The Supply Chain Shift: A Positive Evolution Post-Pandemic

Supply Chain Resilience in 2024

Jody Markopoulos: Good afternoon. It’s a pleasure to be presenting today. My name is Jody Markopoulos and I have spent the last 30 years in a number of operational leadership roles, both in large companies such as GE and Baker Hughes, and as a consultant in a number of smaller public and private companies. With over 25 years in the energy industry, I have seen many economic cycles and their impact on the global supply chain. I’m here today to share some of those lessons, insights, and best practices on how to navigate this ever-changing post pandemic environment. I’ve broken my talk into four areas to share my learnings. Let’s get started.

How Inflation and Unemployment Affect Today’s Supply Chain Networks

Today’s environment still feels like chaos, though the supply shocks we experienced during the pandemic have largely abated. An overhang of uncertainty remains pervasive throughout manufacturing industries. This is the new normal that supply chain professionals must contend with and navigate. So let’s unpack it. Our first compounding dynamic, inflation and unemployment. Inflation peaked in the US at 9%. Today, we hover around 3% to 4%, but economists in the Fed leadership prefer it be around 2%. This has sent interest rates climbing. Couple that with a post-COVID labor rebound rates going in the opposite direction, 14% unemployment during COVID, now less than 4%.

These facts have created intense pressure on US manufacturers, making both access to capital for investment more difficult, and access to labor even tougher. This impact has been seen in this PWC study with the National Association of Manufacturers, 91% of manufacturers surveyed have had supply disruptions over the past two years, and 63% are experiencing risks in securing material. Supply shortages, providers, shipping bottlenecks and longer lead times are all contributing to these input risks as well as rising costs. And on the horizon, new material risks are brewing, these are associated with the energy transition.

McKinsey released this report covering the supply implications with the goal to net zero emissions, electric vehicles, solar panels, wind turbines, products putting in increased demand on some core metals. Projecting new constraints by the year 2030, I point out the trajectories of nickel, lithium, and copper. Materials that have multiple consumer uses and surely consequential ramifications if constrained. The speed at which the world adopts these new technologies and the ability for the raw material supply chain to respond is still developing. Potential to see shortages and price spikes as well as an impact for both companies and countries to meet their emissions goals, suggesting a need to harmonize and balance the rate of demand and supply.

Trade tariffs and then the pandemic has created an accelerated shift away from Chinese manufacturing. The China Diversification Index created by Kearney shows the share of US imports in China as a percentage of total imports from a group of 14 Asian countries. A noticeable decline over the last five years, signaling a shift in the role China has played as a manufacturing powerhouse for the world. European manufacturers are also confronting a new environment. This article highlights a 4% contraction of the manufacturing sector in 2022, driven by material price escalation, weaker demand, hiring and borrowing interest rates, and labor shortages. With further contraction forecasted over 3% this year, creating intense pressure on the UK economy, this equates to two years of negative investment in the sector, a huge blow to Europe.

This has spurned an intense focus on determining the best manufacturing-out footprint. To reduce supply shocks, shipping constraints, and stabilized production, many American manufacturers are reshoring their operations to be closer to their domestic market. As a result, countries like Mexico have seen their exports to the US grow to over $400 billion. Kearney’s US manufacturing import ratio, seen here, shows the total manufactured goods imported from 14 Asian countries as a percent of US domestic output. Measured for year over year change in 2022, domestic manufacturing outpaced Asian imports. This is a direct result of the reshoring efforts by many companies and their suppliers. These moves have become accepted by US consumers with their willingness to pay for more local products, and that trend is being reinforced as 96% of CEOs surveyed in this study are considering reshoring. This was just 78% in 2022.

Lastly, new SEC climate-related sustainability disclosures are proposed to come into effect to report climate risks for publicly-traded US manufacturers. Similar regulation has already been introduced in Europe. These disclosures track a company’s direct greenhouse gas emissions from their own operations in scope one. Indirect emissions from purchased electricity and other forms of energy in scope two. And if you reported in your reduction target downstream activities in your value chain, in scope three. What does this mean? Another new variable for manufacturers to take into account when managing their footprint, climate change, and choosing their suppliers.

