Adapting to Post-Pandemic Transience Strategies!
Moving on from the initial COVID-19 chaos, we find ourselves eagerly grasping for that pesky "new normal" everyone keeps talking about. But hey, let's face it - we all know deep down that our lives are more like a rollercoaster than a steady train ride, constantly experiencing shifts and changes we need to adapt to.
As for supply chain pros, one thing's for sure: our supply lines and long-held assumptions are going to need a serious check-up. In critical sectors like biopharma, PPE, and high-tech medical devices, it's no longer just whispers, but full-blown screams to reconsider our supply lines. Specifically, our dependence on China - an issue that has raised eyebrows for years and is now at the forefront of every supply chain conference.
The folks at these conferences are plotting their next moves, faced with tough questions that require more than a quick Google search for answers. Redrawing supply lines isn't a walk in the park. Factories, labor forces, technical expertise - it's not as easy as packing a suitcase and moving on. On top of that, China isn't just going to sit back and let their years of investment in supply chain infrastructure slip away. They'll fight tooth and nail to remain relevant in our global production mix.
With the news of China's factories reopening and production resuming, there's no denying the allure of returning to "normal". But let's face it, there's plenty of room for complacency to set in. The default will likely be to leave things the way they are. However, between new proposed legislation, public sentiment, and tariffs, wise supply chain leaders will need to consider whether and how they'll make adjustments to their supply lines.
But wait a minute... Moving away from China, even if it's to more reliable locations like India, Mexico, or Singapore, doesn't come cheap. New factories might need to be established, and existing equipment either moved out of China or replaced in the new location. Plus, expertise in the new location needs to be built up over time. Some companies have managed to keep their manufacturing know-how inside their American engineering teams, but others may have unwillingly given some control over production details. Losing that know-how means losing a critical bargaining chip.
Moving back to the U.S. has its pros and cons. Sure, relocation back to American soil would be more reliable in the event that foreign governments become uncooperative during a crisis. Plus, we'd avoid the hassle of dealing with port labor strikes, international air travel restrictions, typhoons, and every other mundane risk that seems less daunting now. Labor costs in the U.S., however, are still considerably higher than in other parts of the world.
Last year, some States voted for a $15/hour minimum wage, which is still a bargain compared to China's hourly wage of less than $3.50. Factories could potentially use automation to replace line worker costs if needed. States with lower minimum wage levels could also be targeted. More skilled American jobs would manage the equipment and oversee operations. Tax incentives could also help bridge any remaining gaps, with at least partially returned benefits through increased tax receipts for those higher-end jobs.
Ultimately, companies will conduct a Landed Cost Analysis, comparing costs at the point of entry into the U.S. (whether the product is made there or imported) to find the best solution.
China: Not so permanent
Chinese policy-makers will also play a key role in the calculus of exiting. As they manage their own labor markets, they have the ability to reduce labor costs as low as necessary to offset domestic U.S. automation advantages. Decades of government investments in infrastructure like land, buildings, and technology will drive decision-making to maintain their labor costs at a minimum. Communist countries like China have that ability.
As tensions between the U.S. and China grow, Chinese leaders may become even less willing to accommodate American concerns about the living wage of the Chinese worker.
We recall the Conflict Mineral legislation that discouraged the use of child labor in nine African countries. Consumers could also demand more transparency regarding the living and working conditions of Chinese employees.
It remains to be seen if consumers are willing to continue spending their dollars in China, disregarding the impact of global commerce on the Chinese worker.
Regionalization and Complexity
China can't just be considered a manufacturing point; it's also a massive global consumer. Companies that target the vast Chinese market will be reluctant to pull all their manufacturing out of the region. A regionalized model, where production is decentralized and divided among a few strategic locations (including back to the U.S.), might help.
This strategy won't be a one-size-fits-all solution. Moving a complete factory from one place to another in its entirety is no easy task. That challenge is multiplied when supply chains are operated from different locations. Multiple regional locations increase the complexity when planning global purchases and material deliveries for each of the new locations.
Complexity equals costs, so these regional models, while offering the ability to hedge supply chain bets across various parts of the world, will also come with higher cost profiles than centralization.
The Supply Chain Agenda
As barbershops and small businesses begin to reopen, we'll start asking ourselves how to get back to work safely while still keeping ourselves and our loved ones safe. Will we look back on the past few months as a horrible nightmare or a warning sign of the need for more assured self-reliance?
Nostalgia for consistency will make it super easy to just pick up where we left off. Chinese factories will be humming along, and goods will be back on the shelves. Complacency will be tempting. But what will be the lasting message of this COVID experience, and what choices will we make as a result?
For supply chain leaders, it's time to plot our course forward using the impermanence of the past as a guide. Here are six areas we need to focus on:
1. Supply base mapping
Supply chains often rely on a small group of "strategic suppliers". But it's crucial to know the names and exact locations of every factory that manufactures components for our top-earning products - even the smallest component.
2. Risk monitoring and governance
The world is in a constant state of flux, and companies need to be ready to respond to unexpected events affecting their supply chains. This requires a technology-powered, cross-functional approach to supply chain risk management.
3. Supplier Management
Supply managers must stay informed about their suppliers' businesses and changes in their pricing, whether due to the previously mentioned risk monitoring or regular reviews. Communication protocols with suppliers are crucial to minimize end-of-quarter surprises.
4. Manufacturing
COVID has shown us the need to diversify our manufacturing locations, with potentially moving some operations back to the U.S. This will involve careful consideration of cost, automation, and labor costs.
5. Environmental, Sustainability, and Governance (ESG)
Consumers are increasingly interested in learning about the social and environmental character of the products they buy. Companies that prioritize ESG efforts and offer transparency in their supply chains will be seen as heroes by their customers.
6. Integration with Sales & Marketing
The supply chain's role in product marketing and sales is becoming more prominent. If reliable sourcing is a concern for customers, sales and marketing teams should be prepared to address it.
Post-pandemic, we'd be remiss to ignore the lessons of the past. Those who forget their supply chain struggles, dependence on foreign governments, and economic instability are seemingly doomed to repeat those mistakes. Our collective COVID-19 memories and resolve to not repeat them could quite literally be the difference between life and death.
- In the post-COVID world, supply chain managers will face tough decisions regarding their supply lines, particularly in sectors like biopharma, PPE, and high-tech medical devices, where reconsidering dependence on China is no longer a silent debate.
- One consideration for supply chain leaders will be the cost implications of moving manufacturing away from China, whether to places like India, Mexico, or Singapore. Establishing new factories, relocating equipment, and building expertise in the new location require substantial investments.
- Automation might be used to offset higher labor costs in the United States compared to other countries, but resistance to the $15/hour minimum wage in some States could make American labor less cost-effective.
- Companies might opt for a regionalized approach to production, keeping some manufacturing in China to cater to the vast Chinese market. A decentralized model with strategic locations, including the U.S., could help companies hedge their supply chain risks.
- In the era of increased consumer awareness, companies will need to prioritize transparency regarding the living and working conditions of their employees. The impact of global commerce on Chinese workers could become a significant factor influencing consumer decisions.
- Regarding supply chains, it's essential to conduct thorough supply base mapping, implement technology-powered risk monitoring and governance, prioritize communication with suppliers, consider diversifying manufacturing locations, prioritize Environmental, Sustainability, and Governance (ESG) initiatives, and integrate supply chain strategies with sales and marketing efforts for a more holistic approach.
