Q&A: How supply chains can survive the pandemic
SCN: Throughout your career, you helped lead supply chain organizations through many natural disasters and economic volatility. What is your advice for supply chain leaders on the front line of this pandemic response and business recovery effort?
TL: I think that one of the most important things companies can do right now to keep their supply chains intact is to “pay it backwards.” It’s like the charitable concept of “pay it forward,” but in supply chain, it is important to pay it backward, meaning you have to take care of the suppliers that are feeding your supply chain. People need to understand just how fragile a time we are living and doing business in.
Supply chain executives should be careful to pay attention to the ability of these small players to survive a crisis like this. A lot of small companies have less than two months of cash on hand at any given time. With little to no income for weeks and months on end, it doesn’t take long for these businesses to go under. We are even seeing well-capitalized global companies struggling. For example, one of the world’s largest automotive suppliers, Aptiv, announced in late March that it would draw down its entire $1.4 billion credit facility.
So, as this lockdown continues, we are going to start seeing more companies going out of business, or not being able to operate anywhere near capacity. This will weaken the entire supply chain ecosystem. We are looking at a potential coral reef moment – where the failure of a small segment of the reef ripples to destroy the whole system.
SCN: What are some specific actions organizations can take to “pay it backwards” to their smaller partners?
TL: There are many ways that an enterprise can help make sure their suppliers remain fiscally viable. For example, in 2008 when the great recession hit, I was with LG Electronics. I was very concerned about our small second and third-tier suppliers, so I convinced our CFO to put together a pool of money that we could offer to these suppliers for low or no-interest loans, similar to what we see the government doing today with small businesses. I read the other day that Lockheed Martin plans to advance more than $50 million to small and medium-sized enterprises (SMEs) in its supply chain, and telecom company Vodafone committed to paying its European suppliers within 15 days.
SCN: Those are some major league efforts. Most companies are not in a position to take those kinds of actions.
TL: That’s very true, but anyone can make a phone call and start the conversation. Find out what your suppliers’ capabilities are and what they need to keep afloat. The tipping point is often much closer than most leaders think. Don’t just rely on a Dun & Bradstreet report and don’t assume your direct, first-tier suppliers will take the initiative to monitor and manage critical lower-tier suppliers. I encourage chief procurement and supply chain officers to get on the phone and talk to the executives of these companies. If necessary bring the CFOs into the discussion. We don’t often think to bring CFOs into these conversations, but I think it is very important for the fiscal sustainability of your supply chains.
I’ll tell you now, your first-tier suppliers may not like you interacting directly with “their” suppliers. The power in the supply chain flows up. The higher you go, the more power the person or enterprise has. Some big players may not want to share that power, but you cannot let these entities create a barrier between your organization and what you need to know about your supply chain. That is something that I have always felt strongly about.
SCN: The pandemic has put a spotlight on the vulnerabilities that are inherent in a global supply chain. Some pundits say this could prompt a shift to a “post-global” economy. What are your thoughts on this?
TL: You know, last summer, well before this pandemic arose, I had stated in an interview with the Economist that I thought we were entering a “post-global” world. And, it was assumed that I was predicting this dark and menacing future, but from a supply chain standpoint, it is actually great news. One of the first laws of the supply chain is that proximity matters, so the closer things are together the faster and more efficient supply chains are and the more cash flows through the supply chain.
The only reason China became a global powerhouse was because of labor arbitrage. Costs are like water, they naturally flow to the lowest point. So, if costs are equalizing around the world, then it becomes more economically viable to manage your supply chain more regionally. Politically speaking, “post-global” may have a somewhat negative connotation, but for the supply chain, it’s good news, especially as we see the continued, and growing, demand for mass customization.
SCN: So, are we going to see more multinationals shifting their manufacturing out of China?
TL: Yes, and no. We have already seen, in recent years, the move to produce goods closer to the point of consumption. So, yes, companies that serve customers in North America, for example, are more likely to transfer their production capabilities out of China, rather than shipping things back and forth. But that doesn’t mean that China is going to be short shifted here. China will develop its own regional supply chains, which will benefit the companies and consumers and the economy in China. And I think we will end up seeing more U.S. companies building factories in China to move closer to their Chinese customers and more Chinese companies will move closer to their U.S. customers. That is what supply chains will look like in 10 years from now.
SCN: How else do you think this pandemic will change the business/supply chain?
TL: It is amazing how quickly the supply chain has moved into the top of the national agenda. You cannot have all these people die and not seriously rethink in how we do things, including the supply chain. When I heard Joe Biden say that he felt the U.S. needed a Supply Commander to coordinate distribution of critical COVID-19 treatment supplies across the 50 states, I thought, ‘Wow, this is a powerful thing that is happening.’
I think we are at an era-defining moment. For example, everyone is online now. People are learning just how much we can get done doing business digitally. For the past 25 years, since the Internet/World Wide Web entered the public domain, we have been experiencing this push and pull between analog and digital worlds.
It’s like the turn of the last century when we had this period of time when the horse and buggy and automobiles co-existed for a couple of decades. They shared the road and there were all kinds of disasters, until the slower, less efficient mode finally got left behind.
I wouldn’t be surprised if this pandemic signals the final death knell for the analog world. I think this could be the horse and buggy moment be for the supply chain, and what we are going to leave behind are all the things that are habit, but no longer essential. A very basic example is PowerPoint. I think PowerPoint presentations are a relic of a time when we did not have the ability to access and monitor supply chain information in real-time. Tools like Flex Pulse that integrate demand, inventory monitoring, manufacturing, quality, outbound transportation, and delivery, demonstrate that it is possible to aggregate and interpret live streaming data from multiple sources throughout your supply chain. Every supply chain should have this kind of live ticker. If you are managing your supply chain with old news, then you are not a state-of-the-art, modern supply chain. We need to be prepared for these era-defining shifts.
SCN: Resilience is another hot topic in supply chain right now. You have said in the past that “resilience is just a euphemism for expensive redundancy.” What do you mean by that?
TL: It is not that I am against resiliency, but to me, resiliency is like buffer inventory. What supply chain organizations need is transparency. If you see everything, you don’t have to buffer your business every step of the way because you have full visibility. Transparency always trumps resiliency.
With digitization, we have the tools to make that transparency possible. Now it is just up to supply chain leaders to have the will to put it into play because supply chain transparency requires a degree of data sharing that most companies do not want to do.
But, it is time we cross the bridge to the new, and then blow up the bridge to the old. We have got to get to the point where we recognize that our mutual success is based on the intelligence we gain from information sharing.
I think the new frontier in the next five years will be the integration of applications throughout and between enterprises. Imagine if we could get the application that tracks lead time to “talk” to the application that handles setting minimum order quantity. If we can automate processes like this, that will create the next level supply chain. The future supply chain is not about drones and robotics, it is an autonomous supply chain where the independent action of the applications that once ran in parallel, can now interact and make decisions together.
The full transcript of our discussion will post in Avnet’s thought leadership journal Supply Chain Navigator in May at www.avnet.com/scn.
Read the rest of SCN’s interview with Tom Linton next month in Avnet’s Supply Chain Navigator at www.avnet.com/scn.