Pursuing Supply Chain Immunity
The COVID-19 pandemic has changed the world, and the consequences of this global event will have long-lasting effects. Along with the continued carnage left in its wake, this pandemic most assuredly revealed significant vulnerabilities, exposing points of serious weakness in global, regional, and local supply chains and networks impacting all sectors of the economy, including the government. Why is the global supply chain so vulnerable? What is supply chain immunity? How can we achieve national supply chain immunity?
Dr. Rob Handfield, contributor to The IBM Center Special Report, COVID-19 and its Impact: Seven Essays on Reframing Government Management and Operations, joined me on The Business of Government Hour to discuss these questions and more. The following highlights some of the key insight from our conversation.
On Supply Chains and the COVID-19 Pandemic. The COVID-19 pandemic highlighted key vulnerabilities in global supply chains. Arguably, until this pandemic, many people likely took global supply chains for granted. A supply chain is a series of connected enterprises that exchange materials. They exchange information and financial flows amongst connected enterprises. There are also what I would call relational flows between them. It is really a value-creating system of multiple connected enterprises. Within the U.S. many of the products that were used in the healthcare response to COVID-19 had supply chains that extended outside of the country. Many of the materials, like personal protective equipment (PPE) and ventilators had supply chains that extended all the way to China. Many of the materials that we required for this response were outside the control of the U.S.
On the National Emergency Response Framework. Our NERF relies completely on external supply chains. To operate, government acquires goods and services from external third parties. In the last few years, an increasing amount of the critical materials required for government response within the national emergency response framework has been outsourced to low-lost countries, such as China, Vietnam, and Indonesia. COVID highlights that there is too much reliance on external sources and not a sufficient buffer in the inventory of emergency resources in the strategic national stockpile. The stockpile for essential materials like masks, ventilators, and rubber gloves, had not been replenished since the last pandemic, the H1N1, which was almost 10 years ago. Much of the products it did contain has expired. Literally, you would try to put on a mask and the rubber band would snap it was so old and the material could not be used. It was no longer effective. This created a serious problem because the U.S. was then relying on material that was being sourced from China. Coincidentally, the epicenter of the COVID pandemic, Wuhan, China, also happened to be the epicenter of the global production of PPE. It was a perfect storm. We were unable to get PPE and critical material because our stockpile had expired and the place that was producing all this stuff was shut down because of the virus.
On the Pandemics Impact on the Global Supply Chain. The response to this pandemic has brought attention and raised awareness about the significant risk exposure being reliant on the global supply chain to source materials that have been essential in responding to this pandemic. This became clear during a Congressional hearing. The CEO of 3M was asked what percentage of its N95 masks are produced in the United States. His response was about 35%. Though this may not sound too bad, what he failed to acknowledge was that all the raw materials -- the rubber bands, the actual spun bound material, and the nose bridge -- are all produced overseas. It was only the final assembly and packaging that was done here in the United States.
This pandemic has exposed our limited visibility into the supply chain demand requirements and not just for PPEs, but all kinds of material that is required in an emergency. It also highlighted poor communication and insufficient acquisition planning capacity across the federal enterprise amongst and between agencies involved federal emergency response effort, which further hindered the federal COVID-19 response. We need to do better and focus on developing a more effective national response system.
I participated in the Joint Acquisition Task Force trying to acquire PPE for FEMA and the federal government, working with the U.S. Air Force and a host of other players. It became clear there was a general lack of understanding, or a naivety, of where these supply chains were and where this material was coming from. This resulted in this sort of Hunger Games scenario where everyone was competing with one another over decision rights and ownership of issues.
We interviewed every state chief procurement officer in the country collecting stories of how they scrambled to find PPE. Some had never bought anything outside of their own state. While others were relying on these third-party distributors like Cardinal Health or McKesson, and they were running out of material as well. Suddenly, these state CPOs were having to pay cash upfront to suppliers in China that they had never worked with before. There was counterfeiting going on. There were scam artists. It was really a chaotic situation. It prompted us to devise an idea of building more effective planning response; we call it supply chain immunity.
On Building Supply Chain Immunity. We borrowed the concept of immunity from the body’s proper respond to a virus and applied it to how best a supply chain should operate. Our immune system recognizes an intruder that is a threat to our health and has an immune response creating antibodies that fight the intruder. In most cases, people get sick for a time, then after a while ideally the body’s immune response overcomes the virus and once again the body gets healthy. Applying this concept of immunity to the supply chain involves building a system that can withstand and bounce forward when a threat or disruption to the system is encountered. How do we create a system that can deal with various types of threats in an increasingly unpredictable and uncertain world? By threats, we mean pandemics, cyberthreats, terrorism, and unpredictable crazy weather events.