And finally, Peter Zeihan’s talk surrounding the current state of geopolitics in demographic shifts. A changing global economic landscape is having a profound impact on the state of global manufacturing. I took away what I think we have all felt post pandemic, a loss of capability. He said, “We need to rebuild the industrial commodity supply. The era of cheap supply is over. Expect a new normal 9% to 15% inflation. We have entered into a new state. Now it is time to focus on strategies to navigate it.” Today’s supply chain professionals are confronted with many challenges. Bear in mind, this is not the first time we have had to manage a turbulent environment. We’ve seen events in economic crisis before.

Think back to 2008 or even events creating disruption like the block Suez Canal in 2021. Whatever the duration these challenges may be, they are all external factors that can have a profound impact. It is important to figure out which ones are key to you and how they can impact your manufacturing and supply decisions and to build resilience into your supply chain operations. For example, you are an electrical cable manufacturer, who consumes thousands of tons of copper, understanding the global price of copper, supply-demand balance, mining, other competing industries. You get it, the key details. These can influence your ability to manufacture, track those relevant factors to make the best informed decisions surrounding your business strategy.

Unknowns. What I just covered are a sample of external facts and information. I call them knowns. They’re measured trends, indices and metrics. Public information, there are many more I didn’t share like commodity prices, exchange rates. You get it, knowns. All factors that are extremely important to know and to help clarify what I call a set of unknowns. These unknowns I will share aren’t new, they just may highlight different challenges given the state of today’s environment versus the past. It is important to address them as an element of how you navigate.

Profitability is always going to be somewhat variable for the environment you are competing in. Business is competition for market share, and every function plays a role in growth or contraction. With many influencing factors, it’s key to isolate those elements that influence product profitability and understand them. For instance, what is the impact of a price increase for a key raw material? What are the lead times of available shipping modes, or how do rising interest rates influence your plant investment decisions? All questions that get at understanding the intersection of impact to your product profitability. The objective here is to uncover the levers that can be used to stabilize or improve it.

Geopolitical Risks and Your Critical Supply Chains

Global manufacturing capacity is shifting. Peter Zeihan mentioned it in his talk and the Kearney Reshoring Index tracks it too. Understanding these capacity shifts can help you ensure your supply inputs. They could also influence markets you may serve. For instance, are there geopolitical risks with unrest in a particular country you source from? Are there tariffs that impact your exports or imports? Is new global capacity needed to serve an existing market or penetrate a new one? Do any customers require country-specific supply or local-country content? I could go on. This is a mapping exercise. Map the countries where your materials are sourced, then balance that inventory against all the countries where those resources are available. Develop a detailed understanding of how your company needs global capacity for both supply and demand.

Labor, Decision Making, and Supply Chain Management

Labor. A big topic post pandemic. Today, manufacturers are assessing labor stability, not just in their own facilities, but also in their suppliers. With low unemployment, companies must utilize new programs to attract and train talent while preventing the knowledge drain. Simultaneously, you must contend with cultural shifts. There are generational expectations around production roles and a growing union sentiment. Understand all these elements, know the demographics of your area and the perception of manufacturing. Have a grasp on the culture in your own facility. Take a talent inventory and employ new ways to retain and replicate that talent. Know your surrounding community. Partner with your local schools. Stay aware of all of the factors that can create an unstable labor situation.

Customer Loyalty as a Competitive Advantage

Customer loyalty. The pandemic really highlighted the importance of product availability. It influenced my buying decisions. Price is important, but availability has become of utmost importance in a world of constrained supply. Customer loyalty is built on preference. Preference stems from product performance, price, and access. How does your company build customer loyalty? Is it by serving local? Is it by being global? Profile your customers and their purchase history. Dissecting these unknowns will help you make better supply chain decisions.

Shifting gears to a more internal focus, in a world full of uncertainty, now more than ever, understanding your unique why is key to a successful future. It’s knowing your product offering and those elements that make it attractive to your served market. It’s a deep reflection using every question you ever learned as a kid. Why, how and what? Then ask why again. Get into the details and understand your product’s, position and decisions. Let’s peel back the layers.

