Some of you may remember the reference to the camel’s flatulence having caused the ship being blown sideways in the Suez Canal. This headline reminded me of that incident “Thanks to climate change, supply chain disruptions are poised to be the new normal” because it is becoming clear that disruptions in the supply chain are now a feature and not a bug. Meaning that supply chain resiliency is now a critical success factor and that means that global supply chains that are long and complex but delivered low costs may no longer be feasible. We may need to be thinking about shorter, simpler supply chains that may feel like they are increasing costs but are far more resilient and therefore much lower in costs long term. We just have to develop the analytical models to reflect that!
I was just talking to the CPO of a large global manufacturing client (hello A.D.!) who has also become a friend and an intellectual sparring partner(?) and I was asking him about this resiliency factor and whether he had started thinking about making long term structural changes to his supply chain. While we ran out of time, he did relay an important factoid. They are making decisions on a PO level where to place their order between China and Italy – not on the allocations of volume they typically make between those two different suppliers in those locations. They run a cost model to incorporate current transportation costs and more importantly lead time before placing each order because of the conditions in China. My challenge to him was to start thinking of that as a constant and not an aberration. I also asked him if their customers (very large global corporations) had started asking more questions about resiliency in his supply chain and not only did he confirm that but also commented that they were wanting to make sure that he was not dependent on Chinese suppliers. If he takes me up on my challenge, it could actually be a competitive advantage. Turning it into a competitive advantage requires education of both your sales force AND your customers – not easy but not impossible either.
While discussing the chip shortage, the article points out that There are only a handful of foundries that account for most of the world’s chip fabrication, resulting in roughly 91% of the contract chipmaking business being located in Asia. Which means that the equivalent of the camel’s flatulence in China could cause a worldwide shortage and the current shortage is not going away fast. Our client AD pointed out that they realized this painfully when they thought they had back up suppliers, but they were in the same geography as their main supplier and when COVID hit, they were both shut down. This particular article posits that COVID was nothing compared to the disruptions from climate change that are already here, are as pervasive across the globe, are far more permanent and we don’t have any “vaccines” on the horizon and then pile on the far greater political divide on climate change.
We have long advocated that the most critical component of any category (supply chain) strategy is the exit strategy – what are the decision factors that you need to monitor so that you know you may have to exit because exit you will at some point? As far as resiliency is concerned, a number of those factors are flashing red. Even Toyota (pioneer of LEAN) learned the hard way during the Fukushima earthquake and tsunami that JIT was a major constraint and started rethinking their supply chain design.
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