Report May 2020

Weathering the Storm: Supply Chain Resilience in an Age of Disruption

This document is the result of primary research performed by Gartner. Gartner’s methodologies provide for objective, fact-based research and represent the best analysis available at the time of publication. Unless otherwise noted, the entire contents of this publication are copyrighted by Gartner and may not be reproduced, distributed, archived or transmitted in any form or by any means without prior written consent by Gartner. © 2020 Gartner. All rights reserved.

Kamala advises companies on designing their supply

chain networks to optimize performance and capacity

for total network cost, service, agility and resilience.

Enabling unified commerce fulfillment models,

evaluating trade-offs in the distribution network for

sustainability and optimizing manufacturing capacity

in light of shifts in trade policies around the world

are recent areas of focus in her research. In this role,

Kamala leverages her broad and deep experience in

manufacturing, supply chain and technology working

in North America, the Middle East and Asia.

Prior to joining Gartner in 2014, Kamala implemented

sales and operations planning transformation at

Borouge (Singapore and Abu Dhabi) to support

expansion of the distribution network across the

Middle East and Asia in a period of high growth.

Previously, Kamala held a number of supply chain

and analytics roles at Honeywell International in the

United States. She began her career in manufacturing

operations and new product development at

Armstrong World Industries.

Kamala holds degrees in Chemical Engineering and a

Master of Business Administration from the University

of Maryland. She is based in Houston.

Geraint John is a senior research analyst in the

areas of sourcing and procurement, supplier

management, supply chain risk and globalization.

He provides insights and advisory support to

leading global companies through research reports,

inquiry calls, interactive workshops, conferences,

and community-contributed case studies.

Prior to joining SCM World (now Gartner) in 2012,

Geraint was an executive consultant at State of

Flux, a procurement and supply chain consultancy.

At State of Flux, Geraint specialized in supplier

relationship management research, training and

process design projects for clients in sectors

such as mobile telecom, consumer goods and

financial services. Geraint also led the firm’s annual

global supplier relationship management (SRM)

benchmarking study.

Previously, Geraint worked as a journalist and

editor, spending more than a decade covering

the global procurement community. He was the

founding editor of CPO Agenda, an international

business review for procurement, launched in the

spring of 2005. Before that, he spent five years as

editor-in-chief of Supply Management, the U.K.’s

biggest circulation procurement magazine.

Geraint holds a degree in economics and

politics from the University of Warwick. He is

based in London.

Geraint JohnVice President, Analyst, Gartner Supply Chain

Kamala RamanSenior Director, Analyst, Gartner Supply Chain

Authors

Contents

Executive Summary

4 11Designing Resilience Into Supply Chain Networks

Supply Chains in an Age of Disruption

6

References

25About the Research

23Conclusion & Recommendations

21

4 Weathering the Storm: Supply Chain Resilience in an Age of Disruption

May 2020

Supply chain leaders are used to dealing with

disruptions. The U.S.-China trade war, for example,

has had a significant impact on many of their

companies during the past two and a half years.

But the COVID-19 pandemic has stretched their

global operations in ways few thought they would

ever see. This crisis has exposed the weaknesses

of global supply chains optimized for cost-

efficiency rather than resiliency, where lean and

just-in-time principles have cut spare capacity and

buffer stocks to a minimum in many sectors. This

problem is compounded in organizations with poor

visibility of complex, multitier supply bases.

Supply chain organizations have begun to attach

more weight to speed and service in their customer

experience offering, as they seek to develop greater

agility and responsiveness. However, relatively few

have accepted that enhancing resilience in the face

of major disruptions might involve dialing back on

efficiency. The cost of resilience-building measures,

such as splitting volumes between different

suppliers and having access to alternate factories, is

often seen as unaffordable.

New Gartner research shows that only 21% of

supply chain organizations believe they have a

highly resilient network today, in the sense that they

have good visibility and the agility to shift sourcing,

manufacturing and distribution activities around fairly

rapidly. It suggests that increasing resilience will be

a priority for many as they emerge from the current

crisis, with more than half expecting to be highly

resilient within two to three years. But in most cases,

this increased resilience will not come for free.

Executive Summary

Six Strategies for Supply Chain Resilience

This same survey data and interviews with supply

chain executives suggests there are six key

strategies being pursued for greater resilience:

• Inventory and capacity buffers. Additional

production facilities or surge capacity with

external manufacturing partners and safety

stocks are the most obvious examples, but

these are expensive.

• Manufacturing network diversification.

The U.S.-China trade war has prompted a

growing number of companies to relocate

production or final assembly to not only avoid

tariffs but also reduce their dependence on

China. Countries such as Vietnam, Mexico,

India and Malaysia have, so far, been the main

beneficiaries of this trend.

• Multisourcing. Switching to alternative

qualified suppliers or to secondary locations

used by existing suppliers is the most widely

used risk mitigation action. Mapping the

extended supply base to understand subtier

interdependencies is essential to craft an

effective multisourcing strategy.

• Nearshoring. One-quarter of supply

chain professionals say they have already

regionalized or localized some manufacturing

closer to demand to gain speed and control.

For Western firms, new forms of automation

on the factory floor may be required to make

this strategy economically viable. Partial

options include postponement and moving

final assembly closer to customers.

5

• Platform, product or plant harmonization.

Seamless product moves across the network

are enabled at companies like Intel by

harmonizing manufacturing processes and

technology. Designing standard parts and

components across product ranges drives

opportunities to source from multiple suppliers.

• Ecosystem partnerships. Resilience

requires a joint effort. Strong relationships

with strategic partners such as contract

manufacturers and logistics providers can help

to diversify the network by supporting multiple

locations and product moves, as well as

effective crisis-response measures.

