6 keys to creating a more sustainable supply chain

Pre-pandemic, the worldwide system of getting products where they need to go seemed to be working. Goods were produced where they could be made most cheaply: A pair of shoes might be assembled in Vietnam using leather from Brazil, polyester from China, and rubber from Malaysia before being shipped to Los Angeles and trucked to a mall in Kansas City. Businesses maximized profits by keeping the workforce lean and using just-in-time inventory management.

The COVID-19 pandemic played havoc with this process, triggering a global shortage of supply. Factories were shuttered by lockdowns. People cancelled vacations and stopped eating out, while demand for goods like bicycles and convection ovens spiked. Millions of workers left their jobs to stay safe or find something better. The ports were short-staffed and there weren’t enough trucks or drivers to move containers to their destinations. Automakers couldn’t get the computer chips cars depend on, and stores were empty of thousands of items—from refrigerators to Italian wines and even cream cheese made in the U.S.

“A chain is only as strong as its weakest link,” noted Luyi Yang, an assistant professor in the Operations and IT Management Group. “At pretty much every step along the way, there’s potential for disruption.”

A chain is only as strong as its weakest link. —Luyi Yang

The pandemic has exposed deep-seated vulnerabilities in global supply chains that were long in the making and not quickly resolved. Yet the supply chain crisis, according to Haas logistics experts, offers an opportunity to put in place a more efficient and durable system, potentially protecting us from future disruption.

“What has happened has been a perfect storm,” said Saikat Chaudhuri, the Grimes M.E.T. Chancellor’s Chair and faculty director of the Management, Entrepreneurship, & Technology Program. “But over the next five-to-ten years, once we make the changes we need, this will accelerate a dramatic upgrading of the entire supply chain.”

What has happened has been a perfect storm. But over the next five-to-ten years, once we make the changes we need, this will accelerate a dramatic upgrading of the entire supply chain. —Saikat Chaudhuri

Chaudhuri and Yang stress coordinated action by business and government is necessary to fix the supply chain and prevent a future crisis of this magnitude. Here, in brief, is their to-do list.

1. Modernize and digitize port facilities: The top priority is making the supply chain more efficient, starting with the ports—now plagued by inadequate staffing and antiquated systems. For example, customs operations must be fully digitized. “Ports need to operate 24-7 and use the latest equipment to help automate the loading and unloading of goods. That’s a no-brainer,” Chaudhuri said.
2. Invest more heavily in infrastructure: The U.S. needs massive renovation of its transportation facilities to eliminate bottlenecks. The infrastructure investments approved by Congress in 2021 represent a giant step in that direction.
3. Put more production and warehousing close to end markets: Businesses have maximized profits by putting factories where production is cheapest. But such practices are risky and may be costlier in the long run. “The economy is always trying for efficiency. But as you move toward efficiency, you lose resiliency,” Yang said. Strategic overhauls may include “re-shoring,” by building a semiconductor plant in Idaho instead of Taiwan, or “near-shoring”—that is, setting up in Mexico instead of China. “People are rethinking cost and benefits,” Chaudhuri noted. “They’re saying, ‘To have a little more reliability in the supply chain, I’d rather have a local production site instead of having things shipped.”
4. Diversify international sourcing: Production locations can also be diversified to reduce the geopolitical risk of over-concentration in any one country
5. Make jobs along the supply chain more attractive by raising pay and improving working conditions: Businesses may need to raise pay to ensure they have the personnel they need in emergencies.
6. Boost staffing and inventory for a rainy day: The same applies to headcount and stockpiles of components and finished products. “You sometimes want to carry a little bit more inventory than might seem optimal because there can be a rainy day,” Yang stressed.

These fixes may fuel inflation, the experts acknowledged. But the long-term benefit of a reliable, sustainable supply chain is ultimately economical. “It’s inevitable prices will go up as a result of these shifts in the supply chain,” Chaudhuri said. “But I’m not pessimistic. Digitization and optimization of the supply chain will bring some of those costs down, and that will partly offset the additional cost of doing things locally.”