Dr. R K Amit is currently an Associate Professor in the Department of Management Studies, IIT Madras. S Ramachandran is a Principal Consultant in Infosys Knowledge Institute.
In 2020, the world is facing a catastrophe in the form of Covid-19. Apart from the health and social ramifications, the impact on the global economy are phenomenal. Already slowing global growth can be hit by a few percentage points, leading to a recession. Up to one third of global trade can fall in 2020 according to the World Trade Organisation. Global and domestic supply chains are disrupted. Approximately a quarter of the automobile components, specifically the electronic ones sourced from China may not be available in India. This can bring the assembly lines to a grinding halt with no immediate alternate sources for supply.
In supply chains, there are five key aspects (Figure 1 below) to consider.
It starts with 'What is produced?', based on market demand. 'Who makes it' is important for cost effectiveness and accountability. 'Where it is made' and how close it is to demand will decide the delivery conditions. 'How things move' across the value chain from the raw material stage to the last mile at the customer’s doorstep and the intermediate points where the products rest for processing or packaging also play a role in the final price, along with other characteristics such as quality. Covid-19 is a unique situation in which each of these factors have been shaken to the core at the same time, especially for supply chains across the borders of countries.
Car-makers have started making critical ventilators. Product makers are on the lookout for local suppliers as an alternate. Parts may not be shipped from some other country but from a nearby supplier. Equipment makers may not be equipped to deliver their products until the last mile. Delivery organisations that only focus on the transfer of goods from one point to another are becoming popular, with as little contact as possible.
With increasing comparative advantage of globalisation in past few decades, the risks and vulnerabilities of this model are also increasing. We are witnessing more trade over longer distances with higher lead times. This is further complicated with higher variety and complexity of products. Apple had to limit the online purchase of its flagship iPhone in several countries due to supply disruptions across Asia. Its plans for launch of new products may get delayed, according to media reports. It is imperative to understand and mitigate supply chain risks, especially when unexpected and unimagined events like Covid-19 disrupt the global economy.
An earlier instance of global supply chain disruption was the 2011 tsunami in Japan. Companies like General Motors and Intel faced serious supply disruptions immediately after the tsunami. The event propelled companies to rethink business continuity strategy during such events. General Motors, for example, used 'white space strategy' to minimise its value-at-risk.
The current episode of Covid-19 provides another opportunity to rethink global supply resilience. The relevant questions can be: Are there better business models that cope with unforeseen contingencies? What is the role of advances in technology to accelerate the adoption of these business models? Technologies such as 3D printing can help bring new products faster to market by accelerating prototyping and proof-of-concepts. The Internet of Things, supported by analytics, can help keep track of the location and usage of critical products.
In modern businesses, variability and uncertainty are the rule. Black swan events like Covid-19 reinforce the need for supply chain resilience. The conventional thinking to achieve resilience in supply chains is by enhancing 'redundancy' or 'flexibility', or both. Extra inventory and multi-sourcing are part of redundancy. For example, to overcome supply risks, one of the largest chocolate manufacturers, Hershey’s, stocks six month inventory of milk chocolates in refrigerated warehouses.
Multi-skilling and configurable production lines increase flexibility. For example, delayed differentiation (or postponement) is used as a strategy by companies such as Reebok and Essilor to cope up with high-demand variability.
These strategies are driven by a law of nature that 'aggregation reduces variability'. This could be the new mantra for business resilience, and should expand from an organisational strategy to supply chain strategy. This strategy can be augmented by localised sourcing, as post-Covid-19 businesses may no longer look at 'cost' as the only important parameter to measure supply chain performance.
Subscription-based business models can be an appropriate way to implement the aggregation strategy. Demand patterns across the economy can change. Some products may see a slow pick-up of demand. Some such as those related to health may see an upsurge. Instead of a one-time sale of these high-demand products, equipment makers can look at on-demand subscription services where the user pays according to the usage, on a periodic basis. They can return it when not required. Platforms are popular today and can be an effective online tool to consolidate demand and make subscription-based business successful in the days to come.
About the authors: Dr. RK Amit is currently an Associate Professor in the Department of Management Studies, IIT Madras. S Ramachandran is a Principal Consultant at the Infosys Knowledge Institute.