Executive Summary

6

Supply Chains in an Age

of DisruptionThe playbook for 2020 wasn’t supposed to unfold

like this. As the previous decade drew to a close in

December, many people felt optimistic about the

start of a new one. Two years of trade war tensions

between the United States and China seemed to be

easing. Britain had elected a new government with a

clear mandate to withdraw from the European Union

after more than three years of bitter divisions. Robust

economic performance in many leading economies

appeared to be holding a long-anticipated recession

at bay. And Japan was looking forward to hosting

the Olympic Games — a sporting phenomenon that

brings the world together and showcases the human

spirit like no other.

Instead, we were dealt a global pandemic that

brought normal daily life on Earth to a shuddering

halt. Businesses have been closed, workers

furloughed, health services overwhelmed and

events of every kind (including the 2020 Tokyo

Olympics) canceled or postponed. Amid widespread

controversy over global shortages of protective

equipment for frontline healthcare workers, chemical

reagents for mass testing, and stockouts (albeit

temporary ones) of consumer staples, supply chains

have come under public scrutiny like never before.

For supply chain leaders, this unprecedented crisis

has stretched their global operations in ways few

thought they would ever see. As one high-tech

supply chain executive explains, “We run business

continuity plan drills every year for events like an

earthquake in Taiwan, but not for a pandemic that

shuts down the whole world.”

6

7

Globalization Under Pressure

Of course, global supply chains were being disrupted

before COVID-19 came along. The U.S.-China

trade war and Brexit symbolized resentment at

three decades of globalization — a trend that supply

chains have been at the forefront of driving. For

Western multinational companies, the offshoring of

sourcing and manufacturing activities to lower-wage

economies allowed them to mass-produce an ever-

increasing array of consumer and industrial goods

at prices customers were willing to pay, while also

improving their bottom lines. This operating model

was facilitated by inexpensive labor, efficient and

cost optimized logistics, and relatively stable and

benign international trading conditions. Low-cost

locations now play some role in almost every supply

chain, even if they are far upstream at the subtier

supplier level. Over time, many have grown into

specialized centers producing everything from active

pharmaceutical ingredients and chemicals to clothes

and electronic devices, further increasing their appeal

as global sourcing hubs.

However, globalized supply chains also have some

notable weaknesses. These include those complex,

multitier supply bases, poor upstream visibility and

longer supply lead times. Such weaknesses are

acknowledged by many supply chain executives,

as well as in the academic community. In an article

headlined “Is It Time to Rethink Globalized Supply

Chains?,” Harvard Business School professor Willy

Shih questioned the logic of heavily outsourced,

concentrated and interdependent networks.

“What the current situation exposes is that the

risks associated with supply chain fragmentation

and globalization have been unpriced and largely

ignored,” he wrote. “For many companies, the

combination of lean production and global multistage

supply networks is leading to crises.”1

In recent years, some companies have begun shifting

away from global supply chain models to regionalized

ones. Key drivers for this include being closer to

customers to serve them in a more agile way and

improve their experience, demand for customized

products and services, stretching sustainability

targets, and opportunities presented by digital

technologies. This typically means attaching more

weight to speed and service, relative to cost, in terms

of how supply chain organizations define “network

efficiency.”2

Although agility and responsiveness are becoming

more important considerations, the primary objective

for most supply chain organizations remains one

of maximizing efficiency. Until now, relatively few —

and typically those that are more mature — have

accepted that ensuring resilience in the face of major

disruptions like COVID-19 and the U.S.-China trade

war might actually mean dialing back on efficiency.

Increasing Resilience Is a Key Priority

Resilience is “the ability of an organization to

absorb and adapt in a changing environment to

enable it to deliver its objectives and to survive and

prosper.”3 In practice, resilience comes with costs

attached. Although the cost of doing nothing may be

significant, not every firm can afford to pay this bill.

Even for those that do have the financial resources,

the menu of options (e.g., dual sourcing, alternative

factories, spare capacity and more generous safety

stocks) is often unpalatable. Such measures appear

to go against the well-versed philosophy of lean

supply chains founded on just-in-time principles.

Nevertheless, new Gartner research reveals that

increasing resilience will be a priority for many supply

chain leaders as they emerge from the current crisis

and reset strategies to anticipate disruptions as the

“new normal” going forward. Participants in the 2020

Gartner Weathering the Supply Chain Storm Survey

were asked to choose one of three descriptions that

best characterizes their supply chain networks:

• Highly resilient — We have good visibility to

the supply network; we view an increase in

flexibility/resilience as a necessary investment

for the network; we have the ability to conduct

scenario planning for trade-offs in the network;

we can shift sourcing, manufacturing or

distribution within our network fairly rapidly.

• Moderately resilient — We have good

visibility to the supply network; it is hard to

justify making the investment to modify our

supply chain footprint; we focus more on

managing disruptions once they occur than

investing in resilience.

Supply Chains in an Age of Disruption

8 Weathering the Storm: Supply Chain Resilience in an Age of Disruption

May 2020

• Not resilient — We are dependent on our

existing sourcing, manufacturing and/or

distribution footprint, and have to find other

ways to compensate for changing conditions;

we have yet to invest in analytics to support

network decision making.

Just over one-fifth (21%) of respondents believe

their networks are highly resilient today, increasing

to one-third or more in the case of high-tech and

consumer packaged goods (CPG) respondents.

But more than half (55%) of the sample overall

expects to develop these characteristics within the

next two to three years (see Figure 1), with those in

retail, healthcare and pharmaceuticals among the

most bullish.

The key question is how to move from a network

that is moderately resilient today to one that will

be highly resilient in the future. The answer will

obviously vary between companies and industries.

However, as the descriptions above illustrate,

one critical enabler is clearly a willingness at the

executive leadership and board levels to invest

in resilience-building measures (see the Issue

Spotlight). In the past, such measures have often

been viewed like insurance policies to be avoided,

rather than a necessary investment to safeguard

the integrity and resilience of global supply chains.

In the wake of COVID-19, many companies will be

under pressure from investors, regulators and other

stakeholders to increase their ability to withstand

external shocks.

