Decoupling May Not Improve Supply Chain Resilience
Everyone seems to agree that making supply chains more resilient is a great idea. A couple of experts, however, recently observed that doing this will be neither fast nor easy, and they offered important points for companies to consider.
In particular, they warned against a knee-jerk “get out of China” policy. It’s of course smart to diversify your risks, but ripping your supply chain out of China might not achieve what you’re hoping for — if it’s even doable.
“Decoupling the U.S and Chinese economies is not the same as diversifying for resilience,” said Kamala Raman, a senior director analyst with Gartner. “The first is seen as a binary all-or-nothing act, which can be expensive or impossible to execute given the depth of integration between these economies. Improving resilience, on the other hand, is an excellent idea.”
Similar caution was voiced by Willy Shih, a professor at Harvard Business School and author of “Global Supply Chains in a Post-Pandemic World,” which appeared in a recent issue of Harvard Business Review (HBR). “There’s a lot of impatience about this supply chain resilience and reshoring,” he said recently. “I like to remind people that it took 20 to 25 years for China to capture the supply chain in many products. And if you want to move the supply chain, we’re not talking about something that will happen in a year, or a couple of years.”
“The tough question will be, will consumers pay more for that risk mitigation?”Willy Shih, Harvard Business School
Shih added that consumers probably wouldn’t like the higher retail prices that result from moving production out of China. “People built these globalized supply chains and the risk of disruption has been very hard to price,” he said in a recent HBR Q&A. “So, people have ignored it. But the tough question will be, will consumers pay more for that risk mitigation? Because if a manufacturer wants to put capacity in a higher-cost country that is closer to the market where the products will be sold, then somebody has to pay that additional cost.”
A potential solution is to hold more inventory, but Shih cautioned that that is expensive, too. “That either means lower profits, or what I think firms need to do is rethink a lot of their manufacturing processes and try to focus on process innovations that will allow them to produce at lower costs, maybe locally,” he said.
Raman, too, had advice for companies wanting to achieve supply chain resiliency without breaking the bank. She recommended they think hard about these 6 questions:
- What is our risk appetite?
- Who are our critical suppliers?
- What are we protecting? For example, a product line or market access.
- What trade-offs are we willing to make?
- Who will pay for it?
- What incentives are available to help us with this effort?
In the quest to build resiliency, doing nothing is not a recommended solution. “One of the things that I’ve observed in this pandemic and the recession that’s going with it, is that companies who use the crisis as a way of unfreezing their ways of working, unfreezing their organizational processes, adopting new ways of doing things — those are the ones who I think can survive and thrive,” Shih said. “The ones who hope that things will go back to the way they were, and are just waiting for it, we’re already seeing a lot of problems there.”