Identify Your Vulnerabilities in Customer Loyalty

What? Product vitality, features, benefits for your users, unique technologies? What makes your product the best? How? How do you manufacture that product or that key feature? How does it impact your performance or your customer’s expectations? Why? These are the decisions surrounding the what? Why do you use that supply base? Why do you use that manufacturing process? Those machines, those skills? Ask why at many levels and at every level. It’s going internal and questioning at this level, you can expose your strengths and your weaknesses. This will help you compete in today’s environment. By taking this approach, you can expose gaps and ultimately reduce uncertainty.

Resilient Supply Chain Challenges

I’d like to share three different challenges, all in different industry cycles I faced, to share how applying this approach helped reduce risk and open up options leading to better outcomes. The ’90s saw a very turbulent power market. There were shifts in global manufacturing, a currency crisis in Asia, deregulation of the market, swirl and lots of swirl, creating a trough in the US power market. Then toward the end of the decade, rolling brownouts started happening in major cities due to high summer temperatures. Electricity reserve margin sank with an aging fossil fleet leading to an unprecedented demand for gas turbines. What became known as the US Gas Turbine Bubble, a massive opportunity to grow. Gas turbines weren’t sitting on a shelf, they are somewhat custom products. Production had to ramp up fast, but the market called it a bubble, so that meant the demand level wasn’t going to last forever.

Supply chain had to create flexible capacity, a controlled, reliable growth. We executed this with speed and confidence in delivery by partnering with suppliers to make components and assemblies. Labor access wasn’t a challenge, jump starting the core material was. The US steel industry had declined in the ’80s, heavy-duty forgings and castings had reduced significantly. There was some capacity in Europe with the likes of Italy, Austria and Germany to name a few, but the demand on the industry was so high and investments cycle so long, it wasn’t enough. Access to large tonnage steel was an emerging industry bottleneck and growing new sources was required. The steel industry had shifted to Asia, in fact, some large furnace capacity now only existed in Asia. To deliver to customers in this time of crisis, we had to find and go where the resources were. It meant the development of a new supply base, at the same time, considering how to maintain those relationships into the future.

Remember this was called a bubble. I look to diversify offerings with suppliers, growing them with multiple-product families to help level the load, grow controlled, and with an eye toward the future. Industry cycles happen, that’s history. The key was managing it with a strategy, create a flexible and global approach to serve all customers around the world. A primary, secondary, and sometimes tertiary supply base to compete in a new global environment.

In the 2000s, the power generation market changed yet again. Climate concerns were growing, fueling a worldwide acceleration toward new renewable sources of power, a new power generation portfolio with renewable energy in the mix. The introduction of the US production tax credit happened in the ’90s. It was growing steam in the 2000s. Wind took off. Europe was ahead in establishing incentive programs and goals. The US and the rest of the world were catching up.

These wind energy adopters were moving from being traditional land farmers to real power developers. Lots of new players all over the world were jumping into the product. I recall over 20 new Chinese wind turbine players erupted onto the scene to compete with European and US OEMs. The market was becoming flushed with product, but was it reliable? Many well-known US power producers were now buying and building wind farms, and they expected the same energy standards on reliability and availability on wind turbines just like any other turbine they owned. The initial product was small, less than a megawatt in output. To support the growing market and have real output and cost scale, it needed to double in size. Examining the product, it was a puzzle. Multiple suppliers provided their design sub-components to make the unit. This created configuration complexity and reliability challenges.

Learning that some configurations didn’t work well on the system, there was a need to overhaul the design. To introduce a larger machine, it required a new design philosophy and teaming. Learning both internally and externally, because your suppliers were an important piece of the equation. There was a joint ownership between functions to procure and manufacture a new highly reliable product, a total team effort to learn and to grow. For perspective, these wind turbines sit atop 80 to 100 meter towers and their blades are 30 to 40 meters long. Supporting these units meant developing new suppliers and technologies such as fiberglass blade molding.