This report draws on the 2020 Gartner Weathering

the Supply Chain Storm Survey findings and

interviews with supply chain leaders in sectors such

as medical devices, electronics, consumer products

and aerospace. It helps companies explore the main

strategies to develop greater supply chain resilience

in the years ahead. As Rick Spann, executive vice

president of global operations at CPG firm Church &

Dwight, said, “There’s nothing like a crisis to expose

your opportunities to improve.”

Source: Gartner's Weathering the Supply Chain Storm Survey, 2020 % of respondents | n = 236

Highly resilient Moderately resilient Not resilient

21

55

62

38

14

3

Figure 1 Expected Increase in Supply Chain Resilience

Q. How resilient do you believe your supply chain network is, in terms of its ability to respond effectively to changes in trading conditions? Status likely in 2-3 years' timeStatus today

Don’t know responses are excluded.

9

Issue Spotlight

Balancing Cost Optimization and Investments in Resilience

We are at a crossroads in the evaluation of global

supply chains that pits just-in-time systems designed

to improve operational efficiency against just-in-

case plans that emphasize planning for a range

of plausible scenarios. Being fully prepared for all

possible crises is not possible for even the most

well-funded organization. It would require redirecting

vast amounts of money toward nonperforming or

under-performing assets (inventory buffers, lowered

capacity utilization, sacrificing volume benefits of

scale for dual sourcing, and so on).

A majority of respondents to the Weathering the

Supply Chain Storm Survey believe that resilience

results in additional structural costs to the network

(see Figure 2). A sensible approach to risk

management, therefore, starts by understanding

the organization’s willingness to take risk onboard

and how it quantifies that risk against other

network objectives.4

For example, an investment in increased network

agility has benefits both in the context of risk

mitigation and opportunity capture through being

able to fulfill customer demand, improve revenue and

reduce obsolete inventory. Elements to consider in an

organization’s ability to take risk on will include its:

• Tolerance for uncertainty

• Strategic objectives

• Ability to make a choice that puts a key

objective at risk

• Prioritization of resilience

9

Figure 2 Resilience Costs Are Built Into Many NetworksQ. Thinking about recent changes to your supply chain network, please indicate your agreement or disagreement with the following statement: structural changes in sourcing, manufacturing or distribution models mean that increased costs are built in for additional resilience or agility.

% of respondents | n = 235Source: Gartner's Weathering the Supply Chain Storm Survey, 2020

Agree

5818

Don’t know

24

Disagree

10 Weathering the Storm: Supply Chain Resilience in an Age of Disruption

May 202010

Other elements that will impact the company’s ability

to invest in buffer capacity include:

• Market position (market leaders versus

smaller players)

• Nature of the product (commodity sellers

versus specialty sellers)

• Profitability (markets with higher margins

versus those on razor-thin margins)

• Market or regulatory influences (export

restrictions or trade barriers versus free-trade

agreements)

If the investment in resilience results in carrying

redundant capacity, the higher costs associated with

this redundancy may be made up for with operational

improvements. Flexibility in the use of manufacturing

plants and distribution centers can reduce the cost

of changeovers, product moves or network flow

changes, and enable a fast response to disruptions

with minimal additional cost. The regulatory

challenges that hinder diversification can be directly

countered with local content rules that provide an

incentive for localizing supply chain networks.

Government Support May Be the Push Needed to Accelerate Localization

In some cases, countries step in with infrastructural

support to provide redundancy and support the

shortening of global supply chains, and shift or

preserve capabilities closer to the end markets. In

the wake of the COVID-19 crisis, Germany stepped

in to protect domestic firms from foreign takeovers

after company valuations dropped drastically. It is

accomplishing this through the Kurzarbeit initiative,

which provides liquidity support to businesses and

measures that make it easier to reduce working

hours rather than lay off workers. Sweden has a

similar program to reduce the burden to employers

as employees reduce their working hours, without

losing a large percentage of pay.

Japan, as part of its COVID-19 stimulus package,

has earmarked $2.2 billion to help its manufacturers

move out of China and back to Japan. In the case

of medical equipment (e.g., personal protective

equipment and generic drugs), multiple countries

and trading blocs (e.g., the U.S., EU and India) have

placed export restrictions on global manufacturers.

Should this carrot-and-stick approach expand

globally with countries supporting or insisting on local

manufacturing to meet local needs, we could see an

acceleration in companies being able to absorb the

additional costs of diversifying their supply chains.

11

Although the global financial crisis from 2007

through 2009 taught banks to build up their capital

reserves, most companies have gone the other

way in the decade since, driven by a fear of having

a higher cost base than their competitors. They

have focused on reducing the size of inventory

or capacity reserves and relying ever more on

just-in-time systems for sourcing, production and

distribution to meet the needs of their customers.

A siloed approach to low-cost sourcing at a piece-

part level and dependence on labor arbitrage

for low-cost-country manufacturing has largely

optimized supply chain networks for maximum

capital efficiency while minimizing security and

resilience. This has led to firms ignoring the hidden

costs of long lead times (including higher distribution

and logistics costs), the need for working capital

and inflexible inventory policies. In highly regulated

industries such as life sciences, it is not always clear

how much of the inflexibility is due to regulatory

requirements and how much of it is poor execution

due to low visibility into the network. These

networks tend to be optimized primarily for tax

efficiency by trading between affiliate companies in

countries with tax advantages. This further muddies

the analysis of what is essential slack for resilience

and what is waste.

Designing Resilience Into Supply Chain

Networks

11

12 Weathering the Storm: Supply Chain Resilience in an Age of Disruption

May 2020

A catalog of crises have occurred since the Great

Recession, including the earthquake and tsunami

in Japan, floods in Thailand in 2011 and COVID-19

today. These crises have brought home the impact

of disruptions in supply chain networks and the

need to mitigate these more effectively than in

the past. Our research and interviews with supply

chain leaders highlight six major strategies that

are being pursued to increase resilience: inventory

and capacity buffers; manufacturing network

diversification; multisourcing; nearshoring; platform,

product or plant harmonization; and ecosystem

partnerships (see Figure 3).

