Procter & Gamble, the maker of Charmin toilet paper, was prepared for thousands of scenarios – including earthquakes, fires, and cybersecurity attacks – but not for a disruption greater in magnitude than all three combined: a global pandemic.
As COVID-19 spread throughout the United States in March, panicked shoppers snapped up what precious paper products they could find. Meanwhile, P&G’s “just-in-time” manufacturing and distribution operations meant it had no more than two or three weeks’ worth of toilet paper to sell.
Other U.S.-based paper goods manufacturers, along with makers of hand sanitizers and cleaning products, experienced similar shortages, not only due to the unanticipated and extraordinary demand, but also because of their heavy reliance on overseas suppliers. P&G had, in fact, warned investors in February that virus-induced factory shutdowns in China, where it had nearly 400 suppliers shipping more than 9,000 materials, would affect more than 17,000 products.
As shipments of products worldwide slowed or stopped entirely, it soon became clear that global supply chains had snapped. Companies everywhere were in trouble. But not every business.
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The COVID-19 pandemic has uncovered wide-ranging vulnerabilities inherent in sourcing materials and manufacturing products thousands of miles away from where they are sold, and it’s underscored the urgent need for more resiliency. While catastrophic outbreaks of disease may only happen every few decades, material disruptions lasting a month or longer happen every 3.7 years. This pandemic won’t be the last event to disrupt global supply chains.
In an increasingly volatile world, businesses need to prepare for all manner of turbulence, from the impact of climate change and regulatory shifts to protectionist trade policies, among other threats. Companies that shift some aspects of their global supply chain closer to the markets where their customers are will be able to respond more quickly, and thus be better prepared for unexpected risks. Global supply chains won’t disappear, but companies can make it a priority to build a better balance between global and local.
These changes can’t happen overnight. While some businesses might only need to make a few small shifts in their supply chains, others might need to overhaul them completely. Considering the benefits and drawbacks of localization will help organizations execute the right mix.
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The vulnerability of global supply chains
For the past few decades, global supply chains worked because they were mostly reliable and cost effective. Plentiful, cheap labor reduced costs, and factories became more efficient, making companies more profitable. Those years were stable, too. GDP grew steadily and with few supply or demand shocks. But as chaos reverberated through the pandemic-stricken world, businesses soon learned that their reliance on the trusty global model had actually increased their risk in ways that few had considered.
“No one was looking at the risk of having all of their sources of supply coming from Asia,” says Lisa Anderson, president of LMA Consulting Group, a supply chain consulting firm. Some companies decided that having multiple suppliers in the region, such as in China and India, covered their risks. Others didn’t want to increase costs to mitigate risks that didn’t seem likely to occur, she explains. After all, while many previous disruptions in the region had caused problems, the impact wasn’t long term. Nor had the effects extended around the globe. “The longer the supply chain, the greater the opportunity for disruption.”
Prior disasters, like the 2011 Japanese earthquake and tsunami, the Thailand floods that same year, and countless hurricanes, should have prepared affected companies for the fallout from the pandemic. Many didn’t.
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Why local suppliers matter
Having more diverse, shorter, less complex supply chains creates more resiliency, Anderson says. Consider what happened to automakers Ford and Chrysler: when the 2011 earthquake and tsunami rocked northern Japan, a warehouse storing a locally produced chemical used to make pigment in car paint was rendered inaccessible. With this chemical temporarily unavailable, and nowhere else to turn for supply, both companies were forced to suspend sales of vehicles in certain colors.
Read the full article: For Resilient Supply Chains, Think Local