Supply chains move from just-in-time to just-in-case4 min read . Updated: 11 Aug 2020, 08:18 PM IST
New business trends are emerging as supply networks get reshaped to minimize disruption risks
In a May 2020 survey of global business leaders by McKinsey, as many as 93% of the respondents said they plan to increase their supply-chain resilience in the coming months. Many of them have created individual blueprints for this since then. Now, they are evaluating a wide variety of approaches to turn their strategies into action.
The writing on the wall, however, has been the same for everyone. Just-in-time (JIT), the decades-old poster child of supply chains, is no longer tenable. It was ideal for a world of certainties, in which you could minimize your inventory because you knew that your supplies would arrive on time and that your demand would not disappear overnight. But, in a post-covid world, where the rug has long been pulled from under our collective feet, industry practitioners are being forced to look beyond JIT.
Increasingly, they are taking refuge in the philosophy of just-in-case (JIC), which has been the mainstay of companies that have a hard time forecasting demand. JIC tenets revolve around eliminating risk from supply chains, and are finding wider resonance now, as companies across the world try to de-risk their operations. Three trends are emerging from this shift.
First, diversification of supplier bases as a shield against geographical uncertainties. While this trend has dominated newsprint and mind-space for a few months, it is intriguing to see the lengths some companies are willing to go in their mission to diversify. A multi-billion-dollar industrial tools manufacturer, for example, is considering shifting its vendor base for a high-cost precision tool—traditionally manufactured using advanced technologies by skilled labour only in the EU—to developing markets in Asia, where it will need to establish much of the required infrastructure from scratch. The move will come at a significant additional cost, but it is an investment the company is willing to add as a one-time “cost of resilience" to its total cost of ownership of the supply chain.
Second, reconfiguration of warehouses to limit supply disruptions. Many supply chain practitioners are expanding their warehousing footprint to spread their eggs across baskets and ensure uninterrupted supply even if a few of their facilities end up in containment zones. A leading two-wheeler manufacturer, for instance, is planning to create more space for storage and is considering two options: shifting to a larger warehouse in a different city, or splitting its existing warehouse between two cities.
Some contract logistics players are going a step further. Not only are they beefing up their warehousing capacity, they are also connecting their warehouses using digital means to create unit-level transparency. With the combined leg-up accorded by these moves, they are now in a position to offer a pan-India single “cost per pallet" to their customers, instead of the variable, regional pricing that characterized the trade in pre-covid days.
Third, increased automation in warehouses to build resilience. Traditionally, businesses have seen warehousing as an avoidable internal investment, with a large proportion choosing to outsource it to low-cost third-party players. Most warehouses, therefore, have taken the shape of manpower-dependent facilities using outdated technologies. The labour crisis engendered by the pandemic has exposed these warehouses as weak links in the system.
To de-risk them, some companies are now turning to technology. According to the 2020 Honeywell Intelligrated Automation Investment Study, more than 40% of the companies in the US are planning to invest in warehouse execution software, order-picking technology and robotics solutions in the near future. Recently, a global logistics services provider announced that it is planning to deploy a thousand robots across its North American supply chain.
Indian companies are expected to follow suit, but only in the medium-to-long term, as India’s low labour costs tend to act as a disincentive against immediate and large technology investments. A few players, however, are making a head start. One of India’s leading third-party logistics providers, for example, is planning to invest in Internet-of-Things-enabled inventory tracking and semi-automatic conveyor belts. Eventually, it plans to deploy even automatic guided vehicles in its warehouses. In response to this emerging market need, an automation provider is also developing a “warehouse automation" service line, which it believes could be a ₹1,000 crore opportunity over the next 18–24 months.
These trends indicate that global supply chains are being restructured in fundamental ways, which is likely to lead to the emergence of a crop of new global sourcing hubs. These are likely to be regions where JIC tenets are speedily gaining ground. In this context, it is encouraging to note that both Indian manufacturers and logistics service providers are already adding JIC tenets to their business strategies.
It is too soon to say what the exact ramifications of these trends will be. Will JIC become the new supply-chain normal, for example, or will a hybrid JIT+JIC model emerge? But these shifts bode well for the world. If and when there is another external shock of the scale of covid-19, JIC could prove to be an invaluable tool in countries’ efforts to keep their essential supply chains running and reduce widespread suffering.
Nadeem Ahmad contributed to this article
Soumyadeep Ganguly and Neelesh Mundra are, respectively, partners in the Delhi and Mumbai offices of McKinsey & Co.