Strategy 1: Inventory and Capacity Buffers

The most straightforward visualization of resilience

is in the form of buffer capacity, whether in the form

of underutilized production facilities or inventory in

excess of safety stock requirements for business as

usual. The challenge with buffers, of course, is that

they are expensive and hard for individual companies

to justify. This is where rich countries have stepped

in with their national stockpiles. Import-dependent

Source: Gartner

Manufacturing Network

Diversification

Inventory and Capacity

Buffers

Supply Chain Resilience

Ecosystem Partnerships

Platform, Product or Plant

Harmonization

NearshoringMultisourcing

Figure 3 Six Strategies for Supply Chain Resilience

Switzerland, for example, maintains a three- to six-

month supply of essential foodstuffs and medical

supplies. The U.S. has its Strategic National Stockpile

with a repository of critical medical supplies (although

this has been found to be inadequate to deal with a

pandemic on the scale we are facing today).

Leading companies do justify buffers for the right

reasons. Surge capacity, for instance, is built in to

deal with product launches or expansions into new

growth areas. Companies also create buffer capacity

by using contract manufacturers strategically for

surge needs. These partners can better justify

the flexibility by risk pooling the demand across

multiple clients, thereby delivering flexibility without

sacrificing operational efficiency. Buffer capacity

can also be created through postponement, or

delayed differentiation of finished goods. Shifting

final assembly closer to demand centers allows

companies to reduce the amount of finished goods

inventory they have to carry.

Before increasing their buffer capacity, organizations

should undertake a careful analysis of their supply

and manufacturing base. They should evaluate the

13

options for multisourcing, and where it is not possible

to dual source, and consider trade-offs between

additional investments in safety stock and the cost of

stockout situations during disruptions. This last point

needs to be based on how long the network can

continue to fulfill demand after a disruption (time to

survive), and how long it will take to bring the location

back to full performance (time to recovery).

Strategy 2: Manufacturing Network Diversification

Efforts among leading firms to improve resilience have

focused on increasing diversification and flexibility

in the global supply chain network and managing

complexity better. During our interviews, several

Figure 4 How Companies Are Mitigating the Impact of Trade War Disruption

Q. In the case of the U.S.-China trade war, what mitigating actions have you taken or are you likely to take?

Switch sourcing to alternative qualified suppliers/locations

No action

Absorb additional costs ourselves partially or wholly

Other

Switch to new suppliers/locations requiring qualification, testing and other measures

Move some manufacturing operations to alternative countries

Nearshore sourcing and/or production (e.g., from China to Mexico)

Have suppliers absorb additional costs partially or wholly

Raise prices for customers/consumers

Lobby government(s) for exclusions to import duties and/or reimbursement of duties already paid

Postpone final product assembly to a more cost-advantageous location to minimize duties

Reengineer product or packaging design to exclude tariff-affected materials/components

49 23

13 10

49 12

3 4

37 22

34 24

33 16

25 21

25 27

23 12

16 18

14 18

Source: Gartner's Weathering the Supply Chain Storm Survey, 2020

Multiple responses were allowed.

% of respondents | n = 230

Action likely in next 2-3 yearsAction taken already

executives noted that their companies’ strategies of

localizing and regionalizing production had helped to

mitigate the supply-side impacts of COVID-19 and

the U.S.-China trade war. For example, at one global

supplier to the automotive and aviation sectors, local

manufacturing and “security of supply based on

localization” have been key operating principles for

the past five years. “So far, this has worked,” said its

supply chain leader for Asia/Pacific, while noting that

some additional opportunities to diversify production

and sourcing within the region remain.

As Figure 4 shows, in response to the U.S.-China

trade war, many companies have taken steps to

diversify their sourcing or manufacturing bases, or

plan to do so in the next few years. For some, this

Designing Resilience Into Supply Chain Networks

14 Weathering the Storm: Supply Chain Resilience in an Age of Disruption

May 2020

diversification has meant switching to suppliers or

manufacturing locations outside China, or using new

locations (usually in alternate countries) for additional

capacity or new product introductions while leaving

the installed base intact (see the Issue Spotlight).

In the post-COVID-19 world, companies will have to

consider the possibility of entire countries or regions

of the world undergoing disruption. As a result, the

cost of retaining multiple supply locations will need

to be seen more as a cost of doing business rather

than an inefficiency to be squeezed out.

Strategy 3: Multisourcing

In high-tech or industrial manufacturing, with long

upstream supply networks, disruptions frequently

lead to the unavailability of one inexpensive but

critical part, stopping the supply chain in its tracks.

The automotive industry experienced the limitations

of just-in-time inventory models after the 2011 natural

disasters, where nearly finished cars were held up

on the line for want of an inexpensive electronic

component. Multisourcing is an obvious strategy to

mitigate this risk. A Gartner survey of procurement

leaders in 2019 found that qualifying dual sources for

critical components was the most widely used tactic

to ensure supply availability — albeit one used by

only a narrow majority of functions.5

Gaining visibility to the supplier network,

categorizing suppliers not just by spend but

also by impact to revenue if customer fulfillment

objectives cannot be met, and understanding

risk concentration in the subtiers are essential to

crafting a multisourcing strategy. Aircraft maker

Boeing has made significant progress in mapping

bill-of-material components down to Tier 3

suppliers in some cases, said Eric Strafel, a vice

president in its global procurement organization.

But, like other manufacturers, it relies on many

sole-source suppliers, so having this visibility has

highlighted the need to “rethink resilience in certain

categories,” he added.

Diversifying supply is usually done across

suppliers, but in sole-source arrangements, asking

suppliers to build parts at a secondary location

is common. A consumer electronics firm that

has traditionally built its products in China is now

working with existing contract manufacturers to

add production capacity in Vietnam and Thailand.

