Few industries have been immune to supply chain disruptions over the last two years. First it was food and paper goods; then it was computer chips, home exercise equipment, and face masks. More recently, construction material, at-home COVID-19 tests, and cars have taken their turn being out of stock.
Disruption certainly occurred on a large scale. But as supply chain and operations experts pointed out in a panel discussion during the 2022 MIT Manufacturing Conference hosted by the MIT Industrial Liaison Program, disruption is not new, and it isn’t going away.
“This is really the only constant you have, is change and disruption,” said Erez Agmoni, senior vice president of innovation and strategic growth at shipping company Maersk North America. “People will not go back to the normal way of thinking, ‘Everything will be fine.’”
One McKinsey study found that companies can expect supply chain disruptions lasting one month or more to happen at least once every four years. Another said that on average, supply chain disruptions cost companies 45% of one year’s profits over the course of a decade.
How can organizations prepare for disruption that is certain to happen — without knowing where, when, or why it will happen, or for how long? Increased supply chain resilience helps, along with an open mind about what to expect, and a willingness to rethink just-in-time production.
Prepare for uncertainty
Managing uncertainty can be tricky, especially when the “steady state” is no longer as steady as it once was, said Jarrod Goentzel, founder and director of the MIT Humanitarian Supply Chain Lab. The right response, though, can help organizations prepare for the future.
In the wake of Hurricane Maria in 2017, for example, many hospitals faced shortages of saline because of limited manufacturing capacity in Puerto Rico. That motivated hospital executives to think about establishing more direct relationships with their suppliers. This proved beneficial at the beginning of the pandemic, Goentzel said, as these hospitals were better prepared to address potential disruptions with their suppliers and faced less pressure to stockpile items that might be in short supply.
Goentzel compared how companies used to prepare for major disruptions to old maps that depicted dragons where explorers had yet to tread. “These dragons are showing up more in our operations,” he said. “You need to be willing to venture occasionally into uncharted waters. It helps you know where and when you might expand your boundaries and still be profitable. You learn about the ocean and all its complexities.”
Simply put, organizations need to assume uncertainty in their state of operations, said MIT Sloan professor of operations management He outlined three aspects to managing this uncertainty:
- Knowing the boundary between regular and irregular operations. Many companies are blind to the boundaries of their operations — being aware lets you know when trouble is ahead.
- Designing and implementing systems to make your company more resilient and robust, allowing for relatively smooth transition from regular to irregular operations.
- Building enough flexibility into those systems to maintain irregular operations.
Build supply chain resilience one investment at a time
Organizations best prepare for supply chain disruption through incremental investments, Goentzel said. This makes it easier to implement change, and there’s less of a financial hit to absorb.
“Building hard capacity that won’t be utilized a lot of the time is probably not the right kind of investment,” he said. But investing in your people, investing in relationships, and mapping key supply networks — “those kinds of investments are going to have more value over the long term.”
Levi agreed. “Often, a moderate level of investment will give you surprisingly high gains when it comes to flexibility and resilience,” he said.
When deciding where to invest, Levi recommended looking at three domains of disruption response. One is long-term survival, or having enough inventory to ride out a lengthy disruption to regular operations. The second is quicker recovery, which includes things like finding alternative supply sources. The third is managing exposure — taking action such as postponing deliveries if needed.
From there, organizations should design a portfolio of interventions that allow for a quick response wherever a system is most vulnerable, Levi said. Here, the benefit of flexibility comes into play. “If you’re able to detect a problem a week before your competitors, that might give you a huge competitive edge,” he said. “And sometimes, it’s just a few hours before the competition.”
Take an end-to-end approach to your supply chain
Prior to the pandemic, many companies managed supply chain as a transaction, which placed limits on flexibility. “That cannot help you in times of problems,” Agmoni said. “You need partnerships ... if you want your supply chain to be much more resilient.”
An end-to-end approach could make one provider in charge of the entire shipping journey, for example. Just before the pandemic, transit times from China to the U.S. Midwest averaged 34 to 74 days, Agmoni said — a 40-day fluctuation makes it hard to design your supply chain.
This variability leads to uncertainly, which leads to a buildup of safety stock — inventory that keeps operations running in the event of long, unexpected delays. In an end-to-end model, a company would look at that delivery window, find an acceptable middle ground, and hold the provider responsible.
“You may say, ‘I don’t need it in the fastest time, but I need it in 50 days, with a window of plus or minus three days,’” Agmoni said. “So, now you have a short one-week window of exceptions. You can let [the supplier] route it as they wish, instead of going step-by-step. That brings more stability and much more resilience.”
Take a fresh look at just-in-time manufacturing
One benefit of the end-to-end model is a reduction in safety stock, so companies can spend less on inventory at a time when the cost of both material goods and transportation is rising.
This could also contribute to a decline in just-in-time manufacturing, as companies have fewer goods on hand to finish products on demand. “Just-in-time for everything is not viable financially,” Goentzel said.
Rather than killing just-in-time manufacturing, though, Levi said the current circumstances can give companies an opportunity to rethink it. To do this, he encouraged manufacturers to take a hard look at the finished products themselves.
“We have overly complex and diversified products, and we have lack of standardization in many industries. That does not allow you to switch between different components from different vendors,” Levi said. This increases the likelihood of a production slowdown if one supplier is disrupted, as alternative sources of highly customized or complex components are limited.
Levi recommended redesigning products to make them more flexible and modular, and creating cross-industry standards that allow for flexibility to switch between vendors.
“COVID, the experience over the last two years, should make us think about flexibility in a far more end-to-end and comprehensive manner than … just in time or just in case,” he said.