Building More Resilient Supply Chains
Staying competitive requires a network of sustainable suppliers in multiple regions.
For a glimpse at the state of the global supply chain in 2021, a look out at the waters off the coast of southern California told the story. On any day, more than 60 ships could be waiting at anchor unable to unload cargo at the two ports that handle 40% of all containers coming into the United States[i]. This record backlog is limiting supplies of everything from toys and furniture to video game consoles. Even the great toilet paper shortage of 2020 was poised for an encore when retailer Costco announced purchase limits in the fall[ii].
Supply chain disruptions are particularly acute for the tech sector, which is dealing with more than just shipping delays. The industry was already navigating a chip shortage expected to linger well into 2022[i] when it received more bad news: In September, China ordered many factories and assembly plants to shut down temporarily to deal with electricity shortages and to help meet the country’s carbon-reduction targets. Those restrictions hit key suppliers to major tech companies like Tesla, Microsoft and HP, according to the Financial Times[ii].
Not surprisingly, these bottlenecks have tech companies taking a hard look at how to make their supply chains more reliable and resilient. The process often starts by diversifying supply chains more broadly across individual suppliers, countries and regions.
“The pandemic has driven home the importance of having flexibility in the supply chain or multiple supplier relationships,” says Steven Cranwell, CEO of Standard Chartered Americas. “In the long run, supply chain resilience is likely to become a higher priority than the cost efficiencies that have historically driven many of these decisions.”
The shift to a “China Plus One” strategy
Although the need for supply chain resilience is becoming more urgent, the push for greater geographic diversity predates the pandemic. When the U.S.-China trade war put the tech industry’s reliance on Chinese suppliers in sharp relief, many companies discovered that they didn’t have to look to far afield to find new options: The countries within the Association of Southeast Asian Nations (ASEAN) have been a natural fit for many large multinational firms pursuing a “China Plus One” strategy.
Countries like the Philippines, Malaysia and Vietnam have greatly improved their tech expertise and manufacturing capabilities. Since the ASEAN market is geographically close to China, U.S. companies have expanded their direct production capacity and/or contracted in the region without having to make significant changes elsewhere in their supply chain. That proximity also means ASEAN suppliers may have similar access to existing deep-tier suppliers already used by Chinese manufacturers.
Ongoing shipping disruptions are now sparking interest in regions such as the Middle East and Africa as a way to diversify freight routes and avoid potential pinch points like the Suez Canal. The Biden Administration has also signaled support for reinvigorating domestic supply chains in the United States[i].
Diversifying into new countries alone doesn’t create more resilient supply chains. One of the challenges is gaining visibility into the deeper layers of a supply chain to monitor production capacity and to ensure third-party suppliers adhere to environmental protocols and safe working conditions.
A framework for supply chain resiliency
Creating a resilient supply chain is a dynamic process. Risks change, as do the opportunities for sourcing in different countries. To manage these evolving conditions, multinational organizations need a process that helps supply chains adapt proactively rather than reactively.
With the right framework in place, a company that successfully integrates new suppliers in one alternative region can rely on the same approach to move into other markets as necessary. The key elements of a resiliency framework include:
Improved supply chain visibility. Automated production schedules and technology that tracks the progress of products through the manufacturing cycle can give companies unprecedented visibility into the real-time status of their supply chain—wherever the supplier is located. This information makes it possible to spot potential problems early and adjust quickly. The need for greater visibility is crucial in assessing sustainability issues such as suppliers’ energy emissions and labor practices.
Efficient onboarding capabilities. Ad-hoc processes for conducting due diligence and integrating new suppliers make it more difficult to create a geographically diverse supply chain. Developing a standardized, streamlined onboarding process can accelerate the addition of new suppliers. Companies also can look for third-party platforms that provide a network of vetted candidates, making it easier to quickly and confidently locate high-quality suppliers.
Robust financial structures. Managing finances across multiple suppliers and countries involves both payment for products and services, and investments that help improve a supply chain’s financial stability and sustainability. As with an onboarding system, it’s important to have end-to-end payment infrastructure to help new suppliers get paid promptly. A robust payments system can also reduce foreign exchange risk─a particular concern for suppliers in countries with volatile local currencies.
Companies also should consider financial mechanisms that can help suppliers address sustainability goals. For example, partnering with local suppliers to build a wind farm or install a solar array to get off a coal-fired electrical grid can greatly reduce carbon emissions.
A commitment to collaboration. The perfect supplier may not exist anywhere in the world—yet. But that’s an opportunity for the U.S. tech sector to use its influence to help improve standards and practices in new regions. In some cases, companies may help suppliers or governments to finance sustainability projects, as Dell has done with a solar installation in Malaysia[i]. Organizations may also collaborate with suppliers to improve hiring practices and workplace conditions in countries with different regulations.
Trading “just-in-time” for “just-in-case.” Where bottlenecks cause particular problems, companies may find it worth investing in backup manufacturing capacity or increasing inventories in key strategic areas. These strategies involve shifting the focus from short-term costs to longer-term risk reduction—but organizations that strike this balance will eventually see the benefits. “Companies that build adaptable supply chains will have a substantial advantage over the competition the next time a major disruption takes place,” Cranwell says.
The long-term benefits of investing in new markets
Even without another global disruption on the scale of the COVID-19 pandemic, resilient supply chains will be essential for business success. Natural disasters, political unrest and trade tensions can all threaten the availability and price of goods and components sourced from single countries. Companies that pursue supply chain diversification that emphasizes flexibility and sustainability are more likely to avoid the kind of disruptions seen in 2020 and 2021.
The benefits of broader geographic diversification also may extend beyond supply chain resilience. Over time, the increased economic activity generated by U.S. companies investing in supplier relationships can help support a growing middle class in these markets—potentially building an additional customer base for U.S. technology products.
“Regions like ASEAN have the ambition to grow and the opportunity to support U.S. companies as they push for more flexible supplier networks and improved ESG practices,” says Cranwell. “When industry players, financial institutions and government agencies work together to generate growth, they will produce more than just resilient supply chains—they’ll contribute to a better world.”