- The pandemic has laid bare the vulnerabilities of global supply chains, and brought to the fore the symbiotic, interdependent relationship between upstream and downstream players. What are some possible ways that can help a company better weather the storm and mitigate the risks associated with supply chain disruptions?
In the past few years, the resilience of global supply chains has been put to a gruelling test. Upending supply and demand in equal parts, the COVID-19 pandemic – an outlier or a black swan event deviating from the normal course of events – has brought supply chains around the world to a grinding halt and sent companies reeling. The ripple effects are still clearly visible today: recently, Jaguar Land Rover has been forced to pause production in the UK due to a global shortage of semiconductors exacerbated by the pandemic. In the early days, the sudden fluctuations in demand, including a spike in demand for consumer electronics and home appliances, led to stockpiling and double-booking of chips, leaving others scrambling for their share. Although slowly making its way back to normality, production has yet to match the surges in demand. Evidently, the pandemic has laid bare the vulnerabilities of global supply chains, and brought to the fore the symbiotic, interdependent relationship between upstream and downstream players. What are some possible ways that can help a company better weather the storm and mitigate the risks associated with supply chain disruptions?
Uncertainty should be the new normal
Perhaps an apt overarching piece of advice would be to brace yourself for uncertainty. This means embedding uncertainty in your operations so that it becomes part and parcel of the normal state of affairs. Leaving almost no room for the unexpected, the pre-pandemic blinkered focus on supply chain optimisation to drive down costs and increase efficiency has exposed companies to the tender mercies of unforeseen shocks in the system and deprived them of buffers to absorb such shocks. To ensure a smoother continuity between “regular” and “irregular” state of operations, it is advisable to build robust systems that allow for flexibility and fluidity between the two modes, according to Retsef Levi, Professor of Operations Management at MIT. A few examples of what this may look like in practice are explored in subsequent points.
Diversify your supply chain
There is wisdom in the adage: don’t put all your eggs in one basket. With factory closures being a commonplace occurrence as a result of lockdowns, the reliance on a sole supplier could be a ticking bomb for your entire business. While adding a supplier to your network may introduce complexity, such as the risk of inconsistent quality between products made at different sites, if it is managed well, dual sourcing can ultimately help spread risk and mitigate the impact of unforeseen events.
The advent of the Regional Comprehensive Economic Partnership (RCEP) – the world’s biggest free trade agreement – to which 15 countries including China and 10 ASEAN member states are signatory, will significantly facilitate dual sourcing and supply chain regionalisation. The unified rules of origin mean that qualifying inputs from all members states are considered as originating from the RCEP trading bloc and can, therefore, enjoy preferential or zero-tariff treatment. Unhindered by tariffs and complicated customs procedures, companies will have access to a greater pool of suppliers within the region as well as to a larger range of locations where they can centralise production. Additionally, the RCEP provides ample scope for cumulation, enabling inputs from one member state that are used as materials in the production of another good in another member state to be deemed as originating in the latter member state. This again allows for more flexibility in deciding from where to source goods and a tighter integration of regional supply chains.
Is it high time to explore near shoring?
Supply chain resilience can also be derived from near shoring, which refers to the relocation of manufacturing operations closer to the final point of sale. By shortening the supply chain through minimising the distance between supplies and sites of demand, lead times can be reduced, thereby easing pressure on working capital thanks to shorter hold times and a leaner inventory. Furthermore, companies can exert greater control, as there is less likelihood for unknown variables to crop up than in the case of a protracted supply chain that spans across different continents. For companies that manufacture products which do not require a lot of labour-intensive input and are more capital-intensive in nature, near shoring would be a more attractive proposition. However, some of the drawbacks of near shoring are not to be dismissed lightly. These mainly revolve around overcoming logistical challenges, including the logistics of setting up new distribution channels and shipping lanes, physical relocation of facilities, processes, people and technology, and the cost of transition, i.e., accounting for any production down time and halts in supply during the relocation.
Just-in-time or Just-in-case?
It seems that the heyday of just-in-time practices is gone – with the pandemic revealing the inherent fragility of a management philosophy premised on keeping operations as lean as possible, which includes cutting down on excess inventory by ordering materials and components as and when required. This essentially involves keeping upstream suppliers on their toes by ordering parts on short notice. Of course, the glaring flaw is that it overly relies on seamless and on-the-nose deliveries by suppliers; one single glitch in the system may mean a production stall for an entire week. Hence, one would be well advised to transition towards a more just-in-case mode of operation by keeping some buffer stock on hand in anticipation of the unforeseen. According to a survey conducted by McKinsey & Company in 2020, companies were more inclined to build up inventories than to diversify supply chains (except in respect of the supply of raw materials) or to adopt near-shoring or regionalisation strategies. A possible explanation is that it may be more cost-effective and efficient in the short term to simply boost inventory levels.
It is of particular significance that Toyota – the cradle of just-in-time practices – has not been spared from production stoppages caused by supply chain disruptions either, and has signalled a retreat from the very practices of which they were a textbook example for many decades. However, companies would be ill advised to swing from one extremity to the other in a knee-jerk reaction by hoarding stock. Overdoing inventory buffers is counterproductive, leading to excess cash being tied up and stock obsolescence. In a lot of supply chains, there is just not enough margin that allows for a strictly just-in-case mode of operation and a complete abandonment of the efficiency which just-in-time offers; therefore, a more discerning middle-ground approach that balances between the two would be preferable. The key is to identify the most critical and vulnerable points in a supply chain and adopt a targeted just-in-case approach, for instance, towards high-value customers, while at the same time strengthening management systems to maximise visibility and transparency, so as to anticipate any potential congestion within the supply chain.
