With uncertainty at an all-time high, the operations and management science faculty, along with Tuck's international trade economists, are helping a range of industries refine their practice and prepare for what might come next. In this multi-part feature, we highlight current research by Tuck faculty.
Supply chain disruptions are nothing new, but they have become one of the most important global concerns over the past few years because of the dual crises of the COVID pandemic and various politically driven trade discontinuities and disputes. Brian Tomlin, the William and Josephine Buchanan Professor of Management, and the senior associate dean for faculty and research, has been studying supply chain resiliency since the early 2000s. His 2006 paper in Management Science, “On the Value of Mitigation and Contingency Strategies for Managing Supply Chain Disruption Risks,” is one of the most-cited articles on the topic, and he’s recognized as a thought leader in the area.
Senior Associate Dean for Faculty and Research; William and Josephine Buchanan Professor of Management
“In the past, as a consumer, supply chains have been like referees in sports games,” Tomlin says, “you only see them when things go wrong. Well, many things are going wrong at the same time now, so people, companies, and governments are paying attention. The one benefit for companies at the moment is that all their competitors are suffering, and customers are therefore more understanding, or to take a more cynical view, their customers have fewer switching options given overall supply constraints.”
Tomlin’s research has explored all the important tactics firms deploy to manage disruption risk: hold inventory, diversify sources of production and supply, ensure availability of emergency (backup) supply sources, manage demand (e.g., rationing and shifting customers to less-constrained products), harden assets and processes (i.e., reduce risk of failure), and purchase business interruption insurance. There is no one size fits all resiliency strategy. The right mix of tactics to deploy depends on many underlying drivers that can vary by product type, firm, industry, and region.
Take inventory for example. Stockpiling inventory costs money but, perhaps more importantly, it ties up money that could be deployed elsewhere on higher-return business uses. In an industry such as pharmaceuticals, in which shortages can have life-altering consequences and production diversification can be expensive due to scale economies, inventory stockpiling can be an attractive tactic because product life cycles are long and obsolescence risk is low.
As a counterpoint, stockpiling inventory in industries such as fashion, where selling seasons are short and tastes are fickle, carries with it a large opportunity cost and a very high obsolescence risk.
Using inventory to guard against supply chain disruptions is the opposite of the strategy many firms have developed over the past decades: just-in-time (JiT) production. Some observers have predicted the pandemic will spell the end of JiT, but Tomlin disagrees. “The notion that a company could have had enough inventory to ride out a year-long (and counting) global pandemic is mistaken,” he says. “Even if it could have found the physical storage space, that company would have gone out of business long before the pandemic because the fundamental misallocation of its assets rendered it uncompetitive. There will surely be some adjustments to JiT, but the basic concept is not going away.”
A lesson from the chip shortage and the pandemic, in general, is to recognize that you are competing for production and transportation resources with other firms and industries that you don’t normally view as competitors.
Tomlin says that managers wrestle with resiliency investments in part because the payoff—both in the timing and the size—is uncertain but the near-term costs are very real and can put you at a cost disadvantage relative to a competitor that ignores resiliency. According to Tomlin, “senior executives need to be explicit that resiliency is a goal that managers will be measured on, and managers need to find the efficient frontier that maximizes resiliency for a given cost level.”
These past two years have, if nothing else, been very interesting for Tomlin, given his deep knowledge of supply chain resiliency. The shortage of semiconductors, for example, which has caused slowdowns and shutdowns in automobile assembly lines, has brought a supply chain lesson that few were expecting. When the automobile industry reduced their semiconductor orders at the beginning of the pandemic, firms in the industry seem to have assumed they would be able to ramp up their orders quickly as the pandemic waned. But other industries, such as computers, video games, and mobile devices, stepped in and bought the semiconductor production capacity the auto industry left behind. Now the automobile industry wants its allotment of semiconductors, but the semiconductor manufacturers can’t ramp up their production quickly enough to meet the growth in demand.
“A lesson from the chip shortage and the pandemic, in general, is to recognize that you are competing for production and transportation resources with other firms and industries that you don’t normally view as competitors,” Tomlin says, “and that means when demand decreases you need to be careful about switching off supply with the assumption that it will bounce back quickly.”
Tomlin sees other supply chain lessons from the pandemic. One is that countries will start paying closer attention to the continuity of supply of critical goods, such as vaccines and semiconductors. For exporting countries, that might mean limiting exports of those critical goods at times. For countries like the U.S. that have come to rely on long supply lines and offshore sourcing, it might mean focusing on domestic manufacturing capabilities—also known as near-shoring. But nearshoring is easier said than done. Countries and companies in Asia have invested decades and huge sums of money in the infrastructure and know-how to produce, say, iPhones, and those capabilities won’t effortlessly shift to the U.S. “I agree there will be an increased desire for near-shoring,” Tomlin says, “but that desire will have trouble overcoming reality.”
A more likely outcome from the pandemic is a trend to accelerate the resiliency of operations through automation. Supply chains have suffered during the pandemic from factory shutdowns due to public health mandates, worker sickness, and difficulty in hiring. The cost of automation used to be compared to the cost of human labor, but if the labor shortage persists and gets imprinted on managerial memory, then Tomlin says, “labor availability and its impact on capacity will become an important ingredient to the automation question and that will drive companies to invest in AI, robotics, and other labor-substituting technologies.”
This article originally appeared in print in the winter 2022 issue of Tuck Today magazine.