Panos Kouvelis contributed this post. He is the director of The Boeing Center for Supply Chain Innovation and Emerson Distinguished Professor of Operations and Manufacturing Management.
There was no worse time for global supply chain managers to hear about a 1,300-foot ship carrying 18,000 containers and weighing over 200,000 tons stuck, diagonally, in the Suez Canal and stopping global trade flows between the Mediterranean Sea and the Red Sea.
Major supply chain pains already were in play. Electronic chip supply chains were suffering shortages affecting diverse industries, such as autos and consumer electronic products. Tight shipping capacity was overstretched in an effort to respond to a quickly recovering demand for durable goods shipped from Asia to Europe and the US. Ports were severely congested on the West Coast of the US and in Europe. Now a major shipping route handling $10B in global trade a day was blocked for six days.
All of the supply chain headaches got worse because of the Suez Canal incident. (The ship was freed March 29.) Some of the ships carried electronic components and products that got further delayed, to the despair of factory managers and consumers waiting for them. Furthermore, other commodities from steel, coal and grains needed for production and consumption either in Europe, Asia or the East Coast of the US were going to be coming at least a week to a few weeks late.
360 ships in waiting
It would take days to get the 360 ships in waiting through the canal and to their next port. And, as queueing theorists like to remark, the “batched departures” from the canal would hit the already congested ports in Europe (e.g., Antwerp and Rotterdam) and on the West Coast (e.g., LA and Seattle) as “batched arrivals,” an overloading pattern creating further delays for the ships in finding berthing space and getting unloading services. The delays would result in further loss of shipping capacity for all products, and as much as 4% for shipping crude and petroleum products.
For ships rerouted around Africa’s Cape of Good Hope the delays would be for at least two weeks and with increased fuel costs of at least $30,000per day. Freight costs that were already high, with China to the West Cost more than double and China to Europe more than triple over a year ago, would get even higher for the coming year. Moreover, containers stuck at sea and waiting for unloading at ports accentuated the empty container shortages and imbalances in this crucial ingredient of global shipping flows.
More for coffee and gas
As you sip your gourmet coffee from Africa, get ready to pay a few extra cents for your coffee and your gas, and to wait a few weeks longer for your Japanese car, exercise bike, new PlayStation and iPad.
On the other hand, if you hold shares in major ocean shipping companies, these are good times. Probably not the best times, though, for ship and maritime load delay insurance companies. As always, some win and some lose.
Global supply chain managers feel no great relief: They know all about ripple effects and “bullwhips” cracking and hitting long lead-time, just-in-time, global chains in painful ways. The Suez Canal incident will be felt within their retailing, manufacturing, chemical and oil chains at least for the next month.
Forty of the world’s leading supply chain scholars were invited to the Olin Business School at Washington University in St. Louis, back before a virus’ early days gave rise to shortages of cleaners, toilet paper and such. This was May 2019, under the auspices of the 5thSupply Chain Finance and Risk Management Workshop in which The Boeing Center for Supply Chain Innovation served as host.
The assembled academics offered such relevant presentations, research and ideas — a full nine months before a pandemic derailed, if not stymied, global operations — that it produced a special edition in scholarship: how to pay for production and distribution today and manage global risks in a highly uncertain COVID-19 environment. Supply Chain Finance and Fin Tech Innovations was published Oct. 1 as the 14th volume of Foundations and Trends in Technology, Information and Operations Management.
The volume was co-edited by two Boeing Center/Olin faculty: Panos Kouvelis, the Emerson Distinguished Professor of Operations and Manufacturing Management and the center’s director, and Ling Dong, professor of operations and manufacturing management. Their third co-editor was former Olin colleague Danko Turcic of the University of California, Riverside.
“Innovative ways in managing working capital within global supply chains is of utmost importance in a turbulent environment,” said Kouvelis, who also sits on the journal’s editorial board. He also was part of a team that published a separate paper on these issues in the journal Production and Operations Management. “Especially small suppliers in global supply chains are currently stretched thin in their liquidity and ability to collect on their accounts receivables. Their debt exposure has drastically increased, and they rely on innovative financing schemes by their large corporate customers, such as reverse factoring schemes, or on fin tech innovations, such as the Ant Group fast loan services.”
