We recently did a webinar with approximately 75 manufacturers. And we asked attendees, who mostly came from the procurement, operations and supply chain functions of their companies, what is the most pressing business issue that your company faces with regard to the pandemic. Choices included: supply continuity, price volatility, logistics concerns and cash flow.
Among this group, over 50% cited supply continuity as their biggest concern, followed by price volatility at 23%. What does this tell us about the current market, and more important what does it tell us about the future of manufacturing in the aftermath of the pandemic?
We can read into it in numerous ways, but for us, what stands out is that manufacturers across different sectors will need to revisit global supply chains. Today, what is closing businesses is not just a lack of demand (in fact many industries are not seeing reduced demand) or instances of employees contracting Covid-19 but rather, it is part and material shortages.
Of course we need to take into consideration the “Shelter in Place” orders and what the government describes as “essential” vs. “non essential” businesses which are impacted by it. But many manufacturers still fall into the essential category. In Illinois, this includes those who offer “manufacture, distribution, and supply chain for critical products and industries.”
Automotive firms, for one, are considered essential, as are their suppliers. But GM, Ford and Mercedes have all announced prolonged plant closures owing to part shortages within their supply chain. We are aware of other large diversified manufacturers who have also shuttered facilities for exactly the same reasons (some also have employees who have tested positive for the virus, and used this as the “cover” for closure, but in fact it is their supply chains which are shutting down first).
If we unpack the situation with part shortages, the ripple effect of shuttered production in the supply chain has origins outside of North America, including regions which were hit with COVID-19 before us. The elephant in the supply room here is that the US is dependent, as a country, on specific regions of the world, and even individual countries for critical supply categories. Let’s look at a few examples in this regard.
Japan, followed by China, are the two largest capacitor producers in the world. The majority of capacitors come from these regions. Printed circuit board production is as concentrated as capacitors. According to Beroe, a research firm, the “The APAC region contributes to more than 90 percent of the global production of PCBs and is expected to be an essential influencing factor for the PCBA market until 2020 (as well).”
Beroe suggests that China accounts for 43 percent of global PCB production (South Korea is second with 16 percent, and Taiwan, third, with 14 percent). Outside of these supply markets, hydraulic parts, which are essential to modern equipment manufacturing, come primarily from China, Germany, Italy, the US and Japan.
So even in North America, if a manufacturer has access to local metals and resin suppliers up and down the supply chain (from raw/base materials to parts and component production), there are still other key supply categories which require a global market to keep the factory lights on. Even material and part spend accounting for <1% of spend needed to produce a given SKU can effectively shut down a production line if it is not available.
Based on supply risk data coming out of technology systems which track local news and other information sources, it is clear that local shutdowns across the world are impacting supply availability in North America. Coming out of the crisis, this will beg the question: should we consider policy to make US manufacturing less dependent on the weakest link in these supply chains, pandemic or otherwise?