Global Supply Chains Post-Pandemic

Coronavirus caught the world off guard as it spready quickly throughout the spring of 2020. Global economies shut down, but demand for personal protective equipment (PPE), pharmaceuticals and respirators surged. These unexpected requirements highlighted gaps, weaknesses and vulnerabilities in our supply chain. The pandemic brought to the forefront how much production we send offshore and how few domestic sources of supply remain.                                 

The Department of Defense (DoD) and private sectors develop disaster plans to deal with emergencies. Yet, the U.S. still dealt with a number of inefficiencies in our supply chains once the pandemic spread, specifically around PPE: N-95 masks, surgical gowns, face shields and gowns.  It’s short-sighted to rely too heavily on a near-peer competitor for critical material. During a crisis they can then dictate terms and prices or meter the flow of material, essentially holding us hostage. The fact that we discovered this during a national emergency should give us enough pause to reflect, evaluate and develop mitigation strategy to prevent similar situations in the future.

Fortunately, the U.S. does produce some PPE domestically. During the pandemic we saw a huge ramp up in production to meet the increased need. In some cases, companies that did not regularly produce PPE, put production of their current items on hold and began to supply PPE in an effort to help the nation.

As the pandemic surged and the President of the U.S. declared a national emergency, the federal government invoked the Defense Production Act (DPA). Designed to “expedite and expand the supply of materials and services from the U.S. industrial base needed to promote the national defense,” the DPA allowed the government to prioritize production of essential material. While this hastened the production process for the current crisis, it would serve our best interest to develop robust supply chains and create plans so that we do not need to enact the DPA during each future crisis.

Though the pandemic brought supply chain concerns to the attention of the media and the general public, for several years, the government studied the problem. Responding to an Executive Order, in October 2018 an Interagency Task Force delivered a report titled Assessing and Strengthening the Manufacturing and Defense Industrial Base and Supply Chain Resiliency of the United States. Developed to assess risk, identify impacts, and propose recommendations to support a healthy manufacturing and defense industrial base, the report looks at this critical aspect of economic and national security. The report provides a great starting point by looking at different market segments, determining the vulnerabilities and recommending how best to mitigate those challenges.

U.S. military supply chain management

Within the military, we do our best to manage supply chain inefficiencies before they occur. The DoD works to cultivate multiple sources of supply and then to balance inefficiency and effectiveness by not relying on products delivered just-in-time. We maintain stock levels based on demand history, then layer those supplies based on urgency of use. Some items we keep at maintenance depots to support rebuilding equipment and major component. Other parts remain within in close proximity held by supporting logistics units, and finally, using units hold high-use items to provide immediate repair support.

The military also maintains special reserve for wartime. These war reserves include major end items like tanks, trucks and howitzers as well as supplies such as ammunition, medical equipment and nuclear, biological & chemical protective equipment. We geographically disperse war reserves both ashore near likely areas of conflict and afloat to respond to contingencies. We routinely rotate these items to prevent issues such as shelf life expiration or obsolescence. This helps ensure that if and when needed, the items are readily available.

Diversification of supply

Another way the U.S. can prevent a future supply crisis is to geographically disperse manufacturing capabilities. When possible, it makes the most sense to remain flexible and not tie ourselves to a single manufacturer in only one location. This will help avoid bottlenecks or single points of failure in times of crises like we’ve seen throughout the pandemic with PPE and ventilators. Added benefits of spreading production wider among our allies helps distribute the economic burden, ensure interoperability and strengthen both economic and military ties.

To help mitigate shortfalls in the future, we must begin by really knowing our supply chain from beginning to end—mine or field to factory or end user—then continuously analyze each constituent part. With this knowledge and analysis, industry can better balance “just-in-time” and “just enough.” Cultivating strong relationships prior to a crisis occurring is also key. Then when a challenge arises, vendors and suppliers remain supportive, helpful and ready to assist.

While the search for lower costs drove a significant amount of production off shore, the U.S. – China trade war demonstrated the vulnerability of concentrating production in a single location—particularly when that country is not just a trading partner, but a global competitor. This realization encouraged manufacturers to shift production to other countries such as Vietnam and Malaysia, where labor remains cheap, production sufficient and likelihood of foreign government interference is reduced.

Even if manufacturers move production from overseas to on shore, consumers will continue to demand the low prices the currently pay. Options to make domestic production cost-competitive includes reducing the amount of “touch labor” in the manufacturing process through automation, robotics and artificial intelligence/machine learning. This approach also creates good paying, information age jobs.

Government involvement and the Berry Amendment

In some instances, the government may need to step in and apply pressure to eliminate our dependance on overseas production sources. If the government provided tax credits, preferential buying or other types of incentives, that could support domestic production. To truly help, we need the government to show the benefits of on shore production and demonstrate how manufacturing hers is good for the company, the community and our country as a whole.

The Berry Amendment provides one example of government intervention. It “requires the DoD to give preference in procurement to domestically produced, manufactured or home-grown products; most notably food, clothing, fabrics and specialty metals.” Similarly, the Buy American Act requires federal agencies to purchase “domestic end products” and use “domestic construction materials” on contracts performed in the U. S. Finally, the Specialty Metals Clause requires DoD to acquire the specialty metals contained in aircraft, missile & space systems, ships, tanks & automotive items, weapons systems, ammunition, and other components melted or produced in the United States.

In these cases, government intervention helped many domestic companies, demonstrating the benefits of on shore production and providing opportunities for companies to succeed.

Moving forward

As we look to 2021 with a new president and a several coronavirus vaccines on the horizon, we can expect additional challenges for both supply chains and distribution. Leaders within our government and industry must demand balance in several areas: balance between efficiency and efficiency, balance between on and offshore production and balance between quarterly earnings and long-term value creation.

When we eventually turn the corner on the pandemic, we need to analyze what went well and what did not, develop mitigation strategies and make decisions to prevent recurrence. Not just in the areas of PPE, pharmaceuticals and medical equipment, but across our entire realm of national security. It is crucial for us to develop a thorough understanding of our supply chains and work to make them more robust and resilient.

Though both time consuming and easier said than done, the pandemic shined a spotlight on our supply chain issues. We need it to also create the window of opportunity for us to bridge the gap before it happens again.