Out of Tragedies and Supply-Chain Challenges Comes Resiliency
“When sorrows come, they come not single spies, but in battalions.”* The extent to which supply chains can take a beating is one of the great questions to have emerged from the COVID-19 pandemic. We saw a rapidly growing impact on parts supply gathering pace throughout 2020, representing a real test-by-crisis of supply-chain resiliency.
The global impact of COVID-19 has also been supplemented and exacerbated by the types of accidents and nature-driven events that can qualify as “force majeure.” These included a whole array of challenges happening around the world that impacted the supply chain in profound ways:
- A severe winter storm in Texas in February 2021 that put the squeeze on industrial production, particularly areas of chemical and resin production.
- A fire at a Renesas plant in Japan in April this year that impacted auto-electronics production.
- The long-running drought in Taiwan is also now negatively affecting semiconductor-chip production on the island, again impacting auto-electronics.
- And a cargo ship effectively “stuck” in the Suez Canal for 6 full days, blocking all subsequent shipments using the canal for timely transfer of goods.
The reality behind all these seemingly unrelated events has placed stark focus on how global supply chains can cope, recover and become stronger for whatever the future might bring. Years and years of companies working to make their operations more flexible and more dynamic cannot hide the simple fact that when there’s a major shock to the system, many are not even close to coping adequately. These major shocks place a spotlight on how resilient a company and its suppliers need to be at all times.
A resilient approach to adversity
Supplier shortages during COVID-19 and other natural disasters form the backdrop to the challenge. For a typical company in ‘normal’ circumstances, a backbone of flexibility and agility serves to deal with fluctuations in global supply, but how far can this be stretched in times of crisis? Many companies, strategically and/or historically, design and make products and parts that are customized for particular customers, and this effectively diminishes their agility.
Allied to this, a V-shaped economic recovery from COVID-19 is so steep that it is placing almost unbearable pressure on global supply chains, regardless of how agile or flexible they think they are; it takes a considerable amount of effort and money to scale up as quickly as the current situations demand.
COVID-19 has highlighted the need to build resiliency into a company’s supply chain ethos and practices. Without it, external crises serve as critical shocks to the system, limiting its ability to snap back in a sustainable way. And this lack of ability to rebound has second- and third-order impacts that can cripple a company’s success.
The key focus now is how to ensure companies have the required flexibility, agility and, resiliency within its system to protect and sustain operations for future obstacles.
Understandably, there are limitations to a fast scale-up of supply chain, not the least of which are bottlenecks in human resources, and transportation, such as shipping and reduced air freight, which lead to spiralling costs. Further, demand curves across all markets are completely different from what many are accustomed to, making it difficult or impossible to assess trends in a meaningful way.
Then, there are physical constraints as to what suppliers can source with shortages of any one piece of a supply chain having cascading effects both upwards and downwards. Chip and copper supply shortages are two examples of how global markets are affected, with automotive manufacture, energy, and infrastructure activities among those facing the direct impacts of those constraints.
Historically, the level of flexibility that’s needed may not have been inherent in how many companies operated, largely due to cost, but there is no doubt that it’s needed now, and fast.
What’s the way forward? Companies, such as Molex, with well-established positions in their markets, plus decades of experience and cross-industry collaboration and powerful supplier relationships have built enduring ties globally that help drive sustainability. Further, with our sales and operations planning (S&OP), an integrated business management process that continually aligns focus and synchronization among all functions of the organization and our suppliers, Molex is committed to ensuring agility and risk mitigation vital to addressing all impending challenges.
Quantitatively, how does the requisite combination of agility and flexibility manifest itself in real life for companies? The effective centralized and strategic control of global supply chains requires a globally distributed set of inputs that enter data in real-time with all the advantages of data entry, access, and management handled either in the cloud or locally at the “edge,” or both.
The 5-Step Process
It comes down to five steps to achieving supply-chain agility:
Step 1: Construct an end-to-end transparent database using the tools of digital transformation (DT), that allow clear and rapid analysis of supply-chain problems and their solutions. For many, this may still be a work in progress, emphasizing how advanced digital database technology remains a challenge for the entire industry. The creation of a digital ‘lake,’ or a careful combination of digitization and digitalization is critical to this step.
