Because China is both a primary producer of components and a large customer of global products, shutdowns in China during the coronavirus pandemic have had implications for producers and consumers across the globe, disrupting supply chains for everyone.
In China alone, industrial production in January and February 2020 fell 13.5 percent compared to a year earlier, according to the World Economic Forum.
At the same time, Chinese exports of automatic data processing components dropped more than 30 percent, and textile raw materials dropped more than 25 percent.
“Demand is caving and supply chains are in distress," George Lazaridis, head of research at Greece-based Allied Shipbroking, told The Wall Street Journal in April. “The industry is in a battle for survival."
With disruption at every level of the supply chain, how can companies based in the United States access the raw materials and component parts they need at prices they can afford?
It will require new approaches and different perspectives than many companies are used to. However, there are several ways to get started.
In recent years, businesses have learned from natural disasters and geopolitical events how to quickly tweak their supply chain management strategies.
For instance, tariffs implemented last year in the ongoing trade war between the United States and China drove many buyers to look for suppliers outside of China.
Other supply chain disruptions have resulted from events like the SARS epidemic in 2002 and 2003, Japan's earthquake and tsunami in March 2011 and the flood in Thailand in August 2011.
As a result of these disasters, many companies began keeping slightly higher levels of inventory on hand. Most usually keep only 15 to 30 days' worth of inventory, according to the Harvard Business Review.
However, business leaders who have seen their supply chains decimated as a result of the coronavirus pandemic should not blame themselves.
“I can't think of a single thing we could have done if we'd known coronavirus was coming that would have protected us," John Neill, chairman and chief executive of UK-based logistics and supply chain business Unipart, told Financial Times.
“Factories and operations all over the world have stopped. Let's say we were sourcing all our requirements in the UK. The government shut down various parts of the UK anyway. So we'd still be in the same position," he said.
Rather than focusing on what could have been done to avoid the current crisis, savvy business leaders are looking to develop strategies for building resilience and flexibility moving forward.
Adjusting to a new normal beyond the pandemic, for most companies, will require broader perspective and new approaches to supply chain management.
Steve Bash, City National's Manager of International Banking and Trade Finance, recommended three important steps for moving forward.
In the past, many companies built “patchwork supply chains" based on what they needed at the moment, Bash said.
Today, it's clear that companies need to design their supply chains strategically, in a way that fits into their entire business model.
“A successful supply chain strategy is critical to helping any company optimize their costs and performance objectives," Bash said.
“Designing a supply chain means taking the company's critical operating policies around product, procurement, inventory, transportation and logistics and making sure that every step and participant in the supply chain is in total alignment with those policies."
To build a strategic supply chain, companies would need to engage the leaders of various operating groups, including but not limited to procurement, finance, sales and marketing, warehouse management and logistics.
Each of these leaders should be part of the discussion and planning for assembling a robust and dynamic supply chain, Bash said.
These leaders from various divisions should discuss a wide variety of scenarios, asking questions like:
Where should our inventory be located? A few options are near your clients, near major transportation hubs or in the area with lowest possible cost.
What is the cost to get that inventory in and out of the chosen location? After you answer this question, you then might consider the financing costs of each of these decision points.
Do we want to be a “just-in-time" inventory provider? If not, you might consider managing your order, procurement and shipping processes differently.
Do we want our supply chain partners to share our philosophy on brand, sustainability, inclusiveness, diversity and service? If so, the next step is developing a system for determining supply chain partners' value systems.
Are our suppliers able to work in various regions? It also is important to know if they can be flexible in the event of a crisis and to have backup suppliers that can meet your needs during a crisis.
Building a truly strategic supply chain is a serious undertaking, but it allows business leaders to build an understanding of their entire supplier ecosystem and its relationship to their business and potential results.
Taking time to apply strategy to the supply chain management process frees companies from depending too heavily on one region, one supplier or systems that no longer work for their business.
“The key is setting it up right the first time and constantly reviewing and evaluating its performance," Bash said. “It's also important to know which 'switch' to throw to ensure you have the most efficient and predictable supply chain in any circumstance."
It's more important than ever to learn as much as possible about potential suppliers and their stability before choosing to partner with them.
Just as you would check references before making a strategic hire, Bash recommended checking with a variety of individuals who do business with a supplier, including their current clients, buyers, suppliers and financial partners.
Another way to check out a potential supplier is to ask for information about key performance indicators for their industry.
Find out what shippers and transporters they use, and whether those companies are reliable.
Fortunately, many companies based in the United States have started the process of checking out new suppliers.
While China has remained a very important trade partner over the years, even with new tariffs enacted, “one of the silver linings of the tariffs was that some companies had started looking into alternative sources," Bash said.
Prior to the pandemic, more U.S. companies were looking for alternatives to China, including Vietnam, India, Indonesia and Korea.
While these and other Asian countries will continue to be fertile ground for valuable supply chain partners, “they are still very far away from the United States," Bash said.
“I believe people will be looking for supply chains to be closer to home. U.S. companies will be looking more at Canada, Mexico and even Latin America. In those locations, you're more dependent on trucking than shipping."
Business leaders seem to agree. Moving forward, 52 percent of CFOs plan to have a better understanding of suppliers' financial and operational health, according to a PwC survey released on May 11.
However, Bash cautioned against moving entirely to local or domestic suppliers, or “putting all your eggs in one basket."
Instead, resilient supply chains will include a variety of diverse suppliers that have been thoroughly vetted by a company's specific and strategic criteria.
Authentic and verified documentation is the most important tool for validating and tracking what's been shipped.
The risk of fraud has long been one of the chief challenges related to international trade, and trade fraud often goes uncovered until it's too late, Bash said.
Because digitizing the document flow can be a crucial solution for detecting and preventing fraud and protecting a company's investment, Bash recommended taking advantage of tools that allow you to digitize documents with e-signatures and verification of authenticity.
“Verified documents are huge for us as bankers," Bash said. "The banking system has capital to lend into supply chains, but in many cases banks aren't able to lend throughout the trade continuum because the technology to verify transactions is not in use."
While long-established companies may have to undertake tweaks and adjustments to legacy systems, startups and younger firms are more nimble and able to invest in new systems, giving them a big advantage with digitization.
“If a company is questioning whether to invest in a digital platform, they need to make the investment," Bash said. “You need incredible visibility and disclosure among all partners. You need to know who they are doing business with and what vulnerabilities you face as a result of their supply chains."
Continuing to rely on global trade partners certainly carries risk, just as operating a business in a constantly changing world carries risk.
However, a global trade environment with low barriers to trade helps keep costs low and provides many alternatives, Bash said.
Whether you are importing raw materials or looking for financing to fill a large overseas order, the International Banking team at City National know how to reduce your risk, expedite your transactions and find you funding all around the world. Need to discuss your strategy with an advisor and wish to find one? Get in touch today.
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