Ensuring Short- and Long-Term Supply Chain Stability

(Editor’s note: For more on this topic, see “Developing Antibodies for Supply Chains” in the July/August issue of Inside Supply Management^®.)

As sourcing and supply issues due to the coronavirus (COVID-19) pandemic continue, organizations ponder the future of global sourcing and supply base diversification, as well as shorter-term concerns like availability of parts and supplier stability.

To ensure supply chain continuity, supply managers must be cognizant of their suppliers’ financial stability and, if need be, develop options like shorter payment terms to help them through challenges stemming from the pandemic, says Rob Handfield, Bank of America Distinguished university professor of supply chain management and executive director of the Poole College of Management Supply Chain Resource Cooperative at North Carolina State University in Raleigh, North Carolina.

“Many suppliers have less than two months of cash available,” he says, adding that an issues has been companies delaying payments and canceling orders. “Purchasing managers should reach out to their suppliers regarding their cash flow and working-capital situation, debt level and ability to pay workers.” No organization wants to find out several months from now that a supplier has gone out of business, Handfield says.

One impacted industry has been apparel. “In Bangladesh, for example, some factories of major brands received notices of canceled orders by apparel companies,” Handfield says. “In some cases, the Bangladesh factories had already produced those orders — and they have workers who need to be paid and material that has been invested.” In other instances, apparel companies have delayed payments for already received orders from 90 to 120 days, he says. “(These impacts) will create a major crisis in places like Bangladesh, where people are relying on that income to feed their families,” he says. They also could result in national humanitarian crises, he adds.

Other pandemic-impacted dynamics:

Global sourcing. Global sourcing is not likely to go away, Handfield says. One reason: Shifting production and sourcing to another country isn’t easy. “It takes several years to extract yourself from a country or region,” he says. “You can’t do it overnight. You have to find new sources, qualify them and certify them. You have to negotiate and write contracts. There are a lot of requirements when switching suppliers.”

Another reason: Domestic suppliers may not be competitive. “As an example, I was talking to somebody in the automotive sector, who said there are four brake pad suppliers that produce 80 percent of the world’s supply,” Handfield says. “They are all Chinese suppliers, in the same province. They have gotten so good and so efficient at producing brake pads that no one else can touch them in terms of cost, delivery or anything else. It’s not as if a supply manager can suddenly find a new brake pad supplier that can meet the requirements and at that cost.”

The electronics industry is in a similar situation, Handfield says: “Ninety-eight percent of  electronics today are manufactured in Asia. You can’t bring electronics production suddenly back to the U.S. We don’t have the skills and capabilities, and we can’t do it at the same cost.”

Regionalization of suppliers. Nevertheless, organizations can regionalize suppliers to create more supply chain flexibility when faced with shutdowns, whether of borders or supplier facilities, Handfield notes. “For instance, we might see a pan-North American platform, where the U.S., Mexico and Canada come together … as a trade block that could create more independence and less reliance on overseas supply,” he says. “Mexico has low labor costs, Canada has a lot of natural resources, and U.S. has a lot of capital.”

Workplace changes and visibility. The pandemic is likely to change businesses in other ways, particularly in the workplace and with data. “I think people will be working more from home,” Handfield says. “Companies are realizing that a lot can get done with people working from home — and that they don’t have to build (or rent in) big office buildings, pay for insurance and electricity, and have people commute. They realize they can have a more sustainable footprint with people working from home.”

But for remote working to be successful, workers must have real-time visibility into what’s happening in factories, on roads and in distribution centers, Handfield says. Thus, organizations must ensure that employees can access quality data, wherever they work from.