Supply chain resilience continues to be a significant topic around the world—and a prominent theme at both the Munich Security Conference and the World Economic Forum Annual Meeting. In a panel I hosted at Davos, The Supply Chain Imperative, top thinkers from both the private and public sectors explored the enduring challenges of today’s complex supply chains–which, despite marked improvement over the past few months, remain vulnerable.
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Governments are focused on addressing this vulnerability and enabling supply chain resilience—everything from developing national self-sufficiency for certain key products and materials to working with allies who have mutual supply needs. But while these approaches have merit, governments are limited in how they can influence supply chains and networks. Therefore, they are widening their aperture and exploring how to best use the methods at their disposal.
A complex web
There’s no doubt that today’s supply chains are complex. In fact, “chain” is a misnomer. Rather than a linear, easy-to-comprehend exercise, supply chains are more an intricate ecosystem that can include hundreds or even thousands of suppliers—with disruptions in one area often rippling out to disrupt others within the network. Even supply chains that seem to have a diversified list of suppliers—that is, not relying on any one supplier for materials—can harbor hidden risk if the suppliers themselves draw from a single common sub-supplier or source of raw materials.
Having a clear line of vision into how individual suppliers operate can also be challenging. This is a critical source of risk that goes beyond manufacturing costs and delays to include concerns such as environmental impact, labor practices, and carbon emissions. Not only are major manufacturers and procurers of everything from medical equipment to rare earth elements seeking to address scope 3 emissions to meet sustainability goals, they also are increasingly concerned about how problematic practices within their supply chains can impact their brand.
A lack of transparency can also mean a lack of security. As members of the panel noted, weak cybersecurity in one part of the supply ecosystem can easily allow bad actors to wreak havoc throughout its entirety. Add to this, competitive tensions among nations in terms of trade as well as nationalism and protectionist policies in times of crisis, and it’s clear that rethinking supply chains is becoming increasingly urgent.
What can governments do?
During the COVID-19 pandemic, when nations scrambled for personal protective equipment, the idea of onshoring, that is, producing products and services domestically, became a top-of-mind approach to addressing sourcing emergencies: simply bring production of key materials back within national borders. Through legislation, regulation, and policy, governments could onshore a range of components and manufacturing to solve critical sourcing matters. This approach could also enable more transparency in terms of environmental, social, and governance (ESG) issues. But in reality, onshoring is just not feasible for all products or every country.
So what can governments do? An initial step is to acknowledge there is only so much unilateral action that can be taken by a government to address supply chain disruptions. Next, is to understand what supply chain resilience looks like, how to measure it, and set goals. This could include taking advantage of supply chain illumination tools that organize and integrate information for multiple products or services and from multiple sources, including industry, government organizations, and foreign partners.
The picture that emerges can then help governments decide what supply chains/networks are critical and most vulnerable—and help them develop the right levers with allies, partners, and the private sector to improve supply chain resiliency. For critical products and services that cannot be “onshored,” a pragmatic option is “friendshoring,” or the swapping of risky foreign suppliers with close allies and partners. Friendshoring reduces the limitations or costs of onshoring by balancing necessary foreign sources of supply with the trust that comes with an ally or like-minded trading partner.
But governments should proceed carefully as one-off interventions (such as a tariff) or swapping a source of supply or manufacturer can set off ripples and even more disruption throughout the chain. Rather, governments should work to establish levers that create a cascade of supply chain adjustments that reduce uncertainty and risk.
This is especially critical when considering emerging or entirely new technologies and services so that governments don’t have to backtrack and reorchestrate supply chains down the road—and possibly stifle or disrupt innovation related to those technologies. Nurturing new innovations requires balancing costs with protections; but developing effective resilience levers from the start can help businesses produce and scale new products or services without the fear of supply chain disruptions.
Government and businesses stepping up
Our discussion closed with the panel addressing a critical question: who should take the lead in building more resilient supply chains—the government or businesses? And while there is no simple answer, our panelists agreed that both sectors have a unique role to play.
The private sector should work to be transparent and proactive about their supply chains—drawing on a “by design” approach. That is, companies should try to build security and ESG considerations into their products from the start by using materials that offer the least amount of risk in terms of sourcing.
In turn, governments could consider creating policies and incentives that encourage the private sector to build resiliency into their supply chains. When paired with such actions as identifying critical supply chains and nurturing friendshoring, governments can not only help businesses succeed but also contribute to the overall health of a nation’s—and the world’s—economy, security, and well-being.
Listen to our full discussion of supply chain resilience and learn more in our report Boosting resilience: working with like-minded partners to orchestrate critical supply chains.