It is also partnering with a new supplier to begin a

slow and safe ramp-up of one model in Malaysia.

As this company found out, diversifying finished

goods assembly is often easier than ensuring this

for components. In one case under consideration,

a Chinese partner has existing capabilities in the

Dominican Republic, but the components would

still have to be shipped from China, making the

trade-off more complicated.

Strategy 4: Nearshoring

Beyond multisourcing, for some companies the

emphasis has been on reducing geographic

dependence in their global networks. This is done

by creating regional or local supply chains and

using these to gain more control over inventory

(albeit at the cost of adding more players to their

ecosystems and increasing complexity). This

places greater value on the hidden costs of higher

working capital in a long supply chain and the

inability to hold inventory buffers at a time of cash

constraints. This scenario is certainly familiar to

Dutch cycle maker Accell Group, which does a

lot of final assembly work in Europe, but depends

heavily on customized components made by

suppliers in Asia and, especially, China. The trade

war had already prompted the firm to review

the risks and trade-offs involved in this model,

explained Jeroen Both, its chief supply chain

officer. With COVID-19 disruption causing delays of

six to eight weeks at a time when demand for bikes

has increased, this focus has intensified. Accell

Group is now actively exploring the possibility of

bringing production onshore and using new forms

of automation to make it economically viable. “This

crisis is speeding up reshoring,” Both said.

Some companies opting to use a regional network

strategy will continue to maintain a significant

presence in China for local or regional demand

(in China for China, or around China for China).

However, they will also be looking to diversify the

network for demand centers in Europe or the

Americas. However, dependencies in global supply

chains today may mean that, although assembly

may be localized, components may still come from

specialist suppliers located around the world. The

further upstream you look in any manufacturing

ecosystem, the more specialized and limited supply

15

locations tend to be. This is true of semiconductors made

in multibillion-dollar fabs in countries like Taiwan and

inexpensive transistors and resistors whose producers

are clustered around Wuhan in China. This also the case

for pharmaceutical ingredients coming from India and

China or rare earth ore processing capacity, which is also

concentrated in China.6

Understanding the market need for diversification has

prompted leaders in high-tech companies, in particular,

to create tiers of network diversification. This includes

actions that can be taken now (usually final assembly

handled through product moves within a few months).

It also includes moves that will take one to two years

in conjunction with key partners (this may be for future

NPI rollouts and not impact existing products) and what

is not possible given current capabilities. Evaluation of

platform, product or plant harmonization opportunities

begins to play a critical role here.

Strategy 5: Platform, Product or Plant Harmonization

Regionalizing networks and being agile to meet

changing customer needs depend on harmonizing

manufacturing plant technology and intermediate SKUs.

The use of common vehicle platforms in automotive is

one well-established example of such harmonization.

This allows either seamless product moves across

the network or greater interchangeability of parts

and components. For GE Appliances, this has meant

input at the product design and introduction phase to

ensure that components not visible to the consumer

are standardized across different products to a greater

extent. This, in turn, simplifies sourcing policies and

opens up opportunities to place higher volumes among

multiple suppliers to enhance resilience.

For Intel, a long-term focus on copy exact in internal

manufacturing processes across its factories has been

a strength. The objective is to be able to run a product

through any of the locations qualified to make it and get

the same yield output without degradation. This allows

for product moves across the globe to be successfully

completed in a few weeks. With their suppliers, they

expect consistency in quality and output so that

volumes can be moved from one qualified supplier to

another without impact on production yields.

For consumer brands like Nike, a focus on

cutting the time in product creation by using

digital sampling and reducing the emphasis of

sourcing focused purely on low cost and scale

is a way to increase agility. Switching to a hub-

and-spoke network with high-volume factories

and small-volume slipstream lines to meet

customized demand will become a competitive

advantage for market leaders over the next

few years.

Strategy 6: Ecosystem Partnerships

This COVID-19 crisis has demonstrated

the need to have a country diversification

approach to sourcing. At the same time,

however, there is a risk that suppliers with

strong access to capital concentrated in fewer

countries are more likely to ride out the storm

than smaller firms. Brand owners will need to

step in to help decide where to consolidate

production and which suppliers will need

better payment terms, interest-free or low-

cost loans. They will also need to help decide

where government lobbying is necessary to

get access to publicly owned capital for their

suppliers, and where the strength of large

suppliers can be used to produce multiple

categories of goods. Such decisions will

determine which suppliers survive and thrive

and which suppliers fold.

Beyond this, collaboration with ecosystem

partners is also vital to ensure better

preparedness and resilience for the future.

Edwards Lifesciences, a U.S.-based medical

technology manufacturer, works closely with its

top 50 or so strategic suppliers to assess risk

at a site location level. As a result, its preferred

approach is to use alternate sites rather than

alternate suppliers, explained Jim Bourne,

vice president of global planning, sourcing

and logistics. It has also leaned heavily on its

relationships with global third-party logistics

partners to ensure freight capacity and move

essential supplies during COVID-19 disruption.

“Leveraging their scope and scale have been

huge for us,” said Bourne.

Designing Resilience Into Supply Chain Networks

16 Weathering the Storm: Supply Chain Resilience in an Age of Disruption

May 2020

For companies without the scale to support multiple

locations on their own, partnerships with contract

manufacturers and global 3PLs can be vital in

diversifying production and distribution to different

countries. Our survey data shows that around half

of supply chain organizations are either using or

exploring how external manufacturers can support

product moves, with a similar proportion engaging

logistics partners for this purpose (see Figure 5).

Network Visibility, Analysis and Scenario Planning as Enablers of Resilience

Given the relatively high costs of diversifying supply

chain networks, executing on diversification plans

tends to be a challenge for most organizations.

The first reason is that resilience (which should

be in place well before any crisis occurs) is often

confused with business continuity management

(which dictates responses once a crisis has

occurred). The second reason is that investing

in slack or redundancy in the network requires

resources that may directly compete with the

organizational goal of efficiency.

