How to navigate inefficiency and incomplete contracts

This is an excerpt of the original article. It was written for the May-June 2021 edition of Supply Chain Management Review. The full article is available to current subscribers.

May-June 2021

Indulge me for a minute, while I lead a cheer for our profession. I wrote my column for the January 2021 issue of SCMR one Sunday morning after watching the first trucks full of vaccine roll out of a Pfizer plant in Michigan, headed for a UPS sortation depot. I felt an incredible sense of optimism for the country, and pride in the role that we, as supply chain managers, were going to play to combat a pandemic. Supply chain as in the spotlight, and on that morning, it was for all the right reasons. Fast forward to late April 2021.

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A fundamental theory underlying the concept of supply chain resilience is that the most efficient supply chains are also the most fragile. Of course, when the global economy is humming, as it was for the past 10 years, and supply chain disruptions are region-specific and isolated, as was also the case for the past 10 years, that theory seems, well, theoretical. It was something for academics to discuss while supply chain managers designed supply chains that took advantage of the labor arbitrage, minimized the amount of inventory on hand, operated near capacity and relied on logistics networks for just-in-time delivery over long distances.

Then along came COVID-19. Suddenly, theory became practice and global supply chains came to a screeching halt. Companies operating just-in-time networks with minimal on-hand inventory proved to be the most fragile—shutting down first. Others that were already operating at near full capacity, such as the toilet paper industry, could not increase production to meet demand. Efficiency became a vulnerability rather than an asset.

In addition to supply problems, many of these companies grappled with rigidly worded contracts, with limited options. They were either required to take delivery of supply they didn’t want or couldn’t get supply they desperately needed. The contracts were incomplete. In this paper, we’ll demonstrate that when used in the right context, the adoption of incomplete contracts can actually help companies gain more flexibility and resilience.

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