Meet Tom Goldsby, the Dee and Jimmy Haslam Chair in Logistics and professor at the University of Tennessee, Knoxville’s Global Supply Chain Institute. In addition to teaching at UT, where he serves as the Co-Faculty Director of GSCI, Goldsby has co-authored five books and published over 90 articles in academic and professional journals. He is a former Co-Editor-in-Chief of the Journal of Business Logistics as well as a former Co-Editor-in-Chief of the Transportation Journal.
Shocks to the supply chain take place regularly, as we were reminded many times over this past year. How are companies seeing both agility and resiliency as means to gain a competitive advantage?
Before the pandemic, agility and resiliency were luxuries. Sure, every company would like to have more agility in their supply chain, even back in 2018 or 2019. But in 2020, agility became more than a luxury; it became a necessity. And it became vital to every business to be able to detect market changes, to become aware of vulnerabilities they had in their supply chain, and to pivot as quickly as possible. And frankly, those companies that failed to pivot have struggled immensely and may not have even survived the year 2020. Our research has also underscored that agility is an important form of resiliency; the ability to have options, to create degrees of freedom in your business and supply chain is a very effective way to navigate difficult times.
“But in 2020, agility became more than a luxury; it became a necessity. And it became vital to every business to be able to detect market changes, to become aware of vulnerabilities in their supply chain, and to pivot as quickly as possible.”
Car companies are facing a generational challenge in the resiliency of their supply chains due to the chip shortage facing the global economy. What advice would you give senior leaders looking for an answer to a problem affecting several parts of their production?
Well, you have to start with recognizing just how complex automobiles are, and in turn, how complex the supply chain is to bring those automobiles to market. A typical car has about 1600 parts and components; assembly is all about bringing those parts together at the same place and same time while recognizing that if you have a shortage or quality issue in any one of those parts, you’re going to be very much hamstrung in your ability then to meet your production schedule, and in turn, lagging in your ability to bring those automobiles to the market.
You asked about the chip shortage and that’s a particularly interesting one because so many different products rely on those semiconductors chips. The largest automobile makers, Toyota and Volkswagen, buy an awful lot of semiconductors, but not nearly as many as computer manufacturers. And so while you might be the “big dog” in your industry, you can still be a small customer to those chip makers who are going to first look after their largest customers. Many automakers think they can exert a lot of influence in their supply chain. But here, with chips, they’re kind of a small fry compared to other sectors. This means shoring up relationships where they can try to enjoy preferred status with those critical suppliers. In the absence of owning directly the companies that make computer chips used in automobiles, the best an automaker can do is to try to become a preferred customer, and hope to win out when supplies are limited.
Staying on the subject of computer chips: Intel’s supply chain is a good example of agility, ramping up chip production to meet the increased demand. What can companies facing similar challenges in other industries learn from this and what barriers may prevent them from following suit?
Most manufacturing environments are incredibly capital-intensive and semiconductor production is perhaps among the most capital intensive. Building a fabrication plant requires hundreds of millions of dollars, if not billions. It’s a big, big bet, so you have to be very convinced that the market is going to be there before you commit to investing in new capacity. Fortunately, once your plant goes online, I don’t think there’s any risk that the market is going to shrink. It’s a question of how fast is it going to grow and what share of that market are you hoping to achieve?
However, we’re seeing in other industries that companies are not so willing to make those investments. Look at the lumber industry right now: home builders need more lumber; furniture manufacturers need more lumber, and those are also fairly capital-intensive operations. When you talk about extracting timber, processing the timber into lumber, and then refining it further for manufacturing, those companies aren’t so sure that the market is going to be there in two or three years, the amount of time it’s going to take for them to build that capacity and recoup the investment. And so, companies are deciding to simply soak up the demand while it’s here, enjoy some healthy prices and dividends for their shareholders. It’s a very different tactic than what the semiconductor manufacturers who are making the bet for the long run are engaging in.
What are the biggest questions to ask when building a supply chain for both agility and resiliency?
Ultimately, it comes down to ‘Which bet do you want to make?’ And it’s a very difficult proposition because we’re talking about moving targets. For instance, being resilient for disruptive weather is a different bet than being resilient for supply disruption of another kind: being resilient in the face of pandemic, being resilient in the face of a cyber terrorist attack. And so, companies need to try to understand their vulnerabilities to these different circumstances, and create alternative avenues. Those are the ‘bets’ that I was referring to. Sometimes, this might mean taking on redundancies: we’ve heard many companies and consumers say ‘we know we need to have more inventory,’ but that’s a risky bet in its own right, in that you might have the wrong inventory and inventory can become obsolete or lost and damaged. You might also hear that people are saying ‘we should have more redundancy in sources of supply and the various supply locations,’ and that’s another form of redundancy that might pay off. Or, it may not. In fact, if you have more suppliers and disparate locations, your transaction costs are going to go up because you’re having to manage more business relationships and you diffuse the amount of influence you enjoy with any single one. So there are tradeoffs involved with all of these potential options, and organizations just have to be as informed as possible, understand where they have the greatest vulnerability and determine the best ways to minimize those risks.
The Haslam College of Business at the University of Tennessee, Knoxville, provides students and partners access to industry-leading supply chain experts like Professor Tom Goldsby. Learn more about how your company can partner with the GSCI to introduce more insight into agility and resiliency within your supply chain.