The supply chain provides the intricate connections so many companies and industries rely on. Whether it’s the raw materials a manufacturer needs to create a product or the packaging material required to get it safely to market, if one link in the chain fails, supply breaks down.
Industries have been modifying their approach to the supply chain for decades, always looking for ways to be more competitive. A significant shift occurred after the Great Recession in 2008, when companies were left with overflowing inventories as sales dried up almost overnight. After that experience, companies turned to a strategy focused on just-in-time inventory and cost reductions to remain competitive in the global market. Unknowingly, this approach weakened many links in the supply chain — links that took the COVID-19 pandemic less than a month to break.
Tracking the Supply Chain Breakdown
The business interruption that companies and consumers are currently experiencing is multilayered. With demand soaring in some sectors, links in the supply chain are being strained. Pharmaceutical companies are trying to ramp up new drug products and testing kits while dealing with glass and raw material shortages. Toilet paper manufacturers faced unprecedented demand at the same time that the availability of raw paper material crashed. And lean warehouses are unable to ramp up to handle the demand, even if increased production was possible. Getting a product successfully to market requires a balancing act among supply, inventory and production — and weaknesses in all three aspects have been exposed by the pandemic.
With strategies laser-focused on efficiencies and cost reductions for more than a decade, businesses have increasingly sent aspects of the supply chain overseas. It’s not uncommon for a company to rely on a dedicated material supplier from one country, ship that raw material to another country for processing and production, and then ship to yet another country for packaging. This back and forth handoff might offer immediate cost savings, but if a country or entire region can no longer send shipments due to a natural disaster or a pandemic, the system crumbles.
This unforeseen stress on the system has shown companies the value of reliability and flexibility over cost savings. To bring back certainty, businesses are analyzing which aspects of their supply chains failed in order to modify their approach.
Leaning Into a Turning Point
With the overlapping and interwoven nature of supply chain connections, it makes sense that the solution to strengthen a company’s ability to get its product to market consistently would be equally complicated. However, several universal links will likely need to be addressed, from raw materials and production capacity to inventory capabilities and appropriate storage facilities.
Businesses are now seeing critical value in the close proximity of essential materials, supplies and operations. By reducing the reliance on overseas markets and diversifying supplier networks to include partners within the same region, companies can continue to produce even if an area of the world shuts down. Accomplishing this will require long-term capital planning to accurately predict need and build financially secure relationships with a broader network.
Some companies might also consider returning to a vertically integrated approach to retain control over more aspects of the supply chain. This approach might involve expanding or optimizing the operations or footprint of production and storage facilities, or incorporating appropriate storage capacity to keep supplies on hand. This model would be a dramatic pivot from today’s current divested model, but big change may be necessary.
All aspects of the supply chain are connected, and to succeed each link needs to focus on the same goal — getting companies what they need to fulfill demand. It’s time to analyze and implement new business strategies, and the infrastructure changes to support them, so companies can weather this current storm and beyond.
With the COVID-19 crisis, global insecurities have never been more apparent and are leading to a push to onshore pharmaceutical manufacturing.