Middle East War: Exploding Pagers Highlight Supply Chain Risk
Hundreds of pagers used by Iran-backed Hezbollah exploded in Lebanon and Syria. It appears to be a part of a plan of sophisticated, deadly attacks that targeted specific people, leaving 12 dead and thousands injured. Hezbollah has been attacking Israel and trading attacks across the Lebanese border since the October 7th Iran-backed Hamas attack on Israel. As bad as the news for the war in the Middle East, it also signifies the extreme vulnerabilities and risks in the global supply chain.
According to The Business Times, a former U.S. intelligence official said these attacks were just the latest and most dramatic of a number of supply-chain attacks underway throughout the world. The official said interdiction operations (where goods are intercepted and tampered with before delivery to their ultimate recipient) are rampant. This is deeply concerning news. To add fuel to the fire, the FBI Director Christopher Wray warned in April that China has prepositioned cyber attackers to “wreak havoc on our critical infrastructure at a time of its choosing”. In today’s interconnected supply chain, everything could grind to a halt, just as the CrowdStrike issue highlighted (read our article here).
Addressing Vulnerabilities in the Supply Chain
Successful companies are flipping the page from reactive to proactive. There are several immediate steps as well as near term strategies (just beyond immediate as there is no time for medium or long-term) that must be deployed to protect the supply chain. For example, a significant portion of medical devices contain components from China. Is that a vulnerability that should be examined?
Immediate Priorities
- Assessment: It is obvious if you source directly from a country such as China that you have a vulnerability in your supply chain. However, it might be less obvious if one of your suppliers sources from China. China has influence in the region and is feuding with Taiwan, the Philippines etc. Are you dependent on any of those countries? Is your supplier strong financially? How likely is it that it will survive, not be purchased or taken over by a bad actor? Perform a quick assessment of your critical products and/or materials/ components.
- Get in touch with core suppliers: Do not delay. You must get in touch with core suppliers and assess your comfort, even if your assessment doesn’t identify red flags. Today’s supply chain is identified by volatility and change, and so you should ensure you can count on your core suppliers, that you know their plans and vulnerabilities (as risks exist in the best of circumstances), and that they align with your needs and principles.
- Backup sources of supply: If you haven’t already done so, you must immediately find alternative sources of supply for key materials, components etc. It is not enough to simply find a source of supply. You must purchase at least 20% of your needs from the backup source of supply and build the relationship such that your backup source of supply will be there when you need them. It might be obvious, but do not find a backup source of supply in the same geography as your current source of supply as supply chain chokepoints are popping up at a quick rate.
- Source new suppliers: If you are dependent on vulnerable sources of supply due to enemy threats such as the pager situation or potential supply chain chokepoints such as the Red Sea or the attacks occurring in the Suez Canal, you must find a new supplier in friendly territory not dependent on a potential threat (such as a dependency on commodities from Russia-Ukraine or critical minerals of a region that China controls through its belt and road initiative). Even if you are not terribly vulnerable, you must source additional suppliers.
Near Term Strategies
- Friendshoring: If you source a new supplier in a country on friendly terms with your country and that avoids vulnerabilities in getting to your production facilities and/or customers / consumers, another name for this activity is friendshoring. Be careful to look at the full picture of what your potential new supplier will require. Are electricity, water, or other natural resources critical to the production of your product? If so, can you count on the supply for your new partner? What is the logistics requirements for your product to arrive at its next destination? For example, do you have to go through the Panama Canal? If so, do you know that China owns the terminals on both sides of the Panama Canal? Do you have another route that will meet your needs?
- Strategic alliances: It is no longer enough to simply source a supplier. You must formalize and pursue strategic partnerships, joint ventures etc. If you are going to count on your supply base, you must create formal relationships.
- Reshoring: There is no better strategy than reshoring as it relates to mitigating supply chain vulnerabilities. Reshoring involves moving production back to the region it came from with the customer base. Not only will moving production to the U.S. (or Europe, Japan etc.) increase flexibility, resiliency, and responsiveness in today’s Amazon-like service expectations business environment, but it will also transition control of the supply chain back to the company. Less inventory will be required, increasing cash flow and reducing cost. Also, as automation, artificial intelligence, and advanced technologies are rolled out, labor costs are largely an irrelevant piece of product cost. Thus, most non-commodity product manufacturers will also reduce costs by producing in the U.S.
- Expanding manufacturing: Similar in concept to reshoring, manufacturers already existing in the U.S., Europe etc. should expand capabilities. It is much quicker and easier to build on strength and expand than it is to create new. You can utilize already existing equipment and scale up production. You can utilize already existing resources and talent and scale up. Expand and scale!
- Vertical integration: More and more companies are going beyond what has been widely accepted as an end-to-end supply chain to pursue a vertical integration strategy. For example, a lighting manufacturer vertically integrated when it wasn’t popular because they wanted to control as much of the supply chain internally as possible while sourcing the rest to U.S. suppliers. It provided them with a strategic advantage as they could customize on the fly with quicker lead times than the competition which led to them taking the first position in the marketplace.
- Build New: Although typically a larger project that requires more resources and time, supply chain vulnerabilities will not be addressed without significantly expanding manufacturing capabilities.
- Diversify supply: In fact, smart manufacturers will pursue multiple strategies as there will be heightened risks throughout the supply chain for many years to come. You must plan for resiliency and diversify risk.
In addition to these immediate and near-term strategies, you should roll out a SIOP (Sales Inventory Operations Planning) program to proactively navigate changing conditions and ensure you are prepared to support your customer’s needs. SIOP starts by creating a demand plan that increases your revenue predictability. The demand plan is translated into production / manufacturing capacity requirements, labor and skill requirements, equipment and maintenance requirements, building and storage requirements, supply requirements, and logistics requirements. Since it is vital to stay ahead of changing conditions, SIOP is your key to success in flipping from reactive to proactive. It will give you the notice required to friendshore, reshore, expand manufacturing capacity, source temporary offload suppliers, etc.
For example, an aerospace manufacturer rolled out a SIOP process. Because their parts were large, the SIOP process provided information on the number of buildings and storage capacity required. It was translated into a master schedule and material plans. They used the master schedule to better plan production, increasing service levels from the 60-70% into the 90%’s. In addition, they translated the forecast into key materials and components which enabled the Purchasing resources to set up contracts which improved supply availability and reduced cost since the supplier could flip from reactive to proactive. To learn more about how to roll out the process, read our book, SIOP: Creating Predictable Revenue and EBITDA Growth.
The bottom line is that we need to revitalize and ramp up manufacturing capabilities, create a manufacturing renaissance to mitigate supply chain vulnerabilities and ensure success. To read more about the risks and strategies to address the vulnerabilities and craft tomorrow’s supply chain today, get a complimentary download of our special report.
If you are interested in reading more on this topic:
Supporting MedTech’s Growth: Scaling & Mitigating Risk in the Supply Chain