Readers of Resilinc’s blog will likely be familiar with Tom Linton, the supply chain veteran, senior McKinsey advisor, member of Resilinc’s executive advisory board, and author (whose most recent book Flow: How the Best Supply Chains Thrive with co-author Rob Handfield is now available). In a recent webinar, Linton and Resilinc VP of Customer Success, Glenn Wilensky, discussed Resilinc’s EventWatch supply chain data for the first half of the year, the future of inventory management, changing geopolitical, cyber and ESG risks in supply chains, and many other topics. This edited Q&A covers the highlights.
Wilensky: What trends stand out when looking at the first half data from Resilinc’s EventWatch?
Linton: Regarding disruptive events, the pandemic is at a slow boil now. It’s constantly in the background and has raised the overall risk of many types of disruptions. Port and labor disruptions were in the top 10 in the first half of 2022, mainly because of China’s COVID-related shutdowns. Supply chain risks continue to become more complex and consequential, not just because of the pandemic.
Multi-Tier Supply Chain Visibility
Wilensky: And because most disruptions occur in the lower tiers, doesn’t it surprise you that many OEMs still lack the multi-tier visibility needed to monitor and manage those risks?
Linton: That’s right. And with these multi-tier mapping tools now available, it can be very awkward for a CPO to explain to their CFO or CEO why a lower-tier disruption came as a surprise. In the 1995 Kobe earthquake, we put people on motorcycles to weave their ways along the damaged roads and investigate the status of factories. That was pre-Internet, and well before the kind of AI-enabled supply chain mapping and monitoring that’s available today. Yet, many supply chain organizations still aren’t using these advanced tools.
Wilensky: And we’re not just talking about financial losses, but the potential for significant competitive advantages, correct?
Linton: I often say that supply chains are selfish. Every company is out for itself, and there are always opportunities in risk situations. Suppose a supply chain team can respond to a widespread disruption by buying surplus inventory or re-routing shipments before their competitors do. In that case, they can gain sales and even enhance their brand value.
And speaking of selfishness, it’s important to remember that your first-tier suppliers are not always transparent about problems among their suppliers because they’re in competitive situations, too. So, when a tier-one supplier says, “Trust me, I have this figured out,” my response is, I’ll trust and verify with my visibility tools.
Near Shoring and Just in Time
Wilensky: Shifting gears, what’s your take on all the buzz about near-shoring and re-shoring?
Linton: I’ve coined the term “safe-shoring” to characterize the reduced risks of a supplier network that is closer at hand. In our book, Flow, about how the best supply chains thrive, Rob Handfield and I cover how risks can be mitigated by having a better line of sight on your suppliers. Supply chains are strung out worldwide now, and that’s not necessarily the optimal configuration. But there’s often resistance to changing a supplier network. I argue that companies don’t have to live with their supply chains as they are. They can put strategies in place to change them, to transform them.
Supply chain managers should think more financially about how to de-risk their supply chains. Once you have your map in place, you can plan for optimization. When I was at LG, we were able to convince suppliers to locate near a new factory. We had the purchasing power to accomplish that.
Wilensky: Okay, but for OEMs with lower annual spend, what kinds of contract terms can induce a supplier to stand up a new manufacturing facility in a country that’s closer to the domestic markets or their major contract manufacturers?
Linton: It’s important to help suppliers put together the business case. If you want them to be near one of your facilities in an area where you have a lot of good information, have a meeting with them and share what you know. Help them engage with the government incentive programs for infrastructure or staff training.
You can also win greater leverage with a supplier by taking business you’re now giving to their company and two others and giving them more if they’re willing to open a factory in your preferred location.
Contracts are important, of course. But I’ve never in my life signed a five-year contract that still made sense three years later because the world changed, suppliers changed, technology changed, or my company’s needs changed.
Wilensky: And how about the future of just-in-time inventory? The crippling shortages during the pandemic have caused many to question where this is still a good strategy.