Supply chain managers who want to stay in the forefront of such practices can benefit from the hot-off-the-press ideas in research shared in the workshop and appearing in the edited volume. “Our workshop benefits from the close interaction of the Boeing Center with its member companies, and we listen to the timely topics they want us to research. We bring state-of-the-art thinking back to them to advance their practices,” Kouvelis added.
The scholars came from the London Business School at the University of London, University of Chicago, Northwestern, Penn and Carnegie Mellon as well as top universities in Australia and China. They authored 10 different papers parsed into three supply chain themes: financing issues in supply chains, fin tech innovations for working capital and risk management, and advances in risk management of operational systems.
“Supply chain risk management is the other topic of timely importance in the current environment,” Dong said. “The last 20 years, and especially during the pandemic, made apparent to all that we are more frequently exposed to increased severity disruptive shocks. Building supply chain resilience is what all companies aspire in their initiatives right now.”
The question always remains: How to do it.
“There are some very interesting ideas and practical suggestions on better hedging operational and supply chain risks in the work summarized in the volume,” Kouvelis said.
Working capital needs
In another recent work, Kouvelis and Turcic addressed both of the challenges prominently mentioned above: supporting working capital needs and better hedging certain risks (exchange rate exposure, commodity price fluctuations, interest rates and so on). The two researchers teamed on an automotive industry study forthcoming in Production and Operations Management.
They looked into the effectiveness of two data-driven financial hedging policies, cost hedging and cash hedging, aimed at mitigating financial distress, with their data coming from car manufacturing environments. The paper is titled “Supporting Operations with Financial Hedging: Cash Hedging Versus Cost Hedging in an Automotive Industry,” and for this study, they used data from the Federal Reserve Bank of St. Louis, U.S. Bureau of Labor, U.S departments of Treasury and Energy, and International Monetary Fund data.
The widely used cost-hedging strategy calls for carmakers to hedge raw material and production input purchases. That means they need to trade in raw materials to avoid higher costs, such as amassing the four essential commodities: aluminum, steel, zinc and plastic. Kouvelis and Turcic argue that a better way is to focus on cash hedging under which the firm hedges its net cash flow. Although managers are concerned about fluctuations in commodity prices, their study points out that demand changes are the most significant factor to be hedged.
Their findings also meant that cost hedging is barely more effective than no hedging at all and less effective — plus more costly — than a cash-hedging strategy, which hedges cost and demand. Moreover, in the current pandemic-affected environment, with changing consumer behavior and spending approaches across many product categories, including cars, and with volatile commodity prices, manufacturers should use cash-hedging policies to enhance operating cash flows and protect against financial distress.
Photo: Empty grocery store shelves in Vancouver, British Columbia, in March 2020 reflect the global supply chain disruptions amid the COVID-19 pandemic. (Margarita Young/Shutterstock.com)
The global supply chain has experienced once-in-a-lifetime disruptions — at least four times in the past 12 years or so. The 2007-09 financial crisis was followed by Japan’s tsunami, earthquake and nuclear disaster of 2011, which was followed by the U.S.-China trade conflict that seemed to peak in 2018 and now the COVID-19 pandemic.
Resilience, once a hallmark that academics ascribed to the most successful supply chains, has become a “matter of survival,” writes an international team of researchers including an expert from Olin.
In a series of pandemic-era interviews with 14 senior executives from 12 companies representing a wide range of industries affected by the pandemic, the co-authors discovered that the businesses survived, if not thrived, due to “agile responses”—whether for the short term or long term, or both. These interviews allowed the researchers to derive an integrative framework similar to a how-to list, split into two basic categories: enablers and resilience strategies.
Enablers and resilience strategies
The resilience strategies are built upon policies that increase redundancy and operating flexibility: operation buffers (such as different inventories); footprint diversification (postponing or relocating production lines); supply options (flexible networks and financing); robust distribution (alternative warehousing, transport and routes); product standardization (sharing components or using off-the-shelf parts); and partner network (supplier relationships and sharing risks, costs and gains).
The enabler activities essentially are best practices and “prerequisites for implementing the strategy elements,” the researchers wrote: end-to-end visibility, end-to-end control, continuous IT infrastructure, and organizational readiness (previous or continuous risk management and planning).
