Creating More Resilient Supply Chains | HBR IdeaCast | Podcast

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1:04Welcome to the HBR IdeaCast from Harvard Business Review. I'm Alison Beard.

1:15If you've had trouble buying toilet paper or cleaning supplies or even car and computer parts over the past few months, you've been keenly aware of something that consumers rarely think about, corporate supply chains. The COVID-19 pandemic, with its border and business closures, have showed us just how hard it is to keep making things and getting them into the hands of end users in a timely fashion. Most production is global and increasingly complex, and one kink in the system, never mind the worst health and economic crisis in a century, can wreak havoc. Companies simply can't meet demand. We go without goods, from nice-to-haves like frozen strawberries to necessities like medicine.

1:56And the organizations lose revenue, sometimes so much that it's difficult to stay in business. Our guest today studies supply chains and has ideas for how they can be improved and made more resilient for future crises. Willie Shi is a professor at Harvard Business School, and he wrote the HBR article, Global Supply Chains in a Post-Pandemic World. Willie, thanks so much for being on the show.

2:18Willy Shih:Thank you for inviting me.

2:28So for those of us who didn't study operations in business school and don't think about these issues that often, could you give us just a quick explanation of how global supply chains work nowadays?

2:42Willy Shih:Well, Alison, these days, global supply chains, as you mentioned, are very complex. And And that's because firms tend to rely on a network of suppliers for components or sub-assemblies or raw materials. And because we have experienced an era of rapid globalization, which has really been marked by really low cost and very convenient communications and shipping, firms have tended to cast a wide net geographically when looking for sources of supply. And these have been driven by cost. They've also been driven by specialization. So, for example, when you have very complex products like a phone or a laptop computer, manufacturers will rely on specialists who might be in a very distant part of the world.

3:37Willy Shih:And until this pandemic, that was fine because we had very reliable and very efficient and more importantly, very predictable transportation links. What happened when the pandemic hit, it suddenly exposed the complex network of suppliers that many firms use. And if you're assembling something like an automobile or a notebook a computer or a washing machine or a freezer, you only need to be short one part to not be able to assemble your product. And did we see any hints of this problem before the pandemic, for example, when natural disasters would hit certain parts of the world? Oh, certainly. We've seen a number of examples of these which have served as a warning.

4:27Willy Shih:So, for example, back in 2011, the East Japan earthquake and tsunami took a number of suppliers in Japan around Naka, Japan, offline. And some of those suppliers were critical for these supply chains. For example, there was one company there who made the material that made automotive black paint spark. When you need to build up your team to handle the growing chaos at work, use Indeed Sponsored Jobs. It gives your job posts the boost it needs to be seen and helps reach people with the right skills, certifications, and more. Spend less time searching and more time actually interviewing candidates who check all your boxes.

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5:48Willy Shih:And it turns out every automaker relied on this one company who may have been several tiers down in the supply network. So they didn't realize they were all reliant on this one company. So when that company went down, all of a sudden nobody could paint cars black anymore. There were also floods in Thailand later that year, which caused a massive disruption to the disk drive supply chain for the whole world, because Thailand manufactured about half the world's this drives at that time. That should have been a signal to people that, wait a minute, we have these really concentrated dependencies in parts of the world that we kind of take for granted that they can deliver to us on time in full.

6:40Willy Shih:And suddenly one day comes along that they can't. Yeah. But as you mentioned, global corporations, they chose this for a reason, you know, to reduce costs, increase profits, allow for just-in-time manufacturing in some cases. So is any of that going to change? Well, we have a lot of talk about how people need to build more resilient supply chains. And I think this is a good opportunity for people to go back and examine their supply chains and understand where the vulnerabilities are. But I think consumers, especially in this post-pandemic recession, aren't going to want to necessarily pay more.

7:28Willy Shih:So I think that poses a dilemma for a lot of companies. What has happened is people built these globalized supply chains, and the risk of disruption has been very hard to price. So people have ignored it. But the tough question will be, will consumers pay more for that risk mitigation? Because if a manufacturer wants to put capacity in a higher cost country that is closer to the market where the products will be sold, somebody has to pay that additional cost, right? So you may have more supply security, but will consumers pay more? Now, firms can also mitigate some of that risk by holding more inventory.

8:16Willy Shih:One of the assumptions that I think people have made in their supply chains has been, we want to have a lean supply chain. We don't want to have a lot of inventory in it because inventory first costs me money to carry. And second, there's risk of obsolescence or loss. Okay, so it's one of these tough trade-offs, which is, can I carry more inventory, which will cost me more, or do I pay more for local sources supply in an environment where I don't think consumers want to pay a higher price, right? So that either means lower profits or what I think firms need to do is rethink a lot of their manufacturing processes and try to focus on process innovations that will allow them to produce at lower costs, maybe locally.