Linton: People get hung up on just-in-time, but that’s not the issue. Just-in-time was pioneered in Japan, with suppliers delivering only what was immediately needed by a factory. Now, so much is outsourced to contract manufacturers who are holding inventory for OEM customers. Yet, that is still the OEM’s inventory. The company may be pushing it out to the contract manufacturer financially, but they’ve still added risks.
Wilensky: ESG risks such as forced labor are becoming a serious issue for supply chains. What principles and practices do you recommend?
Linton: OEMs must deal with issues like whether their third-tier supplier is exploiting children in the Democratic Republic of Congo to mine cobalt. You cannot avoid the fact that human rights have become more important in the American political agenda and the agendas of most corporations. I know from sitting on public boards you won’t find a public company that doesn’t have ESG at the top of its agenda. And with the visibility tools available, you can get in enormous trouble with your board, your customers or regulators if ESG violations go undetected.
Invasion of Taiwan and China Dependency
Wilensky: The topic of human rights and supply chains leads to the topic of China. How concerned are you about the potential for a major conflict between China and Taiwan, which would disrupt global chip supplies?
Linton: I’d be more worried about a major earthquake in Taiwan than China invading. Taiwan is earthquake prone, and Taiwanese fabs are in earthquake-prone areas.
Thinking about China, we should be looking more at China’s international strategy and asking ourselves what we can do that’s comparable to China’s Belt and Road initiative. Resilinc CEO Bindiya Vakil, Dale Rogers from ASU and I have written about the great opportunities to build up a Pan-American supply chain. But now, you can’t drive a truck or a car or take a train from Alaska to Tierra del Fuego. There’s no viable transportation infrastructure on much of the so-called Pan American Highway. Compare that to what China is doing, reviving the Silk Road with modern infrastructure, railroads, ports, and gas and oil pipelines.
Canada and Mexico are our second and third largest trading partners. There’s a lot of work to do to create a more integrated transportation network between these countries and into Central and South America. Instead of 50 states competing for factories and businesses by offering lower taxes and other benefits, we should cooperate on a national supply chain strategy. That would be a much better way to de-risk North American and South American supply chains.
Top Supply Chain Issues Moving Forward
Wilensky: What’s the top issue supply chain managers will face in the next year?
Linton: The number-one issue will be inventory. Any recession slows down economic growth and inventories back up. In the last few weeks, major retailers have announced that they’re sitting on boatloads of inventory. They’re discounting heavily to sell it. At the same time, interest rates are rising to slow inflation, and that will mean cash tied up inventory will become more expensive.
Still, there’s a holiday shopping season approaching, and corporations are thinking hard about how much they want to stock up. With a likely recession ahead and consumers spending more on gas and other essentials, there’s a great risk that their holiday shopping budgets will be constrained. On the other hand, no retailer wants to have empty shelves on Black Friday.
Inventory management should be top of mind for supply chain professionals. That means knowing exactly where your inventory is, its status, who owns it and how quickly you can get it when you need it.
Wilensky: Any thoughts on what the next big disruption will be?
Linton: The next big disruption will be something we’re not looking for. Supply chain managers need to figure out what would take them down. In the military, they call it a kill shot. Every supply chain for every solution has a potential kill shot. It could be a single source you depend on, a single location, or a single country. You need to take apart your bill of materials and think about what disruption would take you down, then create a de-risking strategy. That could be going to two factories or factories in two cities or two countries. And you need good multi-tier data, because a Taiwanese supplier may have a factory in, say, China, but you don’t know if they’re making your items there unless you have the visibility.
Supply chain risk management practices must continue evolving. You need strong backup plans for when a key supplier goes down. You need to audit your suppliers’ factories for fire risks. You need backup manual plans in case your SaaS vendor experiences a disruption. You need to find and mitigate the risks you’re not even thinking about yet.
Watch the full recording of our Live Chat with Tom Linton: The State of the Supply Chain in 2022