How tech companies can learn from the crisis to improve supply chainsEnd-to-end visibility will be crucial to building flexible, resilient supply chains.

2 How tech companies can learn from the crisis to improve supply chains

Preparing for what’s nextAs they constantly seek out lowest-cost locations, today’s supply chains are long and lean with minimal inventory levels and single-sourced suppliers to achieve efficiencies of scale. That makes them inflexible and vulnerable to disruption even in normal circumstances. Tech supply chains are no exception, as an inherent need for innovation to satisfy consumer preferences encourages tech companies to carry little inventory.

As the economy awakens and production restarts, tech companies should assemble a supply chain rapid response team (RRT) if they have not done so already. The RRT should be organized along six key functions:

1 Intelligence and analytics provides critical data visibility and identifies gaps

2 Dynamic network optimization analyzes global trade and tax policies to optimize and secure supply chain

3 Integrated planning and sales and operations planning (S&OP) should refresh (and redesign when needed) supply/demand and production/fulfillment planning

4 Supplier and commercial management maps suppliers, performs due diligence and manages supplier/customer contract risk and enforcement

5 Financial and risk impact mitigation performs financial impact assessments and risk and assurance impact analyses

6 Workforce planning and governance manages labor constraints and their impacts, as well as crisis governance and overall communications

The COVID-19 pandemic is reinforcing that a rigid supply chain can utterly fail under stress, with far-reaching consequences. It’s crucial that supply chains be as resilient as possible. Tech companies are now turning from managing the immediate impacts of the crisis to analyzing how to retool their supply chains based on the ongoing potential for disruption. Beyond those mid-term plans, forward-thinking organizations are also beginning to consider what a fully transformed supply chain might look like — and the technology that might support it.

Scenario planningAcross the RRT structure, tech companies should embed detailed scenario planning. Envisioning multiple disruption scenarios builds supply chain resilience by identifying potential mitigation actions and analyzing the costs associated with the mitigation (see “Four supply chain risk scenarios” at right).

For many tech companies, the first step in scenario planning is preparing for disruptions to manufacturing and distribution centers. Companies must consider how to fulfill orders from different locations — or sidestep distribution centers entirely. Supply chain modeling tools can yield smart, data-driven decisions here — by identifying single points of failure, for instance.

Transportation capacity and related issues should be another area of focus. If the economy slows appreciably or labor issues arise, cargo ship and trucking capacity could be reduced. Cargo ports in particular are a vulnerable choke point.

Tech companies also need to identify which parts and components are most critical to their operations and understand the vulnerabilities of those suppliers to liquidity risk — not just direct vendors but those at multiple levels of the supply chain.

Compared with other industries, tech companies are often better positioned and more resilient here, as they tend to vertically integrate by acquiring suppliers up the supply chain. In a similar vein, tech companies should be prepared to support suppliers facing liquidity issues.

Resiliency planning must also carefully consider the demand side of their business. In a highly dynamic market, it can be very difficult to closely track customer demand. The S&OP function can help by increasing the cadence of its operations and reducing information lead times.

3How tech companies can learn from the crisis to improve supply chains

A remade supply chain and reimagined businessAs near- and mid-term operational supply chain issues are addressed, tech companies should pivot to long-range thinking. This includes strategic supply chain considerations but should also incorporate how the wider business environment might change.

The imperative to reduce supply chain costs will likely be the most pressing concern. To reduce costs, tech companies will need to rationalize and optimize their sourcing strategy, product complexity mix and manufacturing and distribution footprint. The goal is transforming a rigid, linear supply chain into an agile, networked ecosystem in which all parties work collectively.

Visibility is the single most important characteristic of a resilient supply chain. Digital twin and execution coordination control towers are extremely useful technologies. They can help create multi-level end-to-end supply chain visibility and enable companies to better stress-test supply chain models. Tech companies already working with such technology platforms should be able to draw on their technical insight and fluency to improve their own supply chains, both internally and externally.

At the larger business level, tech companies will have to take some calculated risks on the degree of an economic recovery, setback or shift in mix/channels to market. Decisions about when and how to spend dry powder will be even more crucial than usual. Maintenance costs are just one example. Spending here can support business as usual and prior priorities, but is unlikely to be an optimal choice if the slowdown continues or new recovery opportunities arise.

Ultimately, tech companies must learn from this crisis — both to futureproof for the next disruptive event and to transform parts of their business that are vulnerable to continued waves of disruption.

Tech companies should be prepared to support suppliers facing liquidity issues.

“

Four supply chain risk scenarios

Scenario 1:

Localized node disruption

Large ports in Southern California are idled due to labor disputes, delaying inbound shipments by a month or more.

Potential mitigation• Diverting shipments to

alternate US ports• Building a stockpile sufficient

to cover the disruption• Sourcing alternate suppliers

Costs• Expense of additional

inventory and warehousing• Higher shipping and

trucking expenses• Surge capacity surcharges

Scenario 2:

High country dependency

Sixty-seven percent of the global supply of latex gloves comes from Malaysia, creating a potential supply/demand imbalance.

Potential mitigation• Hold additional inventory

in the US• Source alternate suppliers• Build surge capacity

Costs• Expense of additional

inventory and warehousing• Higher shipping and

trucking expenses• Surge capacity surcharges• Higher cost per unit from

US vendors

Scenario 3:

Financial risk to suppliers

In a crisis, the costs of borrowing can increase and exchange rates can fluctuate widely, putting overextended suppliers at risk of bankruptcy.

Potential mitigation• Identify at-risk vendors,

especially critical ones• Locate alternatives for

at-risk vendors• Assist vendors with financing• Hold safety stock/inventory

Costs• Expense of financial support,

bridge loans, etc.• Additional cost per unit

when splitting volume across sources

• Expense of managing additional inventory

Scenario 4:

Trade dispute risk

If tariffs increase, the cost of imported goods can rise significantly.

Potential mitigation• Identify products vulnerable

to tariff increases• Model impacts and costs• Identify alternate countries

for sourcing

Costs• Contract termination• Vendor/item qualification• Tooling transfer and

ramp-up expenses• Increase in landed

costs (warehousing, transportation, etc.)

4 How tech companies can learn from the crisis to improve supply chains

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Key contacts

Chris CooksonEY US West Supply Chain and Operations Consulting Leader Ernst & Young LLP+1 415 894 8132 chris.cookson@ey.com

Joel CainManaging Director, Supply Chain and Operations Ernst & Young LLP+1 415 894 8538 joel.cain@ey.com

Dave LuboweManaging Director, Supply Chain and Operations Ernst & Young LLP+1 949 437 0399 dave.lubowe@ey.com