9:17Okay, so let's look forward to solutions. All the downsides that you've outlined are the reasons that companies probably didn't act to the other warning signs that we saw even decades ago. But the pandemic does seem to have changed attitudes. So what's the first step that you would recommend for an organization who wants to assess their supply chain, identify their vulnerabilities and begin to fix them? When you need to build up your team to handle the growing chaos at work, use Indeed Sponsored Jobs. It gives your job post the boost it needs to be seen and helps reach people with the right skills, certifications and more.

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10:38That's O-L-L-Y dot com.

10:43Willy Shih:Well, I think the first step, obviously, is mapping your supply chain. And while that sounds obvious, it's actually a much harder task than most people appreciate. And the reason is because these days with kind of the division of labor and specialization of many firms inside the supply chain, we have many tiers. So, for example, I might be a manufacturer who will rely on 50 or 100 suppliers. And those immediate suppliers are what I think of as my first tier suppliers. Okay, those first tier suppliers will in turn rely on others and so on. So you'll have kind of this layer cake of suppliers. The numbers get very large very quickly for complex products.

11:41Willy Shih:products, oftentimes when you go to your suppliers and say, I want to know who my tier two is, who is supplying you, they don't necessarily want to share that because they're worried that you might find out their cost data or you might find out some competitive information. So understanding those vulnerabilities, which is really the key to starting to address those risks, is a much more difficult task. I would suggest to you that most companies don't know who their suppliers are beyond the second tier. I'm doing a study right now looking at pharmaceuticals and active pharmaceutical ingredients.

12:28Willy Shih:That was something that, you know, the pandemic really exposed. Okay. And people didn't really understand we might import, for example, generic pharmaceuticals from Indian companies who in turn relied on Chinese manufacturers for active pharmaceutical ingredients. And as you follow the supply chain down, it's not really clear how many of the people who your supplier may be buying from is in fact a manufacturer or just a reseller, right? So then, you know, the material may pass through many different hands. And it's hard to get to the root of who actually made a material. Right. And even once you've identified all those tiers, which I do said is an arduous process.

13:23How do you then evaluate where your highest risk spots are?

13:31Willy Shih:Risk assessment is really key, okay? Because as you look through those tiers, then you can say, well, how easy is it for me to substitute somebody else? Are there alternative sources of supply? find those ones where they have a high revenue impact to me if one or more of those suppliers is unable to deliver for whatever reason. A lot of other ones, you know, you can mitigate some of these risks by saying, well, you know, maybe I'll carry more of a stockpile because that will give me time to find an alternative, right? But what you want to really do is find the ones that cause you the most potential heartburn.

14:19Yeah. So the solutions you've mentioned so far, one is stockpiling, another is bringing sourcing closer to home, and then process improvement. That seems to be your favorite solution.

14:31Willy Shih:Process improvement is my favorite one, especially for companies like in high-cost regions like the U.S. or Europe. If you think about why manufacturing... When you need to build up your team to handle the growing chaos at work, use Indeed Sponsored Jobs. It gives your job post the boost it needs to be seen and helps reach people with the right skills, certifications, and more. Spend less time searching and more time actually interviewing candidates who check all your boxes. Listeners of this show will get a$75 sponsored job credit at Indeed.com slash podcast. That's Indeed.com slash podcast. Terms and conditions apply.

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15:37Willy Shih:manufacturers outsource their supply to Asia or East Asia or South Asia in the first place, it was to save costs. Process technologies are constantly moving forward as well. Depending on the field, if you can use newer process technologies that may be lower cost, then you can offset some of that cost differential of going into a higher cost country. Let me give you an example. After World War II, the American steel industry was the king of the hill, right? We were the largest steel producer. You know, in fact, American industry had won the war. And the American steel industry did very well in the late 40s and 50s and even into the early 60s.

16:28But then they

16:29Willy Shih:started facing competition after World War II, for example, Germany and Japan, their steel industry was in ruins. Okay. But as they rebuilt, they used newer technology that were more efficient, produced better quality at lower cost. But incumbent manufacturers who had their existing process technology that was fully depreciated were slow to adopt the newer technology. Now, we've seen that pattern in many other industries. Where I think this is particularly relevant is when you look at chemical manufacturing, for example, active pharmaceutical ingredient manufacturing. The new technology that I think would afford a lot of opportunity to Western manufacturers is continuous flow manufacturing.