Steps to build resilience, such as cultivating a

relationship with a key partner or using technology

to simulate different scenarios and develop

responses, need to begin well before a disruptive

event happens. Trying to develop trust and

collaboration with a supplier in a shortage situation

Figure 5 Collaboration With External Partners to Boost Resilience

Source: Gartner’s Weathering the Supply Chain Storm Survey, 2020

Q. To what extent are you using contract manufacturers and logistics providers to help shift operations to alternative countries?

% of respondents, n = 228

6 6

Increased usage in the last two

years

Similar usage as in the past but exploring new locations more

aggressively

Not using currently, but interested in

exploring

Not expecting to change anything in terms of usage of these providers

1715

Logistics providers (3PLs, 4PLs)Contract/external manufacturers

29

26

34

38

Don’t know responses are excluded.

17

Source: Gartner’s Weathering the Supply Chain Storm Survey, 2020

Multiple responses were allowed.

Regularly review global supply chain footprint to optimize cost, service, growth and resilience objectives

More frequent reviews of the network to account for changing global conditions (e.g., shifting cost structures, emphasizing

resilience, sustainability focus, regulatory regimes)

More frequent reviews of the network to account for changing business conditions (e.g., growing

personalization, e-commerce, new growth markets, changing service-level expectations)

Review the design of the supply chain network in regional or business unit buckets to account for a decentralized approach to individual markets

No change because supply chain network is already regionalized

Review the design of the supply chain network in functional buckets to account for different

modeling approaches or tools for manufacturing capacity, distribution or last-mile optimization

No change away from existing globalized supply chain network

Figure 6 How Companies Are Reviewing Network DesignQ. From a supply chain strategy perspective, how would you characterize your company’s approach to network design?

% of respondents | n = 232

68

46

42

38

35

11

11

is too late. Similarly, investments in network

visibility and analytics capabilities to project

inventory moves, optimize network capacity,

or model the impact of demand or trading rule

changes cannot be done in the throes of a crisis.

To quantify and address the cost of resilience,

companies must understand their networks better

and reflect on supply chain vulnerabilities. Leaders

emphasize the value of having a process to handle

enterprise risk management, including governance to

define decision making, as being critical in improving

their resilience.7 Such an approach needs to engage

the external partner ecosystem, since resilience is

not something that one company can develop by

itself. This includes capabilities provided by existing

vendors for data transparency and advanced

analytics to simulate changes to the network and

estimate the associated costs or savings.

Leading companies use enterprise risk

management combined with scenario planning

to design resilience into the supply chain.8 As

highlighted in Figure 6, trade-offs across multiple

network objectives have to be generated and

reviewed periodically given the high level of

uncertainty around postcrisis scenarios for

prolonged demand suppression or demand

rebound. Serious scenario planning considers not

only specific risk events that have happened in

the past, but also lateral situations that may not

previously have occurred. An example might be

evaluating the unavailability of a specific supplier,

production site or shipping location in the network,

without trying to guess at the reason for this

disruption. It can also generate broad scenarios

that incorporate quantitative and qualitative trade-

offs in decision making.

Designing Resilience Into Supply Chain Networks

18 Weathering the Storm: Supply Chain Resilience in an Age of Disruption

May 2020

Resilience is not a capability that can exist in

isolation of other objectives for the network. Given

the global economy’s move toward specialized

capabilities, managing complex global networks

for operational efficiency has become imperative.

The main ways to add resilience, as we’ve seen

above, all require an investment of capital. A way

to manage these conflicting objectives is through

supply chain network optimization, where the

existing network is compared against alternate

visions for the future. These scenarios help

organizations to create a set of trade-off curves

to explore the cost of different levels of resilience

set against different levels of operational efficiency.

Given the needs of their products and markets,

organizations can then select the position on the

efficiency-resilience curve that represents the right

balance of these objectives.

Effective scenario planning results in action plans

that are invested in and tested regularly. Some

of these actions may be strategic (the location of

the next manufacturing location or the selection

of a key partner, for example). Others may be

more localized, such as periodic reviews of trade

lanes or changes in growth levels or service-level

expectations by market. Empowering local actions

is a way of distributing power that can, in turn, help

to contain the scale of operational disruptions.

Incorporating diverse views and attempting to limit

bias are also essential components of scenario

planning exercises. Human decision making is

prone to biases, including:

• Confirmation bias — favoring information

that conforms with accepted views and

discounting evidence to the contrary

• Herd instinct — not acting until everyone

else around us acts

• Availability bias — overemphasizing the

examples that come to mind more readily

• Normalcy bias — believing things will

continue to function the way they have in the

past and underestimating the need for action

• Optimism bias — believing that we are less

likely to experience a negative event than the

world at large

Building a set of scenarios from the most

conservative to the most aggressive, evaluating

them periodically, and testing the resulting action

plans for crisis management are all important in

bridging the execution gap.

19

Issue Spotlight

Diversifying Global Manufacturing: Why and Where Firms Are Moving

For years, China has been the go-to destination

for low-cost, high-quality manufacturing, and a key

source of supply for high tech, industrial, automotive,

retail, pharmaceutical and other firms. As recently

as 2018, Gartner’s annual Future of Supply Chain

Survey showed China as the dominant country for

job expansion in supply chain operations. But, in

2019, the balance between those firms planning to

add jobs there versus taking them away narrowed

sharply. To be clear, the data showed that China was

still in growth mode, but also that rival countries were

beginning to eat into its share.9

Our latest findings from the Weathering the Supply

Chain Storm Survey support this trend. Tariffs

imposed by the U.S. and Chinese governments

during the past two and a half years have increased

supply chain costs by up to 10% for more than four

out of 10 organizations. For just over one-quarter,

the impact has been higher still. In interviews, several

executives said the additional costs of the U.S.-

China trade war for their companies were more than

$100 million. This is by far the main reason for the

companies diversifying part of their sourcing and

manufacturing operations to other countries in Asia or

further afield (see Figure 7).

