Last month, President Joe Biden’s administration released the findings of a 100-day review into the domestic supply chain and, more specifically, how to strengthen it. The results and recommendations focused on four key sectors – semiconductors, large-capacity batteries, critical minerals and materials, and pharmaceuticals and advanced pharmaceutical ingredients – with the outcomes of a review into six further sectors due in February 2022.
While the announcement may not have created the same level of public interest as some of the White House’s other recent initiatives and executive orders, for manufacturers, it could prove to be the tip of a very important iceberg. At a time when many businesses understandably hanker for a touch of normalcy, change is in the air.
And necessary change it is, according to the report’s findings. The review revealed significant structural weaknesses in both domestic and international supply chains. As one government document put it: “Unfair trade practices by competitor nations and private sector and public policy prioritization of low-cost labor, just-in-time production, consolidation, and private sector focus on short-term returns over long-term investment have hollowed out the US industrial base, siphoned innovation from the United States, and stifled wage and productivity growth.”
Alarming as that analysis may sound, it’s nonetheless accurate. And it won’t be especially surprising reading for manufacturers, either. One of the pandemic’s many impacts has been to cast into stark relief the risks posed by the industry’s historical focus on cost reduction, streamlined stock and vendor rationalization. What were once considered efficiency victories have now become weaknesses – weaknesses that present a very real threat to economic prosperity and supply chain security.
Working the system
The review also made a number of suggestions for how to address these challenges, foremost among them the need for greater resiliency. Put simply, there’s widespread agreement that US firms must become better equipped to navigate the inevitable ups and downs of an increasingly unpredictable trading environment.
Yet this, too, is at odds with manufacturers’ long-held passion for cost cutting. Indeed, whether it’s by diversifying their supplier network, growing their stock inventory, reshaping their operating model or establishing a smarter, data-led technology infrastructure, companies must increasingly accept that the first step to boosting resiliency involves spending money, not saving it.
Just as important as this willingness to invest is the need to resist the temptation to go it alone. Yes, every firm will have steps it can take to bolster its ability to survive and thrive in the face of disruption. But to build a domestic supply chain that is truly secure and economically viable requires a collaborative and holistic industry response. As Michael Mandel, Chief Economic Strategist for the Progressive Policy Institute, said recently, “resiliency is a system concept.”
A question of “four-sight”
So what, then, does this systemic response look like? How can manufacturers collectively foresee potential risks and opportunities, and then prepare for them? Broadly, they should focus their attention on four areas:
1. Move from capacity to capability – Rather than think about what they have the capacity to produce today, manufacturers should consider what they have the capability to produce tomorrow. Take the creation and distribution of the vaccines, which saw an unprecedented – and frankly unexpected – collaboration across sectors with incredible results. The industry should now build on this experience, growing its collective ability to flex production environments and respond quickly to unknowns.
2. Expand their supply base – Now is the time for manufacturers to review their domestic and international supplier portfolio. Topping the list should be reducing geographical concentration, especially when sourcing key components and materials. Why? Because partnerships with suppliers across a wider variety of locations means more ways to keep working when disruptions occur – be they temporary local supply issues or global black swan events like COVID-19.
3. Innovate the what and the how – As you might expect, innovation will be vital to long-term success. But for manufacturers it must now carry two meanings, both equally important. The first is product innovation, i.e., what modifications can firms make to their products to make them less susceptible to shortages of key raw materials? The second is more operational, centering on how manufacturing companies become more innovative and flexible in how, when and where they work.
4. Build strategic reserves – The days of streamlined stock inventory and just-in-time production appear to be over. Instead, manufacturers should look to build strategic reserves of critical components that they can quickly dip into when problems arise. The location of these stockpiles matters, too. Ideally, firms should establish several reserves across a range of areas, thereby mitigating the risk of a single local or regional issue hobbling their entire operations.
Onward and outward
There’s no doubt the government’s 100-day review is a welcome step toward creating a more resilient and agile supply chain. For manufacturers, it also shines a valuable light on the challenges they must address for the future. Yet it should also be seen as simply the beginning. Next year’s follow-up review must go deeper and broader, not just in terms of its sector focus but by mapping out more clearly the journey ahead.
In particular, there needs to be greater emphasis on creating what Mandel calls a “distributed digital manufacturing capability”: an ecosystem of trusted partners working together to ensure that when the next disruption occurs, the industry doesn’t grind to a halt. Crucially, this ecosystem must be powered by advanced digital and data technologies that enable firms to operate more flexibly and become more agile in decision-making – all while fending off ongoing cost pressures from Asia and maintaining price points that customers are willing to pay.
The good news is that the platform for change is laid. The pandemic has forced companies to reshape their business models while accelerating long-planned transformation programs. Likewise, President Biden has made it clear that addressing national supply chain vulnerabilities is a priority for the months and years ahead.
But driving that change also means accepting it can’t be achieved individually or selectively. Instead, it requires a renewed sense of collaboration between manufacturing companies themselves as well as between the industry and the government. To usher in a more secure, resilient and prosperous future, manufacturers must begin by looking out.
The views expressed by the author are not necessarily those of Ernst & Young LLP or other members of the global EY organization.