And don’t forget the size impact, that attribute was important. This created a new logistical challenge in the United States, not just finding new suppliers, but also locating warehousing and buildings large enough to make these tower sections and blades, then figuring out how to transport them to the field. A puzzle to unlock. We needed to know where the customers were building wind farms and how that location intersected with railways and roadways. Transportation was a big factor for the manufacturing locations of these critical components. A dynamic matrix, a successful supply chain was built with the involvement of sales, engineering and sourcing, and ongoing partnership to design, supply, and transport at scale.

Today’s Supply Chain Challenge: Batteries, Robots and the EV Market

Continuing with the focus on climate in the energy transition, enter batteries. Over the last decade, we’ve seen the emergence of large-scale batteries that support renewable power and microgrid applications. Capturing and delivering more of this renewable energy, batteries can help smooth out the variability to the grid that comes from wind or solar. Supporting the electric revolution underway, it’s possible your EV charging at home could be drawing power from one of these, a huge enabler to delivering these emerging electricity needs. These containerized battery blocks are actually strings of smaller batteries working as units inside. Depending upon the size of the container, it could contain anywhere from 400 to 600 units, which means manufacturing scale matters in an enormous way. Many battery companies were growing that production scale when COVID hit, a devastating blow to the labor force for so many, even worse when trying to increase your output.

Competition for labor rose, especially from the services sector. First, if you recall, in delivery services like Amazon, then eventually into restaurants and hotels where they offered hiring bonuses to attract talent, something I’d never seen before. Couple that with reshoring, the US was in the midst of a skilled, manufacturing labor shortage, a confluence of events impacting the ability to meet and grow with market demand. To tackle this situation, finding ways to utilize automation and do it quickly take an inventory of demand operations on the line. Then we drew a value stream to look at what was possible with automation.

Another example of a partnership with engineering to understand technical requirements from robots to conveyors to hands-free stations. This phenomenon has not just happened in the energy space but across many industrial and consumer manufacturing sectors today. As an operations leader, I learned many lessons from both success and failure throughout my career. The one that stands out, “Always build options.” I approached every economic cycle, every industry shift, or new product introduction with that headset in my mind. I created strategies with multiple options, and I believe resilience comes from this effort. Resilience is the outcome of optionality.

Supply Chain Mitigation Strategies

Let’s talk about four elements to consider when building options. First, plan for failure. Understand what could go wrong in your decision and plan around it. Use tools like the five why’s or an FMEA or enterprise risk management matrices to expose your risks. Know how it can influence your decisions and what the worst outcome could be. Seek ways to abate that and plan for it. Second, stay close to your commercial team and customer. Industry or market changes, customer preferences, they all can change, be ready for it. Anticipate that and have a plan. Your suppliers can be your partner, they can provide insights in critical capabilities to support your product offering. Having a relationship built on strong communications and trust can be the difference between a good and a great business outcome. Consider taking stock of your supply base and how they might create options to your plan.

Lastly, your team. Functional peers can be a source of expertise and help when confronting a challenge. Listen, debate and ask questions. For me, the best ideas to solve problems come from cross-functional input. Create your options with multiple insights. I want to leave you with some thoughts on tying this all together. Start with being a realist, understand the environment and competitive landscape you are in. What economic forces can move your business and affect your market? Know these elements and monitor them closely. Go deep, understand the essence of what you do, your technology, your product offering, and why customers buy it, where you build it and why, and how you build it and why. Know the uniqueness of your why. Find the gaps. Where are the risks? What can go wrong? Where are the weaknesses? Connect the dots of your unknowns. What is your plan for failure?

As manufacturers, we will continue to see industry shifts and global economic cycles. They will impact our ability to perform temporarily until we evolve. Introducing technology and new ideas, markets and customers will evolve. Our world will always be dynamic, that is a given, but we can address those risks, meet those needs, and deliver outcomes by creating options. Options are what makes you resilient, not just in a post-pandemic environment, but in any future environment that may come. Thank you very much for listening. It was my pleasure to present to you today.