The COVID-19 pandemic has tested supply chains like no other event in recent history.
With entire populations isolating and quarantining, companies are seeing demand spike for certain items and plummet for others, while their access to parts and labor from around the world is being severely disrupted.
“Weather-related supply disruptions have been much more common over the last 20-25 years,” Sunil Chopra said, “but this is the first time I have really seen a supply-disruption risk due to people not being able to go to work.”
On a societal level, this has led to shortages in products such as hand sanitizer and masks. Thankfully, hand sanitizer is simple to produce, allowing other producers, such as perfume manufacturers and distilleries, to step into the breach. Masks present a trickier problem, however, in that they are produced almost exclusively in China. Since other countries are not equipped to quickly ramp up production, shortages will likely continue.
On a company level, individual manufacturers are being hit hard.
So what can these manufacturers — both large and small — do to cope with supply-chain shocks? Chopra, a professor of operations at Kellogg, explains.
Over the decades, global companies have concentrated production geographically in order to save money.
Yet even before COVID-19, as Chopra and his coauthors argued in a 2014 article, the marginal benefits for this kind of concentration were diminishing, while the risks were increasing.
“The additional cost of a large company operating plants in different locations is often not more than the cost of having one huge plant,” Chopra said. “You may reach the limit of your economies of scale at half the size, so by running two plants, you don’t give up much in efficiency, but you gain a lot in resiliency.”
In other words, whether you have one plant that can produce a million items a week or two plants making 500,000 items each, in both cases you may be producing so many items that you are already close to achieving whatever economy of scale is possible. But the likelihood of both plants going offline at the same time decreases significantly.
“Think of it like segmentation of the supply chain by region,” Chopra said. “Say you produce face masks. China will usually be a good place to make them. But in March 2020, Vietnam or Mexico might be better.”
Even this is no guarantee of smooth sailing, however. “It’s not that all those locations cannot get disrupted at the same time. They can,” Chopra said. “Coronavirus has come as close as anything to doing that. But what you see is that different countries are going to hit peak disruption at different times.”
Creating regional supply chains is not an argument against outsourcing or globalization, Chopra explains.
“The idea is not that we are building walls, but we are building a system that is not concentrated,” Chopra said. “This allows us to be agile enough to match the appropriate supply points with the appropriate demand points as the situation continues to evolve.”
A few companies are providing consumer-product manufacturers with that kind of flexibility. But, Chopra cautions, for the most part that agility still requires a lot of planning. The best option for many manufacturers is to maintain an awareness of the precise status of all their production-facility options, then to coordinate their overall network in response to the conditions as they evolve.
“The problem is that this level of awareness may be difficult to achieve for companies that don’t have good visibility into their global network of facilities,” Chopra said.