The Big Short – Diversifying the Supply Chain
By: Tod Cooper
As we have heartbreakingly learnt, this was no SARs. The reliance on China as a mature economic power has created a perfect storm in terms of vulnerability to the global supply chain and to world-wide logistics. For most of us, this has highlighted the risk of reliance on supply chains that stretch well beyond our borders.
New Zealand, while isolated at the best of times, is not alone in this unique problem. As a consequence, there is a global drive to look at ways to shorten supply chains, in particular the consideration of a shift to “onshoring”. In fact, the New Zealand Government is working on ways to further enable (and encourage) government procurement to stimulate local business, with the objective of channelling more of their annual $43Billion spend. This approach is also happening in Australia and across the world.
So while onshoring may come at a premium, primarily due to the vulnerability to economies of scales from overseas manufacturers, especially China, it can provide benefits such as reduced shipping costs, reliance on large inventories stocks due to faster lead times, further reducing need for storage capacity, and potentially stronger brand association and presence (www.buynz.org.nz). All this may very well offer a balanced trade off against the higher prices, but at the same time reducing your risks.
So, what do you need to start considering now that we are back to ‘Business as Unusual’?
Simple; establish a strong strategy around your supply chain, specifically think about the below four points:
1. Gaining Situational Awareness
You should undertake a thorough impact analysis on your supply chain, in particular critical supplies, again heat map it. Identify which of your suppliers genuinely suffered impacts on their labour, material, plant, equipment, logistics, etc. Which of those unscrupulous, or maybe opportunist, suppliers exploited the situation to drive higher margins, or force larger orders, or revised and unbalanced payment terms?
2. Diversify Your Supply Chain
You need to assess opportunities to diversify your supplier chain. Note it is best from a self-fulfilment perspective to do the unscrupulous ones first, it will make you feel better.
While it is not always possible, feasible, or affordable to source materials locally, it is widely believed that we will see a strong withdrawal from, and reduction in, the dependence on Chinese manufacturing.
Along with onshoring, a move towards regional and more diversified markets such as the ASEAN countries for example Indonesia, Thailand, Vietnam, etc are gaining momentum. However, it is important to note that diversifying comes at a risk, and it is important to consider ethical factors when dealing with suppliers from non-traditional countries.
Transparency International’s Corruption Perception Index (CPI) is a great reference document to help you understand the risks you are undertaking when doing business within a particular country (https://www.transparency.org/en/cpi#)
The more corrupt the country, the more chance you will be implicated in unethical activity such as fraud, corruption, money laundering or worse yet sex trafficking. None of that sounds very appealing for your brand and your reputation.
So, diversify but do it carefully.
4. Risk/Demand Management
New Zealand may be out the other side of COVID-19, but in many other countries around the world their COVID-19 nightmare is just beginning.
It is therefore important, particularly with your critical suppliers, to establish a comprehensive risk management approach to the monitoring and preparedness for potential future material and manufacturing capacity shortages.
Remember, it will be a long time before this pandemic will be over, and longer yet for the impact on the global supply chain and logistics to settle down, let alone fully recover.