Now that the 2021 holiday season is behind us, can we expect the current supply chain problems around the world to magically resolve themselves? The answer is no. For more than a decade, the supply chain has been splintering. The once popular “just-in-time” approach to inventory management, which was based on cheap foreign labor for manufacturing, has proven to be fatally flawed. Many observers blame COVID-19 for causing the supply chain breakdown, but the pandemic was not the cause. Instead, it was an accelerant for a supply chain that was no longer reliably functioning. That is why I wrote the book Transforming the Global Supply Chain: Cyber Warfare, Technology, and Politics (Ankerwycke Publishing, Chicago, Illinois, October 2021). This article describes ten points that in-house counsel and corporate executives need to do in dealing with today’s supply chain issues going forward.
Point One: The Changes are Permanent. What the supply chain is experiencing is not a temporary disruption. The fact is, it is undergoing a permanent and substantive transformation in both how and where goods will be manufactured in the future. Waiting for things to return to “normal” is not realistic. Any company which has not taken a serious look at its supply chain to identify and manage its weaknesses is at great risk.
Point Two: Public Media Misinformation. Most media stories seek to illustrate the failure of the supply chain by showing photos of backlogged cargo ships in Los Angeles, Norfolk and New York and running stories about the shortage of truck drivers and train conductors. This completely misses the point. The fact is that consumers -- both commercial and individual -- are fundamentally changing the types of of goods they want and the speed at which these goods must be delivered.
Point Three: The Impact of Four MaxTrends™. In my book, I describe four MaxTrends™ as the true roots of why the global supply chain is reinventing itself. The MaxTrends™ described are (1) how the growing threat of cyber warfare is undermining supply chains; (2) the impact of 3D printing/manufacturing on where and how goods are produced; (3) the ways robotics and AI are changing global manufacturing and distribution; and (4) the reasons why political rivalries between the United States and China are likely to permanently alter where products are manufactured.
Point Four: MaxTrend™ One – The Threat of Cyber Warfare. The media over the last year has reported on a number of highly visible cyber attacks which primarily targeted larger corporations. Some of these cyber attacks were the result of “foreign government sponsored activities” while others originated from cyber criminals who were freely allowed to act within certain countries. Obviously, a number of companies have begun to realize the importance of cyber security and take preventative measures. However, far too many companies fail to recognize the significant and sometimes fatal risks that a cyber attack can have. And while the company itself may be protected, what about that company’s dozens, hundreds, and sometimes thousands of suppliers? The truth is that it is those suppliers which are most at risk from cyber attacks because they are a channel through which hackers can either make a quick score or cause serious damage to the overall company. All companies regardless of size need to immediately evaluate how vulnerable their suppliers and thus their supply chains may be to cyber attacks.
Point Five: MaxTrend™ Two – The 3D Printing Revolution. It used to be that parts and components were produced in mass quantities at cheap prices overseas using inexpensive labor. This enabled companies to free up capital that would otherwise be tied up in inventories, which was the basis of the just-in-time manufacturing model. Today’s reality is that the availability of cheap overseas labor, particularly in China, no longer exists. 3D printing (a/k/a 3D manufacturing) is creating a revolution in that parts and components once manufactured overseas can now be produced domestically in a much less expensive manner. While in the 1980s 3D printing was primarily a way to create prototypes, great advances have been made in the sophistication of techniques and materials (such as metals) that can be used. This technology will be greatly disruptive to the global supply chain as it currently exists.
Point Six: MaxTrend™ Three – Robotics and Artificial Intelligence. Aside from the growing consumer demand for instant delivery of products as promoted by companies like Amazon, the need to efficiently inventory, store, and ultimately distribute products has become a global phenomenon. Finding individuals willing to work in warehouses is a challenge because these jobs are viewed as undesirable and oftentimes dangerous. Thus, the warehousing industry is finding itself increasingly dependent upon robots to merge available human labor and automation. Artificial intelligence (AI) makes it possible for robots to seamlessly interact with humans to create a more efficient distribution network. Combining AI with the Internet of Things (IoT), which is the method by which digital data is captured, has led to a complex and encompassing technology which uses a virtually infinite number of sensors connected to individuals, machines and other animate and inanimate objects. When they are linked, vast efficiencies of scale are possible, which drives down the prices of producing, storing, and distributing consumer items.
Point Seven: MaxTrend™ Four – The Collision of National Security and Globalism. International trade has been the driving force behind globalization ever since the end of World War II. Beginning with the Marshall Plan following WWII, then under the General Agreement on Tariffs and Trade (GATT), and followed by the World Trade Organization (WTO), the goal has been to reduce tariffs and discourage countries from subsidizing national industries. In theory, every country would do what it does best and free trade would become more open and beneficial to all. This thinking led to significant foreign direct investment (FDI) around the world, with one of the major beneficiaries being China. The problem is that decades-long multilateralism is now under attack as countries such as the United States and China view each other as both political and economic rivals. This has led to many countries introducing legislation which creates barriers to foreign direct investment (such as CFIUS in the United States). One result of the pandemic was that countries worldwide became swiftly aware of just how vulnerable their health care systems were when they could not obtain critical items such as ventilators, medical supplies, and PPE. This realization led countries to become more nationalistic and focus on, wherever possible, manufacturing their own products for national security purposes. The United States, the United Kingdom, Germany, Russia and China are just some of the countries implementing legislation mandating more domestic production, which in turn will directly affect the workings of the global supply chain.
Point Eight: Reshoring. The good news for many American companies is that the four MaxTrends™ described herein and other global developments (including the COVID-19 crisis) are making companies realize the advantage of reshoring manufacturing that is currently sourced overseas. The first and biggest casualty will be China. Many companies which are currently sourcing solely in China are actively looking to relocate elsewhere. Oftentimes this leads them to setting up in other locations in Southeast Asia. Others have begun looking at North America, made easier because of the recently renegotiated U.S.M.C.A. While not all companies can feasibly adopt a reshoring policy, those that continue to source solely from a single country – any country -- will find themselves increasingly at risk of their supply chain irretrievably breaking down.
Point Nine: What Companies Must Do Now. Every U.S. company whose success depends in any large or small way on a supply chain should take a brutal look at its suppliers to see where they are located and whether they are capable of remaining reliable in the future. A common mistake is that companies use U.S.-based suppliers and feel they don’t need to worry. What they fail to understand is that those suppliers have their own suppliers, who in turn have their own suppliers, and ultimately the supply chain winds in many directions outside the United States. A top-to-bottom evaluation of a company’s supply chain – which I recommend is done by third-party or neutral consultants– will reveal weaknesses and the extent to which they exist.
Point Ten: The Challenge for CEOs and Boards of Directors. Far too many C-level executives and directors view the company’s supply chain as simply a “ministerial” or lower-level activity that does not warrant much attention. This is a critical misjudgment which can lead to significant problems when the supply chain that has been stable and reliable for years no longer exists. The ultimate impact will be a loss in a company’s valuation (whether it be public or private) once it becomes clear that a supply chain failure is affecting fiscal performance. Boards of directors and CEOs need to check each other in making sure this becomes and remains a high-level priority.
To sum up, although COVID-19 did not cause the supply chain crisis, it did accelerate a process that was already occurring. In-house counsels need to look closely at existing supply chain contracts and structures to identify potential risks and then work with top level executives to address weaknesses going forward.
Author: Dennis Unkovic, Corporate Lawyer, Meyer, Unkovic & Scott LLP