Supply chain should shift from cost focus, say Maine Pointe and Michigan State University

22 June 2020 3 min. read

The pandemic has exposed the weaknesses in a cost-driven global supply chain, according to a recent executive and board discussion paper from Michigan State University and Maine Pointe, an operations and supply chain consulting firm.

The report “Is today’s supply chain model dead? Have you got it replacement ready?” says companies need to switch to a new supply chain model that prioritizes resilience and digitization in order to prosper in an uncertain future.

The pandemic crisis has shown that the popular cost-driven supply chain management model is ill-equipped to deal with current and future global risk events. Problems such as empty shelves, higher prices, and concerns over food supply have stemmed from an inflexible model which over-relies on offshore plants and suppliers.

The dominant model, refined over 50 years, focuses on efficiency and speed, and excels at driving down costs. However, it has trouble dealing with sizeable changes in demand, as seen in the pandemic.

“Is the supply chain dead? No, but a new model needs to be put in place that addresses weaknesses. A more resilient supply chain will be better able to withstand the next major disruption, whatever that may be,” Simon Knowles, CMO of Maine Pointe and co-author of the paper, said.

Supply chain should shift from cost focus, say Maine Pointe and MSU

As such, companies will need to rebalance their supply chains to ensure resilient, digitally enabled, and agile operations as the post-Covid business world changes due to number of factors. Free trade will likely shift to managed free trade, according to the report, as protectionist policies continue to proliferate. Consumers will also focus more on safety, demanding transparency into products and facilities.

Meanwhile, new business models will continue to emerge through digitalization; for example, digital distribution for new movies which could eliminate cinemas. 3D printing could also enhance many manufacturers’ ability to produce parts locally.

The economic crisis, unfortunately, will result in the elimination of many suppliers. The previous recession more severely impacted small and medium enterprises, and this will likely hold true in the current downturn. As such, the report notes that companies will have to rebuild their supplier base and rebalance risks.

The pandemic shutdown in China, as well as a continuing trade war with the US, emphasize the increasing folly of putting all of one’s supply chain eggs in a single, low-cost basket. “Long-term rebalancing will limit exposure by avoiding single-region or single-supplier sourcing. A balance of global, regional, and local sourcing will prove to be less risky and more efficient in the long run,” said Steven Melnyk, a professor of supply chain management at MSU and co-author of the paper.

The report advises taking several actionable steps immediately to address short- and long-term challenges.

First, companies should carry out a review to see what went right and what went wrong in their response. They should also examine how long it would take to respond to various percentage changes in demand.

Companies should next reassess their global footprint, building in more agility (even at higher cost), and rebalancing their offshore, nearshore, and onshore mix. This should be followed by building more optionality into supply, procuring critical components from two or more locations to ensure business continuity. Organizations should also digitize their supply chain operations to enhance visibility, speed, and agility.