Step 2: Optimize planning by use of “what if” scenarios, where simulations or “digital twins” allow new conceptual solutions. We can see here, perhaps, the power of “gamification” and its influence on corporate creativity.
Step 3: Create internetworking resources whose operations incorporate flexibility and versatility. This demands skilled human resources and is comparable to other obvious solutions for supply-chain agility, in that it is fundamentally expensive, just like stockpiling materials and product inventory. Keeping everything working smoothly while upscaling and downscaling resources can be tricky.
Step 4: Do not be trapped into assuming that a huge portfolio of specialized products must be maintained in inventory. Companies can and should be highly customer-focused, but the problem with focused custom solutions is that the resulting inventory overhang reduces supply-chain agility. Designing for agility is key here.
For some, the solution involves the concept of “postponed variability” which, essentially, waits for a specific order before the end-product is defined for delivery. For example, the length and coloring of connectivity cables might be delayed until the order finally stipulates “red and 1-meter in length.”
Step 5: Instill and foster a corporate culture that’s laser focused on supply-chain agility at every level. That agility needs to be orchestrated across sales, demand planning, supply planning, and procurement. It requires an ‘agility’ mindset at every level of the organization, so that everyone can play a role in the solution.
Reasons for optimism
There are causes for global optimism however, with China an example of how prudent planning and supply chain measures have initiated an economic recovery in the second half of 2020 in the form of a V-shaped recovery driven at least in part by robust global demand in the automotive sector.
In October 2020, central government data indicated that it was the first major economy to start growing again amid the global wreckage of the first half, with growth of 4.9% between July and September. While slightly lower than economists had expected, it was an astonishing achievement regardless.
China’s automotive production base was a major driver. In December 2020, Reuters reported that China’s vehicle sales were likely to hit 25.3 million units for the year, as the world’s biggest vehicle market continued to lead the global auto-industry recovery.
A series of upbeat economic figures came from China as other Asian powerhouses also climbed out from their pandemic depths, with Japan’s economy reporting its fastest quarterly growth on record at the start of 2021.
As automotive production lines roar back to life in Asia, the semiconductor sector is in a conundrum, unable to keep up with demand for automotive chips which remain in extremely short supply. Likewise, other sectors who are also demanding chips continue to struggle for supply.
However well thought-out a company’s approach may be to the supply chain challenges, formidable challenges remain as we head for 2H 2021. In particular, these challenges center around semiconductor-chip shortages. While industry leaders such as TSMC and Intel have announced new investment plans, these will take time to implement. The global automotive sector will be an immediate victim, although exactly for how long remains in question.
Perhaps even more fundamentally, copper, normally considered a ‘safe’ member of the healthy commodities markets, is now considered a new form of exposure to rising prices, despite recovery from the pandemic-led shortages of 2020.
Demand for copper has expanded significantly in 2021, driven by the rebound in the global economy, renewed manufacturing strength, increased construction activity, led by China as the largest consumer of copper. Copper demand is forecasted to further expand with the application of electrification technologies, including electric vehicles, renewable energy and emission reduction projects, and the potential for large infrastructure investments in the US.
On the downside, billions of dollars are necessary to initiate new mining programs and years of new-mine production are required to increase volume at meaningful quantities. Chips and copper have a great deal in common, and it’s not necessarily a great reality.
All in all, while it will be very difficult for many to recover and sustain, a prudent combination of agility, flexibility and resiliency will go a long way towards achieving this. Three years into our digital transformation initiative, Molex has kept close to our customers and suppliers, and by listening to their challenges we have made strong investments to drive both agility and resiliency into our supply chain. As one of our three transformation pillars, supply chain deserves every bit of that commitment, and this laser focus will enable us to be better positioned to manage the speed of the market and any shocks to the system from an increasingly complex and global world that will throw curve balls when we least expect it.
* Hamlet, Act IV, Scene V