“While all executives seemed well-versed into the supply chain resilience theory and concepts, they all discussed the implementation barriers they encountered as they tried to move their company’s supply chain to a needed resilient state,” said co-author Panos Kouvelis, director of the Boeing Center for Supply Chain Innovation and the Emerson Distinguished Professor of Operations and Manufacturing Management at Olin. “The executives were quick to point out supply chain resiliency as the attribute to guide the companies’ adjustment in the new (ab)normal world we will face the next two years.”
Kouvelis and his co-authors— rom Stanford University, Georgetown University, Santa Clara University, Kobe University, Germany’s Otto Beisheim School of Management and the University of Pennsylvania—followed four themes in their interviews: How has your company responded to the crisis? What are the elements of your resilience strategy? How did you arrive at that strategy? What lessons are key moving forward?
Cisco, Colgate-Palmolive, Nike, etc.
They interviewed executives with firms anywhere from a 2,000-employee food business in Asia earning $2.5 billion annually to a 150,000-employee consumer products company in Europe earning $52 billion annually. Among them were Cisco, Colgate-Palmolive, HP Enterprise, Infineon, Nike, Unilever, Emerson and Bayer Crop Science.
The co-authors learned that these companies basically designed a resilient supply chain via a two-stage process: selecting the “right” fit of strategies—and nobody implements all of the aforementioned—and then defining how to implement them. This could mean that, in the definition process, company management decides their first choice proves to be unfeasible or costly and instead opts for a Plan B. A company may also design different strategies for different products under their umbrella.
The researchers also found that strategy implementation, in these times of outsourcing and global disruptions, was enhanced by a collaborative, cooperative relationship among logistics businesses, suppliers and customers.
Interestingly, the researchers learned that executives are more willing to invest in resilience strategies if they had trouble regaining their market position after a disruption. For instance, it was mentioned amid the interviews—as examples of best practices—how Japanese automakers invested in increased buffers to reduce disruption risks after the 2011 earthquake, and Cisco reviewed its supply chain network to assess suppliers’ financial health after the 2007-09 crisis. The expenses were justified as a long-term and cost-effective “insurance policy.”
In fact, cross-company collaboration was seen as a necessary cost to the point where some companies financed suppliers and buyers, or at least provided technical support, to ensure a stronger supply chain.
The researchers offered a list of “prescriptive recommendations” such as centralizing the risk-management function, strengthening supplier relationships and innovative financing. However, they noted that the more resilient companies react early in such a crisis, and chains’ designs differ as much as their products, markets and countries. In other words, what works for toilet paper in Texas won’t work for cars in the Cayman Islands.
Kouvelis said he heard clear echoes of “never let a good crisis get wasted” throughout the executive interviews, and he paraphrased one of them: “You might even consider it a blessing in disguise … .” That particular company used the pandemic disruption to speed up digitalization of its supply chain and invest further in risk management.
In a separate paper written by Kouvelis and Morris A. Cohen, the Penn researcher from the resilience strategies study, and accepted for publication in the Production and Operations Management Society (POMS) journal, the co-authors rewrote the long-held Triple-A framework of successful global supply chains: agile, adaptable and aligned. They re-evaluated and reconfigured it, adding three R’s in addition: robust, resilient and realigned.
The reasons behind the redo are the global crises and the localized shocks that regularly have arrived the past decade-plus: Industrial supply chains have been found to experience a serious, one-month disruption every four years or so.
“The Triple-A framework of supply chain excellence served us well in the 1990s and early 2000s,” Kouvelis said of the rationale for, and the logic of, a new framework. “However, the last 15 years have seen frequent supply chain disruptions—and of alarming severity. Time to add the R’s in the supply chain excellence attributes model.
“Short-term agility has to be complemented with robustness for real-time responses across a wide range of scenarios. Adaptability to long-term technology and macroeconomic trends needs resilience to future shocks and the new (ab)normal world. Moreover, alignment of incentives of existing supply chain partners requires realignment to deal with evolving business models, changing consumer needs and preferences and a newly defined value system. The era of turbulence of the next 20 years needs a Triple-A-&-R portfolio of excellence capabilities in supply chains.”
POMS honored Kouvelis in its November 2020 issue, printing a career commendation called a Laudatio (subscription required). POMS also published as the lead article in that issue a study by Kouvelis and a Chinese University of Hong Kong professor on distribution channel compensation, initially posted online in June.