At the same time, almost half (45%) of respondents

also ranked diversification for resilience as a primary

factor in their strategy of reducing their dependence

on China. Melanie Cook, chief operating officer of

GE Appliances, said that, in its case, this applies

particularly to challenging areas such as electronics,

electromechanical devices and some finished

goods. Its Chinese parent company, Haier, has been

supportive of diversification to other countries, she

added, because of its belief in the importance of

making the right decisions to support the needs of

the local market. Similarly, one PC maker has opted

to source printed circuit boards outside China and

transfer some manufacturing and assembly work to

countries such as Mexico and India.

19

Figure 7 Why Companies Are Diversifying Their Network Activities

Source: Gartner’s Weathering the Supply Chain Storm Survey, 2020

Tariff cost increases

Diversification for resilience

Regulatory changes (e.g., environment)

Technology trade war concerns

Intellectual property concerns

Labor cost increases

Need for closer proximity to customers

Other

Q. What factors explain your decision to move sourcing and/or manufacturing activities out of China?

73 17 10

45 37 18

32 26 42

30 34 36

29 43 28

27 27 46

19 40 41

14 86

% of respondents | n = 79

Secondary factorPrimary factor Not a factor

20 Weathering the Storm: Supply Chain Resilience in an Age of Disruption

May 202020

Among the 33% of supply chain professionals who

reported that their companies had either moved

sourcing and manufacturing activities out of China, or

who expected to do so in the next two to three years,

we asked them to rank their top three alternative

countries. Figure 8 shows Vietnam as the clear

winner of this reshuffle, with more than one-quarter

of respondents listing it as their No. 1 destination.

Mexico is a popular choice, as it was in last year’s

study, although it is primarily a nearshore location for

firms based on the North American continent rather

than as a global hub. And India’s geographic location,

skilled but relatively low-cost workforce and market

opportunities gives it a broad appeal across regions

and industry sectors.

One computer accessories maker that has

traditionally leaned heavily on China for electronic

components and manufacturing was already

Figure 8 Alternatives to China-Based Supply Chain Operations

Source: Gartner’s Weathering the Supply Chain Storm Survey, 2020

Thailand

United States

Malaysia

India

Vietnam

Mexico

Q. What are the top three countries/regions where you have moved or plan to move supply chain operations away from China to?

27 15 7

19 7 10

14 12 3

11 7 5

8 4 7

4 8 4

% of respondents | n = 73

Ranked 2ndRanked 1st Ranked 3rd

looking at some diversification in response to rising

costs and supply chain risk concerns. And while

veering too far away from its core supply base is

“challenging,” tariffs have prompted it to move

some production to Taiwan, Thailand and Malaysia

and to start to build a parallel supply chain with its

contract manufacturing partners.

As a world leader in sporting apparel, Nike has been

moving production of garments, footwear and other

products to Vietnam, Indonesia and other countries

in Asia for many years, according to Amanda Tucker,

vice president of global sourcing. Nevertheless,

diversification — for example, encouraging larger

suppliers to add capacity in countries like India

— continues to be an essential strategy to ensure

greater levels of resilience in the future.

21

Despite their obvious differences, the disruption

caused by the coronavirus pandemic and the

U.S.-China trade war have exposed the vulnerability

of global supply chains tuned for efficiency rather

than resiliency. In normal times, this seems entirely

logical. After all, who really wants to pay for wasted

resources? But in a crisis, suddenly the rationale

is being questioned. For example, for years,

Germany’s health system has been attacked for

having too many hospitals and intensive care beds.

But in the midst of COVID-19, this spare capacity

has helped the country to manage its way through

the crisis better than many others.10

Some companies will undoubtedly invest in

additional capacity and inventory to help them

withstand future shocks better. But, as this report

indicates, resilience-minded firms are already

implementing other strategies, including the

diversification of sourcing and manufacturing

networks. For some, it could mean having “a critical

mass of production close to home using highly

automated factories,” as The Economist argued in a

recent leader column.11

Getting the right balance in these areas will be a

challenging task for supply chain leaders. The right

solutions will depend on many factors, including

profit margins in different sectors, changing

customer requirements and the appetite for risk at

an enterprise level. And it should also be noted that,

for many small- to medium-sized firms, investing in

resilience might be a luxury that cannot be afforded

in the postpandemic world where capital will be at

a huge premium. Given the interconnected nature

of global supply chains, this exposes a fault line

between well-capitalized firms and others in their

level of preparedness for future disruptions.

Conclusion & Recommendations

For years, the discipline of supply chain

management has operated in the shadows.

With the spotlight now on it, the profession must

demonstrate that it has both the ideas and the

capabilities that companies need to survive and

succeed in a new business climate — whatever

that may look like. Additional recommendations

from supply chain executives interviewed for this

report include:

• Harness your CEO’s interest in supply

chain. Specific lessons from COVID-19 may

not yet be fully clear. However, it would be a

mistake to not leverage the extra organizational

focus and resources now available to help

shore up the supply chain, argued Rick Spann,

EVP of global operations at Church & Dwight.

Others noted that making the case for greater

resilience might mean having to untangle issues

around overcomplexity and the costs involved

in adding network flexibility. Whatever the

findings, supply chain leaders need to ensure

that resulting actions have long-term validity,

not just short-term viability, for how companies

redesign their networks.

• Target visibility and vulnerability.

“Understand your network intimately,” in terms

of material flows, costs, revenue and trade-

offs, advised John Coyle, senior director of

customer supply chain and logistics at Morton

Salt. Getting better visibility and reducing

vulnerability also mean mapping suppliers

at the subtier level and understanding the

interdependencies between firms that make

up your extended supply base. Leading supply

chain organizations have been doing this since

the disruptions of 2011; others now need to

make this a bigger priority.

