Supply Chain Strategy Trends: COVID-19 is Prompting Executives to Reconsider Resilience

Editor’s Note: Ann Marie Uetz, head of the Coronavirus Task Force at Foley & Lardner LLP, has nearly three decades of experience counseling manufacturing companies on issues that arise within the supply chain, particularly in financially or operationally distressed situations. Vanessa Miller, co-chair of Foley’s Supply Chain Team, advises manufacturing clients on a wide array of supply chain disputes and the development of supply chain agreements and related negotiations, as well as litigating supply chain disputes.

A new survey suggests a potentially drastic shift in the way manufacturing executives think about their supply chains: from a primary focus on minimizing lead times and cost to one that prioritizes more stability and resilience in the face of disruption.

Of the nearly 150 executives responding to Foley & Lardner LLP’s Global Supply Chain Disruption and Future Strategies Survey, 70% agreed that, as a result of COVID-19, sourcing from the lowest-cost supplier will no longer be the sole focus in making decisions.

Instead, companies will place greater emphasis on partnering with suppliers that have more resilient and flexible processes to ensure continuity of supply. In addition, 62% agreed that the pandemic will lessen companies’ focus on just-in-time (JIT) manufacturing models, in favor of warehousing and inventory banks, for additional protections against shutdowns.

The calls for such change are a natural outgrowth of any disruptive event – executives might have expressed similar sentiment following the Great Recession – but then again, 2020 is not 2009. The pandemic, and expectations of future cataclysms, may permanently transform the global supply chain landscape. This is especially true if manufacturers place more weight on the importance of continuity of supply over traditional pricing and cost concerns.

Which begs the question: How can supply chain and procurement executives begin to make the shift toward a more resilient, flexible, and stable global supply chain?

For starters, they can assess the extent to which they rely on a single source for the supply of various materials and components. Where dual-sourcing is a viable option, manufacturers can and should qualify alternate suppliers with manufacturing operations in different locations, which will help minimize the risk of potential interruptions. Nearly 40% of survey respondents are dual-sourcing or multi-sourcing already or report that they are planning to do so.

To that end, companies should take time to map the entire supply chain – tracing inputs from raw materials to finished goods. This process will require not only identifying the company’s suppliers, but also the suppliers’ sub-suppliers and logistics providers. This allows for the assessment of critical risks at each step, whether it is natural disasters, tariffs, power outages, labor issues, transportation links between suppliers, or any number of other potential hurdles to continuity of supply. Manufacturers can then find suppliers in different regions that will not be subject to the same set of risks, and adjust contracts to allocate who may bear the additional costs associated with interruptions.

For companies that are considering moving away from a JIT production model, there are number of alternate options and protections to consider implementing. For example, companies might store additional inventory themselves to protect against disruptions and the storage may occur onsite or at an offsite warehouse. Another option is to shift the obligation to suppliers by requiring them to maintain a “bank” of materials and component parts for future use, again at either an onsite or offsite warehouse or location. Regardless of the overall strategy for warehousing or inventory banking, companies will need to determine who in the supply chain is responsible for paying for additional warehousing or inventory carrying costs, how much inventory will be banked, the perishability of the goods stored, and how frequently they need to be replenished (e.g., by using the First-In, First-Out [FIFO] method, in which the oldest products in inventory are sold or used first). Manufacturers may even conduct supply chain stress tests, not unlike the financial stress tests that banks have been subject to since the Great Recession.

The strategy that business leaders devise and implement to handle these issues will send ripple effects throughout the entire supply chain, touching on everything from contract negotiations and risk allocation, to reshoring or near-shoring production and storage, to the integration of new digital technologies. Given the many strategy inputs and anticipated changes to most companies’ supply chains, executives should not delay in preparing their post-pandemic supply chains and implementing lessons learned from COVID-19, today.

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