COVID-19 has laid bare the risks of relying on China and other countries for finished goods, manufactured parts and raw materials. Most, if not all, sectors and industries are fragile when it comes to global supply chain processing and distribution. Any disruption can cause ripple effects throughout the U.S. economy.
Production bottlenecks, short supplies and other vulnerabilities have slowed or stopped supply chains. One of the fundamental challenges is that companies have spent decades focusing on reducing costs and inventories with lean manufacturing. They’ve also had the tendency to rely on one supplier for materials and products, which means they’re caught short in natural disasters and public health crises.
“If we go back two or three decades, what used to be emphasized is that you had multiple suppliers to minimize risk,” says George Haley, a marketing professor at the University of New Haven in West Haven, Connecticut. “That philosophy gave way to single sourcing to minimize costs, but if the supply chain goes awry, you lose your supplies.”
Another supply chain expert agrees.
“Supply networks that are overly dependent on the lowest-cost supplier and lean inventory can have a detrimental effect,” says Ananth Iyer, senior associate dean in the Krannert School of Management at Purdue University in West Lafayette, Indiana.
That weakness became abundantly clear in the shortage of ventilators, personal protective equipment and COVID-19 testing supplies. Companies with flexible production lines stepped in to help, repurposing production facilities and providing these much-needed items.
Haley cited a Wichita, Kansas, balloon maker that has been making gloves for first responders. Other examples include General Motors making ventilators and companies with 3D printers producing face shields.
What the Future Holds
In response to global supply chain fractures, companies are evaluating how they can prepare for future unpredictable, yet inevitable, disruptions and minimize their severity. Among the strategies they’re considering is doing more work in-house and moving sourcing and production closer to home, Iyer says.
“The pandemic will put pressure on companies to weigh the efficiencies, costs and benefits of a globalized supply chain system against the robustness of a domestic-based supply chain,” Iyer says. “Manufacturers are more likely to survive shocks to their supply chains if they have several options for suppliers, designs, transportation and production.”
Creating more robust supply chains domestically could increase manufacturers’ costs, but Iyer believes any increases will be minimal and that manufacturers will absorb them rather than passing them on to companies and consumers. He cited factors that include technology improvements, decreased demand for goods, increased shipping costs and flat wages.
Long before COVID-19 hit, technology was improving in the manufacturing sector, including robotics and automation. The technology can reduce processing and production time, leading to fewer bottlenecks and delays.
It’s not a popular subject among workers, but the rise of robots and automation is projected to lead to the displacement of 20 million manufacturing jobs by 2030, according to a June 2019 report from Oxford Economics. The report estimates that robots will replace about 8.5% of the global manufacturing workforce.
“Even before the COVID-19 pandemic, the gap between sourcing globally and sourcing in the United States was decreasing significantly, primarily because U.S. manufacturers were using technology to substitute for labor,” Iyer says. “There was significantly more automated manufacturing and computerized control.”
Automation and robotics can reduce processing and production time, leading to fewer bottlenecks and delays. Meanwhile, technology costs have decreased, making it possible to produce finished goods and components more cost-effectively than in the past, Iyer says. For example, 3D printers, which were incredibly expensive, are dropping in price while their technology is improving. These printers make it possible to replace multiple parts with one complex part and produce it on demand.
“You wouldn’t be taking the same products you were importing and source them in the United States,” Iyer says. “It’s more likely that technology will allow you to produce fewer components.”
While technology is contributing to reduced production costs, manufacturers are experiencing decreased demand for finished goods. Demand remains soft while COVID-19 grinds on and unemployment is at record highs.
In April, U.S. manufacturing production decreased 18% over the prior year period, according to the website Trading Economics. With many states still under partial shutdowns, it’s unclear how long it will be before pre-pandemic operations can resume.
Supply chains must be primed to get things back up to speed, a report from Purdue University and the Dauch Center for the Management of Manufacturing Enterprises concluded, adding that the quality and timeliness of communications with supply chain partners is critical.
“One of the challenges of reopening supply chains is where is demand going to come from,” Iyer says. “Manufacturers are hungry to get demand, and it’s quite possible they may be ready to produce at lower margins than before. Any manufacturer who can get orders and start production will be willing to be a little more price flexible to get that order.”
Manufacturers fear that if they raise prices, demand will worsen, he says. People aren’t willing to pay more, particularly now, with much of the U.S. economy still paralyzed. Any uptick could drive prospective customers away.
“Manufacturers are focused on cash flow and they can’t afford to do things that their supply chains cannot absorb,” Iyer says.
Shipping Costs’ Effect on Prices
Global shipping costs, which also contribute to manufacturers’ prices, have been rising because container ships from China haven’t been full in the wake of COVID-19, Iyer says. As a result, it costs more to fulfill supply chain needs. The higher costs could make domestic sourcing more competitive, thus holding down prices for finished goods. Suppliers in the U.S. could have an edge over traditional offshore operations.
“These are just the costs of doing business and will remain the cost of business for a while,” he says. “How long is an open question.”
While the U.S. has historically relied on cheap overseas labor and ample supplies from offshore factories, that model may be over, Iyer says. Fragility in the supply chain, combined with decreased costs for technology and labor and increased shipping costs, could drive manufacturers to adjust their strategies to regain products, volume and revenue.
“They may have to be much more adaptive than normal to recover,” Iyer says.
Meanwhile, many U.S. manufacturers are cutting costs with “a nip and tuck” in wages through 2021, because of the COVID-19 shutdown and economic downturn, Iyer says. Keeping wages flat will help companies offset a least a portion of lost sales and revenue.
In April 2020, U.S. manufacturing employees earned an average of about $29 an hour, according to the Bureau of Labor Statistics. While wages have increased slightly since COVID-19 was identified in the U.S. in January, it’s unclear what effect the virus will have on future wages – particularly if a second wave occurs in the fall, as the Centers for Disease Control and Prevention has predicted.
Marketing, Supply Chains Must Work Together
With the shortage of ventilators, personal protective equipment and COVID-19 testing supplies, it’s clear that effective supply chain management can’t happen in a vacuum. It requires coordination, collaboration and communication between supply chain, marketing, sales and operational teams.
Marketing generates the demand that supply chains satisfy. Manufacturers can’t risk having marketing make promises that supply chains can’t keep. Digital marketing allows marketers to stay on top of customer demand and track data that helps supply chains make informed decisions.
Companies that have integrated supply chains will be better positioned to be true thought leaders in their industries. They can produce case studies, white papers, articles and digital content that connect and inform customers, suppliers, partners and others about the products they support and how they contribute to positive end user experiences. Get marketing do’s and don’ts here.
Encouraging collaboration and top performance among all links in the supply chain enables manufacturers to demonstrate quality and value in their products. Marketing also helps companies adjust to changes in demand and pricing by strengthening their brands and competitive positions. By working together, marketing and supply chain teams can help improve supply chain planning.
The Bottom Line
Even with the uncertainties around COVID-19, Iyer is optimistic about the future of the U.S. manufacturing industry.
“Manufacturers are ready to get back to work,” Iyer says. “I think a lot of really interesting things will open up. What every company will have to think about is, ‘How do we come back and come back strong?’ We might even end up being in a better place.”
Now, to You
Is your manufacturing company planning to bring stability to your supply chains? What initiatives are you considering? Let us know in the comments below.