Conclusion & Recommendations

22 Weathering the Storm: Supply Chain Resilience in an Age of Disruption

May 2020

• Be proactive on preparedness. In a crisis

situation, knowing upfront the specific steps

that need to be taken and the questions to ask

suppliers — for instance, about their capacity

— is essential, noted Mike Knapp, director

of supply planning operations at Intel. A clear

playbook, whether for a pandemic or any

other type of major supply chain disruption,

should document the processes, governance

and decision-making rights that will be used to

navigate through it. Alongside this, you need

strong leaders who are empowered to act

decisively, said Edwards Lifesciences’

Jim Bourne.

• Actively engage external partners. Strategic

partnerships with suppliers and logistics

providers are vital, added Bourne, “so that if

you have to pick up the phone for support,

they answer.” This foundation needs to be built

in advance, since trying to forge relationships

during a crisis will be too late to make a real

difference — for example, if suppliers start

putting products on allocation. Developing

contacts with local government officials can

also pay dividends in a situation like COVID-19,

so add this to your to-do list when conducting

plant visits. “Having a name and an email

address really helps,” he said.

• Double down on data and technology.

Rapid access to data that enables you to

understand your options for navigating a

disruption is a key lesson for David Null, vice

president of supply and trading at Georgia-

Pacific. In practice, this means being able to

aggregate and visualize data across multiple

ERP, MRP, sourcing and other systems.

Investments in technologies that map and

monitor global supply chains, create digital

twins of factories, and enable organizations to

model different scenarios more easily and often

will also be needed to support greater resilience

for the future.

23

In February and March 2020, Gartner Supply Chain

Research sent invitations to complete an online

survey to Gartner clients, community members and

to a wider group of practitioners in supply chain

and other functions globally. We received 260

About the Research

completed responses during the survey period for

this Weathering the Supply Chain Storm Survey.

Key demographics were as follows (all figures

represent percentage of respondents):

About the Research

Job Level

SVP/EVP/Board Level

1112

Other

46

VP/Director

31

Manager/Head

Job Function

Purchasing/Procurement

IT/IS/Technology

General Management

Manufacturing/Production

Operations

Supply Chain

Logistics/Transport & Distribution

Academic

Sales/Marketing/Business Development

Other

Engineering

43

11

10

6

6

4

4

4

3

3

6

24 Weathering the Storm: Supply Chain Resilience in an Age of Disruption

May 2020

Industry Sector

Food & Beverage

Chemicals

Utilities & Energy

Logistics & Distribution

Medical Equipment & Devices

Healthcare & Pharma

CPG

Hi Tech

Industrial

Retail

Paper & Packaging

Automotive

Media & Telco

Fabric & Apparel

Aerospace & Defense

Agriculture & Mining

Construction & Engineering

Academic

16

15

10

9

7

7

3

6

2

5

2

5

2

4

2

1

1

3

42

18

Personal Location

2 38

Rest of the World

Europe, Middle East & Africa

42

North & South

America

Asia & Australia

Company Annual Sales

Less than $1 billion

234

Undisclosed

21

$10 billion to $25 billion

2519

8

$25 billion plus

$1 billion to $5 billion

$5 billion to $10 billion

25

25

1

“Is It Time to Rethink Globalized

Supply Chains?” MIT Sloan

Management Review

4

“Risk Appetite Trade-Offs (Hydro

One)” and “4 Steps to Draft

and Operationalize an Effective

Supply Chain Risk Appetite

Statement”

2

“The Next Generation of Supply

Chain Efficiency: The Network”

5

Gartner Procurement’s Value

Contribution in Supply Chain

Survey, 2019 (n = 264)

6

“Coronavirus Is Proving We

Need More Resilient Supply

Chains,” Harvard Business

Review

3

ISO 22316:2017(en)

7

“Improving Decision Making in

the Face of Disruptions”

10

“Oversupply of Hospital Beds

Helps Germany to Fight

Virus,” Financial Times (Paid

subscription required.)

11

“The Coronavirus Crisis

Will Change the World of

Commerce,” The Economist

8

“Design Resilience Into Your

Supply Chain With Scenario

Planning to Weather the

Unexpected”

9

“Future of Supply Chain:

Reshaping the Profession”

References

References

26 Weathering the Storm: Supply Chain Resilience in an Age of Disruption

May 2020

The Top 6 Supply Chain Breakthroughs, 2020 February 2020

The sixth annual Gartner Power of the Profession Awards recognize breakthrough successes in the supply chain community.

Transforming Procurement Through Digitalization October 2019

Digitalization of procurement is more than moving processes online and boosting efficiency. This report highlights key trends and how procurement leaders should approach transformation.

Future of Supply Chain: Reshaping the Profession November 2019

Four big trends are reshaping the profession and the future of supply chain: digitalizing the ecosystem, competing on customer experience, navigating through trade uncertainty and reshaping the circular economy.

Employ Digital Technology to Enable a Circular Economy December 2019

The circular economy is a new way of doing business, managing resources and engaging customers while reducing environmental impact. This strategy ensures prosperity in an era of finite resources and rising demand.

Improving Decision Making in the Face of Disruptions January 2020

In an increasingly volatile environment, supply chain leaders struggle to respond quickly and effectively to frequent, high-impact disruptions.

The Top 6 Supply Chain Talent Breakthroughs, 2020 February 2020

The sixth annual Gartner Power of the Profession Awards recognize breakthrough talent successes in the supply chain community.

Data Is the Future of Supply Chain: Build a Data Foundation March 2020

Data quality is most critical to this foundation. CSCOs must deftly address data-related challenges to reach this future state.

Build CSCO Influence in the Boardroom: Demonstrate Functional Mastery, Business Alignment and Industry Awareness April 2020

In a world where disruption is the norm, CEOs and board of directors are increasingly focused on the implications to supply chain.

Gartner Recent Research