Written in collaboration with Dr. Kevin McCormack.
In 1990, the world was a different place. China was still isolated and disconnected, the eastern and western Europe was just coming out from behind the “wall” and Asia was still an unknown place. It cost $20 to make a three-minute call from Western Europe to the U.S., and that was unreliable. The Internet was only a lab concept —and the big tech debate was how to make proprietary email systems “talk” to each other.
Suppliers were local or regional, except for Japan. Computers were used for spreadsheets and word processing, and some very raw games (like a flight simulator that was in color, which was a big deal). If a supplier shut down in China, nobody knew it or cared. Russia and Eastern Europe were “areas of opportunity” with a great future but no present. South America? Brazil? Africa? Who cared? Middle East oil was important and Sadam (Iraq) was being problematic, but that didn’t have much of an impact to firms in the U.S.
Three decades later, what has happened? Why is what happens in China or Ukraine impacting the world?
During the last 30 years we have connected the world. The Internet is everywhere. Communication is instant and free. Next day delivery is expected. Shipping across the world became capable, reliable and inexpensive. If you were an auto company in Detroit, 20-30% of your suppliers were in other countries with 30-180 day lead times. Low-cost country sourcing was the rage. Low pay, no pensions, no unions, no regulations. We stretched the supply chain rubber band across the world as far as we could.
Then it snapped! Right in our face. Foreign suppliers were shut down. Shortages and failed deliveries became common. The cost of shipping a container from China to the U.S. went from $2,500 to $25,000, and lead times went from 30 days to six months, if that. We could not get foreign suppliers to supply goods reliably, and it was no better in the U.S. The “Great Toilet Paper Shortage of 2020” was a poignant reminder that the rubber band snapped in our face.
Supply Risk Management becomes everybody’s topic of the day
Supply Risk Management became everybody’s topic of the day. We need a resilient supply chain that can “bounce back” the next time this happens. We need “local” (meaning in the U.S.) suppliers. The President says “We need to buy American.” These are the speeches of the “people who know.” These are all simplistic solutions that won’t do anything but make people feel good. What really needs to be done?
The world is connected and will always be connected. The Internet is here and we will always be here. We cannot “buy American” since we don’t make “everything” here, nor should we. We need to make supplier decisions based on quality, cost, lead times and risk. There has to be a balance of global, national and regional suppliers with a blend of lead times and responsiveness. For example, a local supplier can respond to a need in a few weeks and get it to you quickly. A global supplier might take a few months and have a delivery time of 30-180 days depending on the port congestion (which will always come and go unless we build more ports). Responsive, flexible needs should be local while stable, predictable needs could be global. A lower-cost supply chain comes with longer lead times.
Operations drive the supply chain
Operations are the engine — the “what” — that drives the supply chain. There are many effective tools that are more important today than ever to move the material, money and information throughout the supply chain.
In terms of risk management, business should use a PFMEA (Process Failure Mode Effects Analysis). In selecting suppliers, as an example, one could assess the severity of a material shortage to the customer, the likelihood of occurrence of that shortage, and detectability of that shortage given current controls with a PFMEA. By using a RPN (Risk Priority Number), which multiples the severity, occurrence, and detectability ratings, one can determine the level of risk associated with supplier selection, whether domestic or international. One can then formulate back plans to those high RPN failure modes.
Another operational approach that is more critical now than ever before is the lean six sigma methodology. Many confuse lean’s inventory reduction strategy as having zero inventory in the supply chain. On the contrary, lean inventory management is about having the “right size” inventory — the right amount of inventory in the right place at the right time at the right quality level. Determining the appropriate size of the inventory goes hand-in-hand with where the inventory is located (i.e. going back to supplier selection, lead times, and decisions on domestic vs. international suppliers). Beyond inventory, though, lean is about the planned elimination of all forms of operational waste (defects, over-production, waiting, non-used people skills, transportation, inventory, motion, and extra-processing). When these eight forms of waste are eliminated from a process, the operation runs more efficiently.
On the Six Sigma side of it, reducing defects in a period of scarce material resources is critically important to give us a quality product the first time. Each time we need to scrap product, we are wasting that material by throwing it away in a landfill, which then leads to having to remake that product with the same scarce materials we used on the first attempt to make the product. Each time we return a defective product to the retailer, more transportation is used, more labor is used, more cost in the supply chain is incurred as a result — and all that cost trickles down to the manufacturer of that product. If we decide that the 1970s approach of large batch sizes is the way to “flood” the marketplace with material, keep in mind that defect rates were much higher back then (prior to Lean Six Sigma) and that material wound up in landfills. The lean six sigma approach is the only approach to keep quality product flowing through the supply chain efficiently — which is more critical now than ever before during this period of scarce material resources.
Conclusion
In sum, using the tools we have today from an operations and supply chain standpoint makes sense in this volatile marketplace. These tools can help us with the rubber band analogy — the tools can help us build a series of parallel rubber bands stretched to different lengths. If one breaks, another can be used while the broken rubber band is repaired. If the Chinese supplier shuts down, another supplier can pick up the slack until the original one comes back online.
Let’s build it back right this time.
