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In the past two years, supply chains have been disrupted by events ranging from the COVID-19 pandemic to the Russian invasion of Ukraine.
These disruptions are unlikely to subside anytime soon, and organizations will need to develop supply chain strategies that provide more resiliency and flexibility to adapt to such changes.
Traditional supply chain strategies were born out of a different era, when globalization and just-in-time business models were taking hold, according to IDC analyst Simon Ellis. However, the unrelenting disruptions have constrained those practices.
In this Q&A, Ellis discusses why companies may need to rethink traditional supply chain strategies in order to remain competitive.
How should companies rethink some of their old and well-established supply chain strategies?
Simon Ellis: For decades, very smart people came up with the just-in-time inventory approach, which says that you don't want to keep a lot of stuff on hand -- maybe you have a vendor-managed inventory relationship with key suppliers -- and you get the stuff you need just when you need it. That works great until the world does a collective face-plant. Then, all of the sudden, having some extra inventory on hand is quite helpful. So that's one thing that [supply chain professionals] have to think about: Do the inherent efficiencies of having just-in-time justify the issues when a lot goes wrong?
Simon EllisPractice director, IDC
Supply chains have hit an inflection point from when they existed in a largely unconstrained environment to supply chains that largely exist in a constrained environment. So how does that change behavior? I argue that you have to move away from labor and asset arbitrage to speed arbitrage, where being faster is now the key differentiator of performance, more than getting to the lowest price. If you negotiate to the lowest price now, fine, but you may not get your goods because they've already been taken by someone else.
How can companies build more visibility and resilience into supply chains?
Ellis: Resilience is a made up of a few things. You have to see what's happening, you have to have the analytics capabilities to turn that into something actionable and you have to be able to do something about it. I talked with a couple companies back in early 2020 about what they were seeing in Wuhan, China. But they were locked into long-term contracts -- there was nothing they could do, and they were basically spectators to an unfolding disaster. Visibility is critically important, no question, but it's not just that, it's also when you see something going sideways [and] you need to have the agility to act quickly to mitigate or identify alternatives. But agility is not free; agility has costs, and historically, when supply has been largely available and predictable, you haven't needed to invest in that kind of mitigation or active agility because you didn't want to bear the costs.
Can predictive analytics help mitigate supply chain disruptions?
Ellis: There are events that are unpredictable, that can take you by surprise, so having a resilient supply chain would be more helpful. Let's take the example of when the Suez Canal was blocked [by the Ever Given container ship]. Within a few hours of the impact, Company A is able to know what they have on the boat, they know what's stuck behind the boat, and they know what was planned to be there in a week. So within hours, they can make alternative plans and reroute. A week in, Company B still doesn't know any of that for sure. Company A, they immediately know the impact and understand the steps that are available to them to help mitigate the impact. Company B is not resilient and just has to take it. So it's not really about predicting because there are always going to be things that you can't predict.
Will there be a greater adoption of reshoring or near-shoring, which could bring supply sources and manufacturing closer to the end market?
Ellis: I don't think reshoring will happen on a large scale, and we shouldn't fall victim to that knee-jerk reaction because there are some fundamental reasons why reshoring doesn't make sense. First, when demand is global, supply must be global. There are a lot of industries that we haven't run in this country for decades, so if you want to build a semiconductor chip plant in the U.S., fine, but where's the knowledge, where's the skilled labor, where's the venture capital investment? It's all been overseas for years.
What alternatives to reshoring or nearshoring do companies have that will allow manufacturers to have more control over their supply chains?
Ellis: I think what's interesting is not sourcing from a geographic perspective, but sourcing from a vertical integration perspective. [Rather than reshoring or nearshoring,] we might start to see manufacturers decide that certain elements of their supply are so important to their business that it's worth bringing it back in-house. They will make it themselves, or buy the supplier that's making it. I don't think we'll see a massive amount of that, but it will be interesting to see if there's some of that increasing.
Are there any examples of this happening right now?
Ellis: There have been some rumblings of it. For example, the automotive companies are contemplating banding together to buy semiconductor capacity. That way, you own the capacity. And if you have excess capacity, you can sell it into the market as long as we continue to have something of a supply-constrained market. Maybe if you're a direct competitor, you don't want to buy Ford's excess chips; but if you're not, why not?
Jim O'Donnell is a TechTarget news writer who covers ERP and other enterprise applications for SearchSAP and SearchERP.