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Tom Van Woensel

June 08, 2020

Tom Van Woensel

Jannie van Andel

Supply Chain trends: Sourcing strategy in the post Covid-19 supply chain

Ecosystems COVID-19 Supply Chain

In previous years, single sourcing strategies steadily gained ground. Production was moved to low wage countries, enabled by (too) low transportation costs. Supply chain managers seized this opportunity to create more value and not in the least to generate significant cost savings. But, due to climate change, social pressure and scarcity of raw materials, cracks have started to appear in this popular organization model. This trend is now accelerated by the Covid-19 pandemic, that has put the whole supply chain under severe pressure. If there is one thing organizations can learn from the coronavirus crisis, it is that agility and resilience should be at their top priority list instead of cost savings. In times of chaos and serious supply disruptions, being dependent on a single source puts your entire organization at risk.

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Is the current sourcing approach out of date?

No doubt many companies can identify with this. Single sourcing has clearly reached its limits. Supply chain managers are scratching their heads. Have they waited too long? Have they insufficiently spread risk? Should they have shifted focus? Many companies are wondering what to do. Should they adjust their strategy? And if so, how can they do this almost overnight? The transition from a single to a multi-sourcing approach seems inevitable! On top of this, the transition from a global-for-local to a regional-for-local strategy or even a local-for-local strategy also needs discussion. So yes, the current sourcing approaches are out of date, both from a resilience and agility point of view and from an ecological point of view: they create (too) high dependencies and are no longer sustainable.

In the past few months, single sourcing supply chain strategies completely broke down. A highly increased imbalance of transportation flows, border closures, a lack of reliable supply, difficulties with quality control, labor shortage, etc. all led to serious disruptions in the supply chain. This puts a lot of pressure on the global-for-local paradigm. It also opens the door to discussions on what to produce where and why. What are critical goods and what are not?

Collaboration

No one has a crystal ball to predict the future. One thing is certain, though. Companies and supply chains must change their approach. The positive thing about the legacy of the pandemic is the realization that you are not the only one struggling with sourcing strategy issues. We simply need to take collaboration to a higher level. Tackling the transition to a new economy together and letting companies and knowledge institutions join forces will bring supply chains to the next level.

Change is painful

Change is a tough nut to crack, but tackling the transition to a new economic approach one step at a time may help. First, determine your goal. A multi- or single sourcing strategy is not a goal in itself. Take a look at your company’s mission and values and where you want to be in the next two to five years. Use scenario thinking to find out your greatest risks and opportunities. Be aware that changing strategy also implies changing your organization. After all, your employees are acting according to old economic models. To become an agile organization, you will need people with different skills. You will have to revise contracts with suppliers and your KPIs will have to be viewed in a different light (or will eventually no longer apply). The values ​​ assigned to your strategy in the past will be gone or at least have changed. Take into account the degree of cost savings, flexibility, innovative strength, value proposition and customer service levels. Finally, this will also involve a massive change and redesign of your current supply chains. Where you had a single supplier in the past, it might be better to opt for multiple suppliers at various locations or even for insourcing certain activities again.

Conclusion

The current crisis may lead to numerous new opportunities. Learn from the past and dare to be vulnerable. Accept the fact that markets and supply chains will be, and need to be, different. Review the resilience of your supply chain and optimize your production footprint, locations, and risks. Create scenarios for various product groups and map the impact on customer service levels and end to end costs.  A lot of questions need to be answered. In the post Covid-19 economy it will be key to connect within an ecosystem and to collaborate, in order to survive. If your company wants to be agile enough in this new economy, the only way forward is to focus on a multi-sourcing strategy.

This blog highlights one of the trends defined in the previous post 'Four major trends opening doors to a sustainable and resilient post COVID-19 supply chain'.