Out-Law Guide | 07 Sep 2020 | 8:00 am | 4 min. read
Businesses have some major issues to consider when rebuilding and restructuring their supply chains to ensure that they learn from the lessons of Covid-19 and implement more resilient and better supply chains for the future.
We previously looked at how companies can manage supply chain distress in the manufacturing sector.
There has been a trend in recent years for using key suppliers to drive economies of scale but coronavirus has really revealed the risks that single sourcing can pose. An over reliance on China for supply chains emerged once the virus first took hold. Companies are moving to dual sourcing or 'China plus one' to provide greater resilience.
However, diversification in the supply chain may be more than just dual supplier. Businesses should also consider multi-location sourcing, inter-company resourcing and 'make v buy' decisions to provide real diversification and ensure a greater level of resilience.
Businesses are considering their supply chain partners carefully. While cost remains critical in a challenging economic market, it is no longer a race to the bottom. Value for money is an important consideration in making sourcing decisions. A business will need to consider not just the price but the benefit of paying slightly more, for example for dual sourcing or ensuring there is not an over reliance on China. This may be a small price to pay for better resilience in the long term. Businesses need to ensure that their contracting policies and procurement practices enable this more mature purchasing behaviour.
While cost remains critical in a challenging economic market, it is no longer a race to the bottom.
Businesses are also weighing up the need to give consumers choice and customisation against the ability to reduce the number of product lines and stock keeping unit codes (SKUs) in order to reduce overall complexity in the supply chain. We have seen in the context of the pandemic that reducing SKUs has enabled some businesses to survive and be more resilient and more efficient.
Global supply chains were popular before the pandemic but companies are now considering moving to more local supply chain and labour to improve business continuity. Buying local can be of significant benefit to supply chains in avoiding disruption from external events such as coronavirus or Brexit. There are still some practical limitations here because not every product can be made in every location. Plant based products, for example, are climate specific.
Lean and agile manufacturing has been made possible by technlogy and data. However, just in time models have little resilience or tolerance. Businesses which are now prioritising resilience are investigating the use of stockpiling to provide a buffer in case of manufacturing disruption. They are also looking at other production models such as materials requirements planning, flexible manufacturing systems or more fundamental changes such as modular or on-site production. Businesses should consider carefully the best production method and stock holding which balances cash requirements with resilience.
Consolidation of the supply chain brings with it reduced risk and volatility as focus is placed on fewer suppliers which reduces the risk of integration and the inherent risk of poor management of a large number of suppliers. The improved predictability and transparency can result in better compliance and improved relationships which help with resilience. We are also seeing a surge in kingmakers. Kingmakers create value in the supply chain by creating an alliance of supply chain partners to work collaboratively. This could be the OEM, 3PL provider or another party in the supply chain and different models are emerging across Europe.
Fundamentally the current situation provides the drivers for business change at this time. Whether that is aligning to the above trends, increased collaboration, circular economy or increased use of data and technology. To support businesses in rebuilding their supply chains we have created a checklist of some of the key issues to consider and factor into the strategy below.
|Barriers to supply chain improvements||Barriers to supply chain improvement|
|Improved forms of contracting|
|Supply chain finance||How supply chain finance can boost operational resilience|
|The net-zero challenge for the supply chain||Supply chain management: embracing the net-zero carbon challenge|
|Managing regulatory compliance||Regulatory compliance and the global supply chain|