How things have changed in two decades. When SI started, the craze, and the right approach, was new strategies for supply chain management. But that was then, this is now. As we’ve regularly explained over the past few months now that globalization has gone, isolationism has returned, natural and man-made disruptions are on a level not seen in decades, if not a century,

That means that survival is dependent not on new strategies, but old strategies when trade was restricted, dangerous, and lengthy.

Long Term Partnerships

In a recent post we suggested it was once again time to bring back Keiretsu, which can be briefly described as a long continual business relationship, and, in one way or another, has been a significant force in the Japanese economy for over four decades and, despite its long and varied history, criticisms, the Structural Impediments Initiative, and economic downturns, is still a strong foundation for many supply chain relationships in Japan

Whether or not you adopt the Japanese philosophy, the key to success in this unstable economic environment with fragile supply chains is to form solid partnerships where both parties support each other through tough times. If you support the supplier as much as you want to support them, it is much more likely that you will be their customer of choice and when stocks are low, shipping options are few, and support is limited. That’s key — being the one that keeps going when all your competitors shut down.

Localization of Production and Near-Shoring of Inputs

Producing in country B that is halfway around the world for country C doesn’t make any sense in an age where shipping costs are rising rapidly, can triple to quintuple on every pandemic and/or seaway closing, and where raw material supplies can dry up over night. The key to success is buying, manufacturing, and selling as close to the destination country / region as possible.

It’s not twenty (20) years ago when shipping was stable and super cheap, unexpected supply chain interruptions were usually limited to natural disasters or unexpected man-made disasters (plant fires, mine collapses due to insufficient shoring, etc.), and it was much cheaper to mass produce in a single locale (i.e. China).

Now, shipping is unstable and super expensive (while crude oil from about 1985 to 2005, adjusted for inflation, ranged between $40 and $60 per barrel except for the occasional spike; for the past five years, it’s been $80 to $100, with the pandemic and Strait of Hormuz strikes bringing it to $110 to $120), interruptions are daily, and China, which is now 18% or so of global GDP thanks, primarily, to US and EU outsourcing (on the advice of the Big X consultancies, led by McKinsey), is not as cheap anymore). This means that, for North America, South American production is cheaper than China. (Why do you think Foxconn, famous for Apple product production and suicides, has at least five plants in Brazil?)

It’s true that some raw materials, like rare earths, will always have to come from China (especially if you’ve in a country sanctioning Russia), but it costs less and makes more sense to just buy the raw materials which can be shipped very compactly (and even by cargo plane if needed) than finished goods that are often 90% empty space (like appliances).

In other words, the days of centralization in manufacturing, as well as supply chains, is over!

Controlled Verticalization

These days all the techbros want to be railroad barrons and be super rich to the point that it would be impossible to spend all their money unless they started buying small countries. What they forget is that it wasn’t just monopolies, a lack of regulation, and zero worker rights (which the current US administration is doing it’s best to reinstate by rolling back human rights, regulations, and anti-trust laws as far back as they can as fast as they can in the hopes of bringing in a new Gilded Age [while forgetting what followed]), but super efficient execution from source to sink.

The barrons not only owned the most lucrative businesses (like the railroads), but also all the subsidiaries that made the parts, shipped the parts, mined the raw materials, and shipped the raw materials. With vertical integration, they could, and did, optimize every single step of the supply chain.

This means that if you want to succeed, you need to optimize your supply chain. While you may not be able to own every company in your supply chain (since some electronic products require 10,000 components), you could own, or at least own part of, key suppliers and/or your parent company could own your key suppliers and/or key transportation companies. Whatever is critical to your operations, can’t be easily replaced, and could bring down an entire product line (and even your business) if it could not be obtained, that’s what you need to own.

Abandonment of JIT

For years, when supply chains ran smooth, supply was assured, and costs were manageable, JIT was all the rage. When inventory costs were an average of 20% to 25% of the inventory value, reducing inventory made sense (to a point — we’d argue it was taken too far). But when production line shutdowns can cost millions, supply chain interruptions are coming regularly and remediation times can take weeks or months, and customer loyalty might be at an all time low thanks to rapid inflation and limited funds, lack of supply is much more costly than inventory, especially if the inventory is well managed.

With today’s multi-objective multi-scenario pareto forecasting models, demand over a reasonably sized time-window can be predicted to 98% accuracy for many categories, the chance of overstock can be minimized (while minimizing the size of stock-outs), and warehouse sizes and costs can be optimized as well. A slight increase in inventory cost prevents costly stock-outs and shut-downs, leading to lower operational costs overall.

Standardization of Technology

Right now, the average large enterprise has 1,000 or so SaaS apps on top of dozens of ERP instances across half a dozen major products. That’s not efficient — in fact, it’s the exact opposite. And it’s probably costing them at least 40% more than if they standardized on a single app for each function.

But it’s not just software you should standardize on — all forms of technology should be standardized. Production lines, equipment, and components used in your product lines should be standardized to the extent possible. Fleets should be standardized as well so you can standardize parts, training, and operations. The more you can standardize, the lower your overall costs will be.