The coronavirus crisis just might be responsible for pushing supply chains—kicking and screaming—into their long-awaited future.
If anything, the global pandemic has acted as an accelerant for supply-chain trends that had been percolating well before the bottom fell out of the markets in March. Now, the worldwide COVID-19 contagion has crimped supply and crippled demand, forcing companies to rethink networks limping along through previously unfathomable disruption.
“Regionalization of the supply chain was happening way before COVID,” said Katy George, senior partner and global co-leader of McKinsey & Co.’s operations practice, during a McKinsey Live Webinar on Wednesday. But today, a growing sense of nationalism is spurring consumer demand for goods made within their own borders or regions versus product shipped in from faraway places. Globalization, she added, is giving way to a renewed appreciation for close-to-home production—an issue brought to the fore by the critical crunch for essential PPE.
Companies are beginning to think more holistically about where their supply chains and manufacturing bases are located, said Daniel Swan, senior partner and leader of McKinsey’s manufacturing supply chain work globally. “One of the ways to create more resilience is creating options for how products get to your customer,” he said. Companies can de-risk their production pipelines by making goods closer to the end customer, he added, stressing the urgency of infusing flexibility into supply chains.
Companies were already mulling options to introduce flexibility and resilience pre-COVID, with trade challenges, tariff disruption and Brexit top of mind. But businesses are reviewing their supplier base and taking a clear-eyed look at which ones have the chops to go the distance. Now, Swan added, companies are more carefully analyzing their “tier two and tier three” vendors to sniff out where the greatest risk lies.
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Swan suggests companies stimulate productivity by sharing components and raw materials across products and multiple lines, factories and regions. But he also warned against building supply chains specifically to deal to COVID-19 issues. “That’s not the right supply chain going forward,” he said. What businesses should do instead, he added, is analyze the different types of risks—like disease outbreaks and political upheaval—to gauge what is the risk they are willing to live with and where they can augment and enhance to their supply chains. Companies must take a systematic, rather than a reactive, approach to their supply set up.
Increased productivity and resiliency usually come at an added cost, which might give some companies pause, even if the investments will pay off in the end. Swan thinks it will be an interesting see how customers on the B2B side consider where and how they buy product, balancing the need for quality and service alongside reliability and speed.
Another expected trend in the supply chain will be the acceleration of the use of digitalization from software solution to technology and augmented reality, according to George. The tools will help with operational matters such as doing plan inspections virtually. While there are current digital tools to manage the supply chains, one problem currently is the struggle by companies to create a return on their investment. Those that are successful at scaling technology end up seeing a significant increase in agility, she said.
George also sees the use of digital tools and analytics capabilities as ways to “upskill the workforce.” Six months ago, there wasn’t much clarity on what companies should do, and now they’re rethinking their footprint with competitive collaboration in mind. They’re also discovering, thanks to quarantine, that virtual teams can work successfully and are tweaking some governing structures accordingly. “Nine out of ten leaders are embedding digital and analytics skills for their supply chain talent,” she said. “It sounds obvious, but it’s not what we saw six months ago.”
New tools such as augmented reality are “not about replacing the entire workforce with automation,” George added, “but about augmenting the workforce with new capabilities.” The focus on workforce activity and developing apps is about leveraging new technology to make their jobs easier and freeing workers to engage in higher-value pursuits versus painfully repetitive and mundane tasks.