Leverage technology to enhance visibility
The answer to achieving end-to-end transparency in a supply chain lies in digitalisation and harnessing data and analytics more effectively. It is crucial to put in place a digitally sound transportation management system, which can, among other things, track shipments and alert stakeholders of hiccups in real time so that remedial action can be taken in a timely fashion. Such a system can also aid strategic planning by showing performance by shipping lane, keeping track of energy consumption, and providing recommendations on route optimisation. In practice, however, despite companies’ best efforts to improve visibility through a more data-driven approach, there remain knowledge “black holes”, where things get murky beyond first-tier suppliers. It is not uncommon for companies not to know who their furthest tier suppliers are. In order for end-to-end transparency to materialise, it is necessary for all players along the supply chain to install the required technology to ensure continuous connectivity.
Increase the agility of your supply chain
Agility in the context of supply chain management refers to a company’s overall responsiveness to changes, opportunities and threats. As mentioned in the previous point, information integration through cutting-edge technology can shorten response times and help companies make informed decisions more swiftly. It is fair to say that improving agility is often less tangible and harder to quantify than optimising the more tangible aspects of the supply chain. In short, it represents a mindset shift that involves thinking on one’s feet as well as outside the box, displacing the more linear and rigid ways of operating. This can manifest in different forms. For example, to meet surging customer demand, companies may invent novel ways to make use of existing products (scale agility) or come up with new kinds of products completely (scope agility). Additionally, companies can unlock the untapped potential of underutilised assets by using them in the provision of other products and services in parallel with their existing business (asset agility).
Don’t neglect legal protection
If anything were to go awry, companies’ reliance on their suppliers to stay afloat often compels them to resort to commercial solutions instead of taking legal action, which is considered the last line of defence. Nevertheless, this option should not be discounted out of hand. Companies should take time to review their contracts to ensure that adequate protection is in place to safeguard against supply chain disruptions. If goods are not delivered on time, thereby resulting in a contractual breach, a possible course of action would be to seek contract damages, which are akin to liquidated damages. A pre-set amount of damages in the event of a violation should be specified in the contract itself. In determining the most pertinent amount, companies should take the following points into consideration:
- The amount at risk of being lost should there be a breach;
- The amount should be a fair and reasonable representation of losses in the event of a breach;
- The geographical location of the court that will be presiding over the legal proceedings;
- The relative bargaining power of the supplier;
- The relative financial position of the supplier;
- The moral culpability of the breach, e.g., any intent to defraud.
One should bear in mind that the courts are unlikely to enforce the clause if the amount stated is exorbitant and wholly unsubstantiated. In any case, having an appropriate contract damages provision can act as an effective deterrent to non-delivery or delays of shipments for which the supplier is responsible.
As much as companies want to be sanguine about the potential benefits of a supply chain shake-up, the sobering reality is that many of them simply lack the capacity to redraw their supply chains right now. It is an undeniable fact that, for the majority of companies, cost is still the dominant driver of decision-making. Building up supply chain resilience, especially through spreading risk geographically, is however a long-term investment, requiring a shift in both the tangible and more intangible areas of supply chain management. Just-in-time’s time isn’t quite up yet – and won’t be – as long as cost considerations are uppermost in mind.
How Can CW Help?
Analysing your trade flows to explore RCEP benefits
As RCEP provides a consolidated rule book for trade in all 15 member states, businesses should carefully examine their existing trade flows and consider whether there are any opportunities in the form of a new competitive market, a reduction in costs or an optimization of the supply chain. CW team can take a deeper look into your Asian operations, help you identify potential restructuring opportunities and establish strategic presence in RCEP member countries via our Allinial Global APAC network.
Implementing intelligent supply chain management through our technology partner Kingdee
With Kingdee’s Cloud Supply Chain Solutions, the close integration of modern digital solutions and the supply chain model opens up business flow, information flow, capital flow, logistics and realises the visual management of supply chain, which is visible, perceptible and adjustable in real time. This type of supply chain solution strikes a balance among customised orders, inventory, and sales forecast, establishes a flexible supply chain, transforms the original supply chain-based business model to an ecosystem-based business model, and improves the efficiency and effectiveness of the company. CW can help you improve your supply chain management system by adopting cloud solutions from Kingdee.
Finding nearshoring solutions to cater the American markets
CW is uniquely positioned as one of the few CPA firms with a dedicated business advisory desk for the Latin American market. In recent years, countries like Mexico and Brazil are receiving a surge of foreign investments from Asian companies that look to establishing their supply chain for the North American markets. We can help you explore different business and operation models of nearshoring in the Americas.
Unlocking Hong Kong’s potential for your Asian business
Hong Kong has applied to join RCEP earlier in May 2022. Its participation will further strengthen and cement RCEP’s position as the biggest regional FTA in Asia-Pacific. Thus, the benefits of establishing your business in Hong Kong will be further expanded once Hong Kong joins the world’s largest free trade bloc. For long, Hong Kong has been attractive to many international investors as Hong Kong follows a territorial system of taxation, where only income or profit that is sourced in Hong Kong is subject to tax in Hong Kong. Besides, as at January 2022, Hong Kong has signed Comprehensive Double Taxation Agreements with 45 jurisdictions and is in negotiations with 14 more jurisdictions. CW can set up your Hong Kong operation, efficiently manage your tax compliances and help to unlock further business advantages Hong Kong has to offer.