How COVID-19 makes the case for 'high-road' supply chains

Date: Thursday, April 23, 2020
Source: Supply Chain Dive

The pandemic exposes threats to global supply chains that demand new sourcing methods.

Supply chains have been fragile for some time, dating back to before the COVID-19 outbreak. Within the last two decades, there have been major disruptions caused by the Fukushima Daiichi tsunami in Japan in 2011, the floods in Thailand that same year, and the SARS epidemic in China and Hong Kong from 2002 into 2003.

Though long supply chains are known to increase disruption risk, the typical methods firms use to make global sourcing decisions do not sufficiently consider this risk to individual businesses. Furthermore, these methods rarely consider the societal risks at both ends of the supply chain, including the potential for undercutting labor and environmental standards. The fact is that many far-away suppliers win bids partially because they suppress wages and pollute the environment.

The result of this is many supply chains are now "low-road," meaning they encourage the offshoring of jobs to smog-choked industrial zones packed with poorly paid workers operating under lax safety and environmental rules.

But an alternative exists, one where all the players — shareholders, workers, and consumers — are less exposed to the risks and social costs inherent in today’s global supply chains. Private- and public-sector leaders could build "high-road supply chains," in which greater, more equitable collaboration between management and workers promotes the sharing of skills, ideas, innovative processes and, ultimately, better products that can deliver higher profits and higher wages.

Global supply chains should not become 100% domestic. But both public- and private-sector leaders need to fully take into account the risks that far-flung supply chains pose — not only in the developing world, but also in those which have prospered mightily over the past half century or more from the offshoring of manufacturing. Even after considering these risks, most “high-road supply chains” will still likely have some offshore suppliers.

One small step to encourage high-road, versus low-road, supply chains is to develop a new approach to global sourcing decision-making, otherwise known as "total value contribution (TVC)," a term I and my two co-authors, John Gray and Beverly Osborn at The Ohio State University’s Fisher College of Business, propose in a forthcoming working paper.

TVC encourages supply-chain managers to first consider how decisions affect value drivers, before they even consider costs.

In addition to increasing attention to shareholder profit-maximization, revenue and risk (which are often neglected relative to cost), TVC explicitly encourages managers to consider other things they say they value — such as safe, reliable, and sustainable global supply chains.

Other approaches for moving beyond simple price-based metrics provide long lists of other factors to consider. But they still anchor decision-makers to bringing down cost. Further, they do not specify a process for decision-makers to handle the added complexity.

 

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