Coronavirus is a moment of reckoning for global supply chains

Coronavirus is a moment of reckoning for global supply chains
Image: Carlo Cadenas for Quartz
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As the coronavirus pandemic plunged the world toward a likely recession, Nestlé, the Swiss-based food provider, has remained strong. While major companies such as Marriott and Macy’s saw layoff-inducing downturns in the first quarter of 2020, Nestlé’s sales grew by 4.3%.

It helped, of course, that Nestlé makes a lot of products that were in particularly high demand during global lockdowns, such as coffee, pet food, and shelf-safe prepared foods. But it was also able to get its products to consumers worldwide, thanks to rock-solid supply chains.

“Our supply chain strategy and business continuity plan in place are set to manage disruption,” says Vineet Khanna, a senior vice president and global head of supply chain at Nestlé. “We have been able to deliver what consumers needed thanks to the resilience of our supply chain, thanks to the collaboration with our customers, retailers, transporters.”

Globalization has made our trade system more fragile and vulnerable to disruption. This is, perhaps, counterintuitive—there are more places to source more products, so you’d think that would give companies more options. Instead, nodes in a supply chain have become more singular and specialized, and the need to transport various components across borders creates potential snags.

The pandemic is forcing the world to confront that fragility in real time. In the past, disruptive events like hurricanes or civil unrest might have been isolated to a specific country or region—if part of a product was made in a factory in Fukushima around the time of its nuclear disaster, for example, a company could simply rely on a factory elsewhere to make it, causing few delays to the creation of finished goods.

The coronavirus outbreak is different. It’s shuttering factories almost simultaneously worldwide. “The problem in this scenario is that every part of the world is impacted. There’s nowhere to pivot to,” says Alexis Bateman, the director of the MIT Sustainable Supply Chains program. “There’s never been an event like this. There is no contingency plan.”

That’s not to say the disruption the pandemic caused was a complete surprise. Indeed, some supply chains have fared better than others. Companies that have responded best have a few things in common in the way they approach their supply chains. For others, this moment offers the opportunity for introspection that just might help them survive the next crisis.

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A network, not a chain

For many people, the process of how goods reach our stores and homes has never been more top-of-mind. Toilet paper, face masks, coffee—the absence of these items on grocery store shelves is part of why the average consumer is more aware of these networks than perhaps ever before. “My dad didn’t understand what a supply chain was until now, and I’ve been doing this for a long time,” Bateman says.

But what is a “supply chain,” exactly? The term refers to the series of suppliers and manufacturers through which a product flows before it reaches a consumer. “A simplistic way of looking at what supply chain entails is that it’s everything up and down a stream of supply, from the customer up through distribution, manufacturing, production, raw materials, and whatever else,” says John McKeller, the former director of the supply chain programs at the Wisconsin School of Business. “What’s flowing there are goods and money.”

Supply chains have become increasingly more advanced as the economy has become more globalized. Now, more than two thirds of the world’s goods cross at least one border during production. Though the term supply chain brings to mind an orderly diagram of goods that move from supplier to manufacturer, the reality is more like a complex, linked network, McKeller explains. “You look at the number of suppliers that Volkswagen has for example, extrapolate that out to second- and third-tier suppliers, and you’re talking about thousands and thousands of suppliers.”

That can make it hard for some companies to truly know the ins and outs of the process that goes into assembling each of their products. To develop a new supply chain, managers consider a number of different factors, including where their customers are located and how the products will reach them; where the source materials will come from; and how much inventory (and what kind) to keep on hand.

You may not be aware of every step in the supply chains of most of the goods you buy or consume. That’s not an accident. Specifics are often kept secret and are considered proprietary. Supply chain transparency, however, has come under renewed focus as consumers of goods like food and clothing want to be sure the items are produced ethically and sustainably.

