Building Resilient Supply Chains Won’t Be Easy

by David Simchi-Levi and Edith Simchi-Levi - June 23, 2020

The pandemic has exposed one of the major weaknesses of many supply chains: the inability to react to sudden, large-scale disruptions. This lack of resiliency has been especially notable in the supply chains of the life sciences, health care, and food industries. The resulting turmoil has generated calls for companies that had offshored production to Asia (and China, in particular) to bring it back home. But this approach is no panacea. For one thing, given the huge size of the Chinese market, most global companies will need to keep a presence there to serve it. For another, since China is now a dominant, if not sole, source, for thousands of items, reducing dependence on it in many cases will take considerable investment and time.

The best way to make supply chains more resilient is by mapping the layers of suppliers, manufacturing plants, distributors, and other elements of the logistics network and applying a stress test to evaluate the ability to recover from the disruption of these sites. Once there is an understanding of where bottlenecks are located, various mitigation strategies can be considered, including adding manufacturing capabilities or suppliers or creating buffer stocks.

Reshoring alone does not necessarily create resiliency. Consider the recent meat shortage in the United States. This industry’s supply chain is entirely domestic. In order to reduce cost, many companies focused on consolidating manufacturing activities. The result: A relatively small number of slaughter plants now process much of the beef and pork consumed in the United States. Shutting down one plant, even for a few weeks, has a major impact throughout the country: It crushes the prices paid to farmers and leads to months of meat shortages.

Mapping and stress testing are a much more effective approach. Our experience is that companies using this approach often find that risk is hidden in unexpected places. Work that one of us (David) did with the Ford Motor Company found unexpected high risk associated with small suppliers, including many local suppliers. One part it identified that fell into this category was a low-cost sensor widely used in its vehicles: If the supply of it were disrupted, the carmaker would need to shut down its manufacturing operations. Because of the total amount spent on this item was low, Ford’s procurement group had not paid much attention to it.

For industries that are essential to the country, such as pharmaceuticals and health care, there needs to be government involvement to ensure that supply chains are resilient. There is a precedent: In the wake of the 2008 financial crisis, the U.S. government and European Union instituted a stress test for banks to guarantee that major institutions whose failure could cause the entire financial system to collapse had the wherewithal to survive a future crisis. Based on our experience in supply chain risk, we suggest that similarly critical supply chains should be required to pass stress tests.

Increasing supply chain resiliency for essential products and services may indeed require local manufacturing capabilities. But this is not necessarily a cheap or simple matter. In the pharmaceutical industry, for example, more than 80% of chemicals used to make drugs sold in Europe now originate from China and India. The chemical production is environmentally damaging, so increasing resiliency of drug supply chains requires the development of clean technology, which may take up to 10 years and would require a significant financial investment.

But without understanding the vulnerabilities that currently exist, such decisions can’t be made. Companies need to act now to uncover the weaknesses that exist in their supply networks, and governments must decide which industries are essential to their countries. Only then can they begin to take steps that will ensure that the turmoil generated by the pandemic doesn’t happen again.

David Simchi-Levi is a professor of engineering at the Massachusetts Institute of Technology. He co-founded LogicTools, a provider of software for optimizing supply chains that is now part of IBM; OPS Rules, an operations consulting company; and Opalytics, a cloud analytics platform company. His latest book is Operations Rules: Delivering Customer Value through Flexible Operations.

Edith Simchi-Levi is startup adviser and investor in New York City. She was the cofounder and vice president of operations of LogicTools, a provider of supply-chain-optimization software now owned by Llamasoft, and Opalytics which was acquired by Accenture.