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More factors in the supply chain equation

20 insights and lessons around the Executive Order

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Pink and purple over the Capitol The turmoil triggered by COVID-19 has left many businesses struggling to restart, restructure or reimagine their supply chains. Supply chain disruptions have been so widespread and impactful that President Biden signed an Executive Order aimed at creating more resilient supply chains to help ensure national security and financial stability.

The order notes a range of vulnerabilities as it seeks to identify critical points of failure. It calls for a 100-day federal review of key sectors, with a more comprehensive one-year review of other sectors that include the public health and preparedness industrial base.

“Congress has done a lot of reshoring research – with development tax credits and buy American provisions – they’ve paid a lot of attention to supply chains,” said Grant Thornton Public Policy National Managing Principal Robert Johnston Shea. “But, the pandemic has highlighted a lot of supply chain weaknesses that Congress and other policymakers across the government are still grappling with today.”

 
Robert Johnston Shea“The pandemic has highlighted a lot of supply chain weaknesses that Congress and other policymakers across the government are grappling with today.” --   Robert Johnston Shea
Grant Thornton Public Policy National Managing Principal
Supply chains are a complex national issue – and a strategic issue for almost every organization. In fact, the Executive Order specifies new actions that must be taken to shore up inventories and supply chains against future nationwide disruption. That means some organizations have to factor in new requirements at the same time they are considering the risks specific to their supply chains.

The past, current and ongoing evolution of supply chains requires each organization to regularly recalculate the changing variables in its own unique equation. Grant Thornton Advisory Services Principal Jonathan Eaton said that recent events, emerging trends and the Executive Order have highlighted ten important interdependencies that every organization should factor into its supply chain equation.

Ten supply chain interdependencies
  1. The potential impact of new legislation
    New laws are almost inevitable. They may be prompted by the 100-day or one-year reviews, or by a range of other factors. The question is: What forms will they take, and will they offer carrots or brandish sticks?
  2. The regulatory implications of new legislation
    New laws often mean new regulations. These regulations could affect anything from the inventory organizations must maintain to the manufacturing capacity they must create.
  3. The emergence of reshoring incentives
    Reshoring incentives may alter the geographic reach of manufacturing or recenter inventory, posing special problems for pharmaceuticals and other sectors where it is difficult to certify new suppliers.
  4. The likelihood of revenue, tax and cost impacts
    Moving operations onshore could be revenue-neutral, but may trigger a higher (28%) tax rate, generate additional costs and could require legal restructuring.
  5. Issues with labor availability
    There’s a widespread shortage of both direct labor and contract labor, with these shortages affecting both companies and their supply chain partners.
  6. Changes in the minimum wage
    The movement to raise the minimum wage to $15 an hour could create a battle for workers at the lower end of the wage spectrum.
  7. The need for redundant inventory
    Building redundant inventory, which is specifically mentioned in the Executive Order, could be especially challenging for organizations that use debt to fund the inventory. Plus, prolonged shelf lives could mean that inventory would need to be discounted or discarded.
  8. The addition of new contract manufacturers
    Many companies lack the capacity, physical assets or labor to generate redundant inventory, so they will look to contract suppliers. Unfortunately, the scarcity of such manufacturers, and the likely intensity of the demand, could drive up cost.
  9. The reality of supplier set-up times
    New capacity isn’t quick to create, whether it’s in an organization’s own facility or at a trusted supplier.
  10. The requirements of certification programs
    Certification programs are a necessary addition to setup time for sectors like pharmaceuticals, even if capacity and other elements are already in place.

“I think there are a number of other interdependencies, and we could break each of those down, but that would be kind of my top ten list,” Eaton said. He added that organizations should also observe some recent lessons learned about how to balance their supply chain equations.

Ten supply chain lessons learned
 
Jonathan Eaton“I believe that the mindset that COVID-19 was a black swan is correct, but that ‘black swan’ has to be dead. That can no longer be an excuse for poor planning or an inability to have a resilient supply chain.” --   Jonathan Eaton
Grant Thornton Advisory Services Principal
We might still have more to learn from the pandemic, but Eaton said some lessons are already clear – and they start with a new mindset. “I believe that the mindset that COVID-19 was a black swan is correct, but that ‘black swan’ has to be dead. That can no longer be an excuse for poor planning or an inability to have a resilient supply chain.” Eaton expanded on this as the first of ten recent lessons that organizations can learn about how to fortify their supply chains:

  1. Supply chain disruptions will happen.
    We can’t always predict the form of a disruption in advance, but supply chain disruptions will continue to happen. Even apart from COVID-19, we’ve recently experienced Brexit, the Suez Canal blockage and the SolarWinds breach.
  2. Know the cash cycle and forecast your cash flow.
    Supply chain disruptions alter demand cycles and impact cash flow – how it cycles, where it comes from and how much is demanded. This is especially important for smaller companies if, for example, they need to quickly fund ramped-up production.
  3. Identify, early, where you may have bad debt.
    No industry has been immune to customers who simply can’t pay.
  4. Understand any bank covenants.
    This will help you retain cash when cash is king.
  5. Don’t try to improve your cash position with late payments to suppliers.
    Besides being bad business, it’s a short-term solution that undermines long-term relationships.
  6. Establish alternative sources of supply and contract manufacturing.
    Given the limits already noted on contract manufacturing and labor, it’s essential to get ahead of finding sources.
  7. Promptly and proactively evaluate supply chain risk.
    Events such as the SolarWinds breach highlight the interconnectedness of supply chains. Using technology and data, look at primary, secondary and tertiary suppliers. The more you know about the companies you’re working with, the more you can minimize risk. The less you know, the more you are essentially underwriting that risk. So, conduct an independent audit to identify, prioritize and resolve risks around data security, availability, processing integrity, confidentiality and privacy.
  8. Establish models which predict labor needs.
    By using technology to create dynamic models, you can predict issues, forecast evolving capacity and simulate responses.
  9. Proactively manage demand.
    This will support your efforts to predict labor needs and supply chain risk. Whereas upstream forecasting requires predictive models, you can accomplish much of this by simply reaching out to your customers and asking them what they think they will need.
  10. Seek to understand new, proposed and likely future legislation.
    You’ll find surprising insights in legislation which has been recently proposed but has not yet passed. There is a lot of current legislation, or legislation evolved from it, that is likely to pass. The question is what form it will ultimately take.

The new Executive Order imposes some requirements on organizations at the same time that the supply chain vulnerability it addresses might expose them to risks. Organizations can bridge this gap by considering the insights we have gained into how supply chains function under stress. These recent lessons learned and interdependencies can guide each organization to structure its unique factors into the most profitable supply chain equation.

Contacts:

Jonathan EatonJonathan Eaton
Principal, Advisory Services
T +1 704 632 3523


Robert Johnston SheaRobert Johnston Shea
National Managing Principal, Public Policy
T +1 703 637 2780