical supplies and “essential” items.
- Multiple- sourcing, especially for high-risk items, and building partnerships with a few suppliers. In addition to reducing disruption risks, this can have additional benefits such as access to more capabilities, more ideas for cost reductions, etc.
- They are ensuring that transportation is not a bottleneck. This is one reason companies are looking to have supply options closer to home.