Crisis offers lessons on local inventory
During these days of staying at home and scrambling for critical supplies, I am thinking constantly about my paternal grandparents.
I spent a lot of time with them as I was growing up, as they cared for me while my parents tended to their retail/repair business.
My grandparents grew up in very modest circumstances in the tiny mountain village of Guadalupita in northern New Mexico, before eventually settling in Española where my father established his business. Each came from modest families that farmed, ranched and logged for a living. When they were young adults, they, like everybody else, struggled through the Great Depression, and forever carried the scars of this economic tragedy in their psyche.
My grandparents didn’t waste anything. A piece of leather was crafted to become a belt. Flour sacks were used to make handkerchiefs and rags. My grandmother used to always complain that when my grandfather went to the dump to throw junk, he would return with even more junk than he set off with. They lived basic lives without a lot of frills. When they had time off, they would usually stay at home cooking or go to the country camping and fishing.
I still remember my grandmother canning peaches, apricots, tomatoes, and other vegetables. When my grandfather passed away, two years after my grandmother, our family was surprised to discover their bedroom closet full of canned foods that my grandparents had tucked away for a rainy day. It was indicative of the harsh experience they had growing up poor, and steeled by the Depression. However, seeing how they saved for the future made me realize that no matter how hard times can be, or how crises will always occur, they always got up every day, tried to go forward, and do the best that they could for tomorrow.
My grandparents’ example can easily be applied to the current state of global trade. Like my grandparents, do companies make the decision to carry higher levels of inventory (raw material or finished product) going forward to be prepared for another major crisis?
The trend over the past three decades has been for production plants to carry less inventory, because an inch of production space generates money, while allocating space for inventory adds little or nothing to the bottom line.
Over the years, firms have stored inventory in separate warehouses or contracted the storage of inventory to 3PLs (thirdparty, logistics firms) that ship inventory to the production plant via computer communication as needed.
The current COVID-19 crisis has severely affected or outright shut down supply chains in which needed components and supplies move through to production plants in North America. While these supply chains were built based on minimizing costs (i.e.: thousands of suppliers were established in low-cost labor countries such as China and South Korea), a total rethinking of the supply chain is warranted.
First, popular supply chain bases such as China and South Korea no longer have such a striking lowcost labor component compared to 20 years ago. When a crisis such as the present one hits, supply chain managers struggle to keep supplies flowing all the way to production, especially from thousands of miles away.
Secondly, even though moving parts of the supply chain back to North America to be closer to the North American market could be more expensive, in the end it might be worth it. Even though Canada, the U.S., and Mexico are all mired in the COVID-19 crisis, managing a supply chain closer to home and under the aegis of a free trade agreement adhered to by all three countries is infinitely more appealing.
The crisis should be demonstrating to us how dependent we are in certain areas on suppliers based in Asia. I think Americans would understand the need to pay higher prices on certain products, whose supply chain or parts of it, have moved back to North America. And this will not happen overnight or en masse.
Rather than seeing a $100 million production plant close in China and move operations to Juarez, we are probably going to see more satellite production plants pop up along the U.S.-Mexico border. In this way, companies will be able to hedge their bets and keep production going when paralyzing crises occur in the future. They also will be able to create an average cost of a particular component, having production in more than one place.
Modern-day supply chains have been driven by the quest to lower costs and maximize profits. For many companies, the mindset should be shifting to ensuring production during a global or regional crisis and accepting an uptick in costs. A onesize approach cannot be applied across the board. However, carrying more inventory and shifting production closer to home are definitely conversations that global companies should be having during this crisis.