Optionality: The Critical Supply Chain Imperative

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Redesigning global supply chains is the only path to supply chain resilience

Supply chain leaders will spend 2024 racing to redesign supply chains away from political turmoil and violent hot spots. The resultant friendshoring, nearshoring and even reshoring must account for the entire end-to-end supply chain, not just final assembly.

And in a world of perpetual disruption, your organization will need optionality – multiple sourcing for key products, parts and raw materials. Recent missile attacks on shipping in the Red Sea and continued drought in the Panama Canal show how quickly disruption can shut down previously secure supply chains.

“Optionality is the only way your enterprise can achieve supply chain resiliency and deliver through the next disruption. And that must be your focus for 2024.”
Jim Tompkins

Two Key Canals, Two Potential Bottlenecks

Two words – drought and missiles – encompass some of the latest supply chain disruptions in a world that has seen continuous disruption, even before the pandemic.

About 6% of global trade and 40% of U.S. container ships traverse the Panama Canal each year, according to the Council on Foreign Relations. Other major canal users include Chile, China, Japan and South Korea.

Approximately 12% of global trade traverses the Suez Canal, according to the U.S. Naval Institute. Suez handles an even larger share of global container traffic – 30%, according to the New Zealand Ministry of Foreign Affairs and Trade.

Drought has been delaying shipping through the Panama Canal since spring 2023. Missile attacks by Yemeni rebels are a newer phenomenon. Starting in December 2023, major shipping companies paused traffic through the Suez Canal. We do not know for how long.

But both canals are in danger of becoming bottlenecks to global shipping.

In Supply Chain, Disruption Is the New Normal

The above disruptions are not just recent headlines. They exhibit a trend seen since even before the pandemic.

In supply chain, disruption is the new normal.

Before the pandemic, disruptions came from trade wars, tariffs, rapid technology innovation, the growth of eCommerce, even natural disasters. Since then, technology continues to evolve, trade wars have morphed into shooting wars, and political and consumer pressure are pushing enterprises to reorient production and supply away from China and other nations viewed as unfriendly or politically volatile.

“In an instant, your finely tuned plans can go up in smoke. Literally, if your goods are on a cargo ship under attack in the Red Sea.”
Jim Tompkins

Optionality Includes Sourcing, Production, Suppliers, Distribution

When plans go awry, optionality will be the only way your organization can deliver. The ability to deliver is key for profitable growth.

Redesigning supply chains will require examining multiple alternate production, logistics and transportation solutions. Sourcing, production, suppliers and distribution will change.

You must redo your transportation providers, your distribution, fulfillment,

3PL providers, and plan for the right technology to allow seamless end-to-end supply chain execution. This execution must go beyond your enterprise to include every partner that handles every part of your supply chain, from raw materials to final mile delivery.

Such redesigned supply chains are the only way your enterprise will successfully navigate the shifting and evolving political realities and consumer expectations that define our age of perpetual disruption.

That perpetual disruption will require continued adjustments – redesigning global supply chains is not a one-time activity.

Nearshoring, Friendshoring, Reshoring: How to Tackle Costs

Moving away from single, low-cost sourcing to multiple sources for raw materials, parts and finished goods will require examining the entire globe.

Many companies are justifiably worried about how the resultant nearshoring, friendshoring and even reshoring could increase costs.

Three things can help mitigate these costs: evolving technology, lead-time reduction and a new supply chain hub for the Western Hemisphere.

Today’s technology uses advanced software, technical expertise, artificial intelligence, machine learning and cloud computing to link multiple enterprises into digital supply networks. Digital supply networks offer unparalleled visibility and actionability across your entire supply chain, no matter how many links upstream raw materials enter or how many links downstream finished products reach your customers.
Bringing production and supply chains closer to your customers can cut lead times and inventory carrying costs. The potential also exists for faster cash-to-cash cycles.
A nearshoring logistics hub in the Caribbean (I think the Dominican Republic checks all the boxes) could serve the Western Hemisphere cost-effectively and efficiency.

Cost notwithstanding, nearshoring, friendshoring and reshoring are strategic imperatives for future competitive advantage. Multiple suppliers for the same products and resources spread the risk and enable your operations to handle disruption and still serve customers.

7 Steps Toward Optionality and Supply Chain Resilience

Developing agile supply chains that source from multiple companies, countries, continents and hemispheres takes time. You cannot just pick up the phone and order minerals and cotton from Africa, shoes and furniture from South America, semiconductors from the ASEAN nations or consumer products from India.

Optionality: The Critical Supply Chain Imperative for 2024 – 7 steps to help you gain optionality and supply chain resilience… Click To Tweet

But that optionality and supply chain resilience will be the focus of supply chain leaders in 2024 and beyond. Tompkins Ventures has developed a 7-step holistic process to help:

Define the scope and objective of each evaluation. Latching onto the first set of alternative suppliers could skyrocket total delivered costs. Instead, you may want to examine sourcing by country, category, product category or supplier. Or perhaps only examine products with high value or high volatility. Coordinate each evaluation’s scope and objective with all other evaluations to address all risks and improvement opportunities.
Identify the current state of your sourcing and supply chain. Do this for each approved and coordinated evaluation – where are you doing what and at what cost.
Assess your current sourcing and supply chain. Again, do this for each approved and coordinated evaluation. What are the costs, quality, lead times and customer satisfaction levels with your current suppliers. A SWOT (strengths, weaknesses, opportunities, threats) methodology can help identify high level priorities.
Thoroughly investigate high priority opportunities. This includes market research and due diligence on potential alternative nearshoring, friendshoring and reshoring alternatives. Consider factors such as labor costs, availability of workers, infrastructure, logistics, taxes, regulations, political stability, cultural compatibility and customer proximity. Consider the transition costs and time involved in moving your operations to a new source or sources, along with how you would redesign your processes, organization, technology and supply chains.
Develop a detailed implementation plan and timeline for your recommended course of action. Outline the steps and resources required to execute your strategy, such as contract negotiation, supplier qualification, quality assurance, transportation negotiation, inventory management, warehouse, distribution and fulfillment negotiation, staff training and communications.
Make a recommendation based on this full evaluation. Include the trade-offs and uncertainties. Develop and present a communication plan to explain your recommendation and the path forward.
Obtain approval for your recommendation. Follow your implementation plan. Monitor and measure the performance of your implemented recommendations. Collect feedback from your stakeholders, make necessary adjustments, document the lessons learned, celebrate success and then move to the next evaluation.

Optionality: The Critical Supply Chain Imperative for 2024… and how to achieve it Click To Tweet

Redesigning Supply Chains – A Never-Ending Process

No company has escaped the last three years without serious resilience and cost considerations.

Still, I advise leaders to remain realistic. Reshoring, nearshoring and friendshoring are not as simple as just changing suppliers. Due diligence, pilot studies and maintaining substantial optionality has proven wise. Knee-jerk decisions calling for quick results have proven unwise.

Redesigning your supply chains can take years, and you never really complete this process. This is an ongoing pursuit for 2024 and beyond.

Jim Tompkins is an international authority on leadership, logistics, material handling, outsourcing, and supply chain best practices. He is Chairman and Founder of Tompkins Ventures. Previously, he built Tompkins International from a backyard startup into an international consulting and implementation firm. He has written or contributed to 31 books, including his latest, Insightful Leadership. Jim has been quoted in hundreds of business and industry magazines, including The Journal of Commerce and Fortune, and has spoken at more than 4,000 international engagements.