Author: Mike Hodge, Chief Executive Officer at Cimlogic
China is the world’s second-largest economy and accounts for a quarter of global added value manufacturing*, so the outbreak of COVID-19 is a big event.
Encouragingly, the actions taken to minimise the impact of the infection spreading is seeing results, with new cases in China reportedly now falling. They seem to have got to grips with what they need to do in order to keep things under control.
In the meantime, however, the rest of the world is in the thick of it, adjusting to a pandemic, and inevitably business attention in the short term turns towards minimising the impact on the wellbeing of company staff and ensuring continued operations.
Cimlogic have experienced many sensible adjustments from our client base – the common theme of restricted travel for personnel, approach to hygiene and continuity plans in the event of plant or office closures.
Just like China (and hopefully in the not too distant future), businesses will look forward to returning to ‘Normal’. However, the definition of ‘Normal’ is changing as we speak, and the ‘normal’ that we are used to may never be the same again.
Globalisation has brought about many opportunities for business everywhere, but more so with the existence of really strong supply chains – this in itself has created what we know as ‘emerging markets’.
You can order a component from Amazon which arrives in the UK next day, was fulfilled in France, contains components sent from China, and has potentially moved through multiple couriers with embarrassing efficiency and at extremely low cost. If this is the case, then as a business owner, why hold that much stock if we can get what we need, when we need. What’s the point in having money tied up in inventory? So, consider what happens when the component you need is out of stock, and it will be weeks before they have any more? Because of the situation in China, production is down, and freight ships are not leaving without full loads. That component may have, until now, seemed insignificant in terms of size and cost, but it is a critical part of your product. How about Chinese car parts for example? This was a real problem for Jaguar Land Rover recently according to the Independent http://bit.ly/landrovercarparts
So in the new ‘normal’ – do events like these mean manufacturers will bring in house aspects of their supply chain – leading to more examples of backward integration?
- Do manufacturers look to relieve the dependency on supply chains by choosing more locally manufactured components, turning their backs on emerging markets?
- Do manufacturers consider the risk vs benefits of mega factories and hedge in the direction of a greater number of smaller factories each strategically located to serve a customer base, thereby reducing the impact of sudden events?
COVID-19, cyber attack, flooding, fire are all examples of things that can bring the whole process to a grinding halt. Is a ‘Pop-up factory’ potential risk mitigation against the next big event?
Should manufacturers consider greater outsourcing to a higher number of downstream partners? Bottling and filling plants are a great example of this as well as co-packers. Sharing volumes of the same SKU through multiple co-packers could provide benefits in these uncertain times. From an upstream point of view, do you have half your network on Amazon Web Services and half on Microsoft Azure?
It is easy to speculate and only time will tell; however, it’s fair to say that a ‘risk’ based approach to meeting and adapting to customer demand may challenge some of the traditional textbook thinking such as ‘Just in Time’, ‘Line Balancing’, ‘Runners and Repeaters’, ‘Economic Order Quantities’ – which so heavily depend on a supply chain that works.
Flexibility within manufacturing processes and infrastructure, plus greater flexibility around in-house and outsource options may prove to be the stronger beast in the long term.
* https://www.bcg.com/en-us/publications/2018/china-next-leap-in-manufacturing.aspx