17:23Willy Shih:Now, this is still a nascent technology, But there are firms that are working on it in the U.S. and other places. And what it does is it allows you to use much lower capital intensity, smaller reactors, higher temperatures and pressures. And it should produce less waste products. It should be more efficient. And it would be an opportunity to kind of obsolete the installed base of the incumbents. So it's those types of things that I think about. And obviously, there are other newer technologies like 3D printing, which especially when applied to metals, I'm a big fan of that in terms of low cost manufacturing of tooling, for example, or things that really change the equation on labor intensity.

18:16Willy Shih:And, you know, it could give a manufacturer an advantage if you wanted to step up and use kind of that newer technology and produce things at lower cost. so how do we incentivize companies and their leaders to focus on and invest in these things in a period of recession reduced consumer demand hence lower sales and then also in an era when there's pressure to keep people in jobs well one of the things that i've observed in this pandemic and the recession that is going with it, is that companies who use the crisis as a way of unfreezing their ways of working, unfreezing their organizational processes, adopting new ways of doing things, those are the ones I think who can survive and thrive.

19:18Willy Shih:Okay, the ones who hope that things will go back to the way they were, we're already seeing a lot of problems there. So I think what managers need to understand is I'll have new challenges. There will be pressures to regionalize. When you need to build up your team to handle the growing chaos at work, use Indeed Sponsored Jobs. It gives your job post the boost it needs to be seen and helps reach people with the right skills, certifications, and more. Spend less time searching and more time actually interviewing candidates who check all your boxes. Listeners of this show will get a $75 sponsored job credit at Indeed.com slash podcast.

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20:33Willy Shih:Manufacturing. At the same time, I'm not going to have leverage to increase prices as much as I'd like. What am I going to do differently? How am I going to think about my processes? How am I going to organize my supply chains to give me kind of that more resiliency? What should I move? What can I rely on distant sources for? We see a lot of discussion about cutting dependence on China. I don't think that's necessarily an answer in all industries. Maybe I want to diversify my sources, right? We already see many firms diversifying to like a China plus one or China plus two strategy, moving into Southeast Asia, moving to South Asia.

21:25Willy Shih:So that means I will find other low-cost sources, I will take some time to invest in developing alternative sources, and then just having kind of a more robust mix of my sourcing strategy and my logistics strategy moving forward. In a way, it seems like companies should be trying to employ all the strategies that we've talked about. A little bit of stockpiling, some diversification, and then also process improvement. It's going to take using all of these things. I don't think there's any one solution that everybody will be able to apply. it's going to depend on your sector and what kind of alternatives you might be able to develop and how long will that take to develop there's a lot of impatience about this uh supply chain resilience and reshoring okay i i like to remind people that it took 20 to 25 years for china to capture the supply chain in many products, right?

22:36Willy Shih:And if you want to move the supply chain, we're not talking about something that will happen in a year. We also have approached this issue very much from the point of view of the big car manufacturer, the refrigerator manufacturer. What about if you're on the flip side of this? You run the small business that makes the best widget, and you've been supplying all these large companies, And now you're facing the prospect that they actually don't want to only rely on you anymore. What can those small businesses and the suppliers be doing? You know, it's kind of a two-way street. People are finding they were far too over-dependent on a particular sector or particular manufacturer.

23:21Willy Shih:That says diversification is one route you can take in terms of I want to diversify my customers. I want to diversify the sectors that I serve. We've seen a lot of pivots where firms have really moved into new areas, moved into new ways of serving customers as well. So it goes back to I have to unfreeze my organizational ways of working and think about new things that I can do with those capabilities, new opportunities I can address. This obviously is a topic that's highly relevant for people in manufacturing, consumer goods. But what if I'm a leader of a software or a services company? Should I care about all of this?

24:10And if so, what should I be doing to improve the situation?

24:15Willy Shih:Even software and services businesses have adopted global footprints as well. And we're not just talking about Asia or South Asia, but we're seeing software companies having part of their footprint in Eastern Europe, for example, or Ireland. This episode is brought to you by Palmolive. Family time isn't just the big moments. It's weeknight dinners, sitting around the table, everyone talking all at once. So when the plates are empty and the sink is full, use Palmolive Ultra. Palmolive's most powerful formula removes up to 99.9 % of grease, leaving your dishes sparkling clean. And the new convenient pump makes cleaning even easier, so you can spend less time tackling dishes and more time together.

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