Sourcing raw materials in the post-COVID World              (part one of a two part series)

announcements-bgtopright
announcements-bgtopleft

By Patrick Bower, Sr Director of Supply Chain at Aceto

 

 

Patrick Bower, Supply Chain Management, S&OP, Inventory, Specialty Chemicals, Sales and Operations Planning

 

 

Patrick is a recognized demand planning and S&OP expert and a self-professed “S&OP geek.” He has served in a variety of supply chain roles at VP and Senior Director level. He was recognized four times by Supply and Demand Chain Executive magazine as a “Pro to Know". He is also published as an expert in several supply chain journals.

 

Pat joined Aceto in January 2021 as Senior Director of Supply Chain. We’re leveraging Pat’s expertise to bring our customers more value not only through thought leadership, but also in the top service they enjoy from Aceto.

 

As organizations continuously work to reset their supply chains in anticipation of what we foresee in the post-COVID world, I am starting to notice articles and commentary pop up about reshoring. Black swan events such as the current pandemic tend to trigger supply chain overreaction and frustration, and this time is no different. Sourcing has captured the spotlight for good reason; the combination of increased reliance on imports flowing out of China plus the endless out of stocks of basic and essential consumer products such as household cleaners, toilet paper, and now ketchup—of all things—has heightened the awareness of fragility in our supply chain and made the interchangeable terms onshoring or reshoring the catchwords of the day.

COVID-19 gave us all a live, up close example of the proverbial butterfly effect—how a small ripple in China exploded into a global supply chain nightmare. Every aspect of the supply chain has been bullwhipped, with container and vessel capacity being particularly exposed right now as evidenced by recent port delays being experienced globally. And many consumer goods companies still can’t get their necessary raw and pack component products out of China, or through US ports, further exacerbating the perception of shortage and setting us all up for the resultant hoarding effects that inevitably follow. The supply chain is so lean that a week-long delay caused by one grounded container ship in the Suez Canal created a whole series of Armageddon-like scenarios.

Supply chain leadership is concerned. I found the following nugget in a Wall Street Journal article published December 27 of last year: “In May, nearly a quarter of companies told the Institute for Supply Management that they are planning or have begun to reshore or ‘nearshore’ some or most of their operations. That same month, 93% of executives told McKinsey & Co. they would explore a potential overhaul of their supply chains.” There are real discussions afoot as to the future of the supply chain.

As I consider such conversations, my first thought is to question whether the discussion should be so binary. There are far more options currently available to supply chain managers than just reshoring or offshoring. And to be honest most of the discussion around reshoring feels both reactionary and overly simplistic, often infused with political rhetoric, and rarely reflects the exceptional complexity involved in changing sourcing models or building out capacity. Frankly, we cannot always walk the edge of Occam’s razor, seeking out the simplest solution to a problem so complex. You cannot, for example, just build or add incremental manufacturing capacity with the snap of a finger. It takes years to build out production capabilities, with many hurdles between the date of an initial concept and the first product to roll off a production line. Even then, there would remain a tremendous dependency on globally sourced raw materials.

Let’s work an example. Say you want to reshore an intermediate chemical currently sourced from India. You will still need numerous constituent base chemicals or ingredients to complete the whole, with each of these constituent raw materials subject to their own unique risk. In a very real, everyday example, a fragrance used in a body wash may require 15 to 20 ingredients or chemicals, each potentially sourced from a different region of the globe, and each therefore subject to its own isolated risk profile. And this does not include the preservative chemicals, the buffers, the surfactants, the colorants, or the homogenizing chemistry needed to complete the body wash—this just concerns the fragrance. So, while reshoring may read like a great idea on paper, the execution is fraught with innumerable issues. And when we distill all the potential options for mitigating total supply chain/sourcing risk, the best solution in the short- to midterm view is most likely a composite of multiple sourcing and inventory practices, including—but not exclusively—reshoring.

Many may ask, “How did we get here?” The reality is that the offshore sourcing of critical raw and packaging components is the result of decades-long expansion. For the last 30 years, I watched manufacturing capacity move offshore for many reasons. Some were purely economic shifts such as wage inequities between US manufacturing and other countries. The inclusion of China in the WTO in 2001 also served to open trade. And a growing NIMBY mindset—not in my backyard—grew as suburban sprawl highlighted that Americans don’t like either the reality or even the thought of a manufacturing plant in their neighborhood. This sentiment alone made it difficult for manufacturers to operate in many areas of the country. As capacity and capabilities grew globally, local cost concerns and ultimately profit pressures accelerated the pace of offshoring as supply chain folks made decisions to save a half penny here or there on the cost of some critical raw or pack item. In many cases, these sourcing decisions were made due to competitive necessity—to reduce costs as retailers squeezed manufacturers for the most penny profit while holding down costs for consumers. As you can see, there was not just one compelling reason why offshoring became so popular; there were many factors contributing to the shift. And each of these factors now works against reshoring. There remains a strong NIMBY mindset in the US; wage inequities still exist; manufacturing capabilities and talent are in short supply domestically; and consumer costs are likely to rise.

In the wake of COVID, the challenges created by the choices we made years ago are now painfully obvious, very real, and—unfortunately—ongoing. There is no end in our near-term sight. Domestic manufacturers and intermediate processers continue to feel the squeeze. Each week, I hear from colleagues expressing their frustration about shortages of chemicals used as drug intermediates or surfactants or hair-coloring dyes, as they continue to experience short- to midterm outages. Each of these chemicals were destined to be blended into consumer good products that we all know, use, and can’t live without. The failure to deliver critical ingredients and packaging has idled production lines and created order fill issues. In discussions with colleagues, I’ve asked one recurring question: Are you sole sourced? In each case the answer was yes. Therein is the real root cause.

In a recent article that I wrote about the impacts of COVID, I stated that the exceptional emphasis on reducing inventory and leaning operations has worked against the supply chain during black swan events. By making ourselves tremendously efficient, we took most of the slack inventory and capacity out of our supply chain networks. I would argue that we have done the same thing with sourcing. We have spent so much time working cost models to drive to the lowest possible costs while not spending enough time fully assessing the risk associated with things like single-country sourcing, or an extended supply chain, or congested ports, or delayed inbounds. COVID-19 has demonstrated all these sourcing risks to be real.

While this assessment of our current state may seem pessimistic, it is also reality. Nearly all aspects of our supply chains need a reset, or maybe a reboot with different operating parameters. Sourcing and inventory management are in focus now. In Part 2 of this discussion I offer strategies that can help improve the sourcing of critical raw materials.