The ideal supply chain is resilient—it can continue to meet consumer demand even when it is disrupted by things like natural disasters or geopolitical spats. Supply chain managers spend a lot of time thinking about how to reduce the likelihood that some single event or factor will throw a wrench in the flow of goods, which could imperil the company’s business. “The nature of this problem is not forecasting, but anticipating,” says Morris Cohen, a professor of manufacturing and logistics at the University of Pennsylvania. “Can we anticipate risk—worst-case scenario, best-case scenario? We don’t know which will happen but we can examine what will be most likely and be prepared for different scenarios.”

And yet, most managers don’t know how risky their supply chains are, in part due to their inherent complexity. “Most companies don’t know what’s happening in the supply chain beyond their direct supplier,” Bateman says. “They know them potentially well, but they don’t know where the raw materials come from, and they can’t trace them back to their source. That opacity has created a lot of disruption.” Managers with resilient and flexible supply chains intimately understand every node in the complex process to create a good, and have systems to track them.

That’s part of what has helped Nestlé continue to deliver its products and “weather the crisis,” Khanna believes. “Internal supply chain transparency played a key role,” he says. “Knowing which ingredient comes from where, in the end-to-end Supply Chain (Tier 1, Tier 2 or Tier-3 supplier) and having a clear visibility on the real-time demands and needs of consumers in any market help line up supply alternatives and anticipate risk and disruptions.”

An inventory of goods or key components can also act as an important stopgap against supply chain failures, and businesses constantly evaluate how much they should keep on hand. During times when demand outstrips supply, inventory can stop interruptions in the output of goods. Some companies, such as Toyota, eschew a big inventory since it takes longer to recoup their production expenses. But small inventories can also make supply chains more fragile.

To find potential weaknesses in the supply chain, companies undergo a process called scenario planning. Once a year or so, they will come up with different hypothetical scenarios that could potentially disrupt their supply chains (“I’m not sure any supply chain fully planned ever for a global pandemic, but there may have been scenarios where they had imagined where global borders were being shut,” Bateman says). They consider where their suppliers are and the effect if access to those suppliers was restricted for some reason.

Knowing where the production process could fail allows managers to make changes that could increase its resilience. They could seek new suppliers in new locales, or change the amount of inventory they have on hand. They could change the design of their products to use more standardized components, as Boeing famously did (pdf) when designing its 787. They could find new ways to use data to anticipate future weaknesses or respond to disruptions. Some may jump headlong into automating factories.

The coronavirus pandemic may provide some companies just the opportunity they needed to act on all this advice. They could map every nook and cranny of their supply chain, provide failsafes to any gaps the pandemic may have revealed, and give consumers the transparency they crave.

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Supply chains of the future

When we were deciding what goods we should write about for this field guide, we thought it was important to display a wide range of items, and we wanted to explore the range of reasons why supply chains worked or didn’t. Of course, the coronavirus pandemic was the most immediate disruption, but that caused secondary disruptions, such as plants empty of laborers (meat) and fewer commercial flights that limited the import of key components (hand sanitizer).

The resulting picture is of a global supply chain that’s a little less mysterious, but still complex and primed for further disruption.

Companies that survive the crisis may use the opportunity to fully map their supply chains, to realistically consider their risk at every stage, to rethink the parts that are most likely to break down in the future.

For observers, too, the ways supply chains have broken down give us a sense of the kind of world we can expect once the pandemic has ended. It’s unlikely that we’ll see an end to globalization, as some have predicted. But some companies may move manufacturing facilities outside of China or closer to home in order to avoid potential future hurdles in getting goods to their final destinations.

Consumers may also have different expectations for supply chains in the future—they will expect them to continue to function even in the face of disruption, and to understand them better. “[Supply chains] used to be under the radar in terms of their role and function. That will never be true again,” Bateman says. “For a lay consumer, that knowledge that your product has been moved and produced and had all these actors involved [means] they’re going to be asking for more transparency.”

It’s hard to anticipate exactly how that transparency will change industries in the long term, but reassessing the supply chain networks opens up new opportunities for companies to meet shifting corporate goals, that allow them to take responsibility for the ethical treatment of workers and to the communities they serve.