There are four key attributes into making a national supply chain system immune to potential disruptions and shocks: flexibility, traceability, responsiveness, and global independence. These characteristics reflect lessons learned from the recent and evolving pandemic response. Developing a framework that if followed could contribute to building supply chain immunity will require significant changes in the way national supply chains are managed, including the creation of a new governance structure for overseeing and directing activity between the public and private sectors.
A key component of an immune supply chain is the ability to withstand different demand requirements that arise on short notice. This flexibility requires advanced planning, effective category intelligence, and strategic sourcing plans for every key need that might arise in an emergency. One of the ways this is going to happen is if we have playbook. This playbook contemplates scenarios and situations. It identifies who will be on the team. That team should get early clarity on what problem it is that they are facing. How do they work together to address this problem? It sets the cadence for meetings and layouts expectations on what needs to happen and when. It is important to have a playbook that enables one to be flexible according to the different kinds of situations that might arise. Along with this playbook, the ability to have a centralized planning team that can gather intelligence from multiple sources and integrate multiple state and hospital requirements into a unified whole would facilitate nimbleness. Building a nerve-center for market intelligence requires advanced planning, effective category intelligence, and advance development of strategic sourcing plans for specific requirements (personal protective equipment, pharmaceutical products, med-surge supplies, etc.) that might arise under different scenarios. This team would need to regularly perform supply market analysis, threat analysis, war-gaming analysis, and monitoring of global medical alerts. Cross-agency representation in this planning team should include (at a minimum) members of all the agencies involved in national emergency response that collect intelligence from within their agency and provide it as input into the early planning phases of a response. Along with planned flexibility, a balanced strategy that weighs the cost of stockpiling of items vs. flexible contracting arrangements with a pool of trusted suppliers should be developed.
The second attribute is traceability. It is about managing your assets. The key insight: you cannot manage what you cannot see. During the pandemic, the National Stockpile really had no idea of the materials in its warehouses or distribution centers whether they were useful or dated and unusable. A serious tracking system is lacking in this area.Traceability in an immune supply chain necessitates having the ability to see assets, know the real time status of the asset, its location and availability, and the current quality of those assets. Visibility of material occurs through investments in material visibility technologies, including product barcodes, track and trace technologies and real-time mobile dashboards that summarize the current state of material that is available within the supply chain. Creating material visibility does not involve expensive technology, as most of it has been around for 20 years or more, so the investment is minimal. If material is not physically owned by the government and stored in warehouses, then contractual vehicles must be established ahead of time with the private sector, to ensure that they have material stocked and available for use. Such contractual requirements must be supplemented by inventory visibility systems that extend into the private sector which can be viewed by government agencies.
Responsiveness is the third attribute to supply chain immunity. A national response system must be decisive and efficient in making decisions, based on data provided by the visibility system. A leadership team cannot manage what they cannot see—and so there must be clear channels of communication to review data by the experts who are best positioned to understand and derive meaning from it. Time is of the essence during an emergency. A leadership team cannot manage a crisis if there are not lines of communication with up-to-date intelligence reports from the field. A team must also have the right experts who have the requisite knowledge and experience understand and derive meaning from the intelligence and render effective decisions that lead to actions. Data on inventory levels, material capacity, materials in transit, consumption levels at hospitals, emergency use authorization, specifications and standards, etc., all need to be available in real time, consumed by a team of decision makers using a sensible governance structure and deployed rapidly by senior leadership. This was not how things unfolded during the pandemic. For example, those that managed the Strategic National Stockpile were getting signals from their distributors about PPE shortages as early as January 2020. Apparently, they informed the CDC of this reality. However, the people in charge were clinicians and epidemiologists. Brilliant people who lacked a serious understanding of supply chains and how they operate. As a result, they were unable to act quickly enough at a time when acting quickly is essential. This pandemic underscored the importance of getting the right people the latest information so they can make informed decisions and act quickly when things happen.
Global independence is the fourth attribute necessary to supply chain immunity. There is much talk in Congress about finding ways to bring back manufacturing to the U.S. That is all well and good, but we need to be realistic and pragmatic. We need to create a domestic network of trusted suppliers who are willing to become part of the national response system. This may also involve partnering with risk monitoring services that monitor global events in supply markets and map these with key global suppliers. This can facilitate an understanding of the full risk picture, promote securing national needs first, with a “cold eye” on global impacts. The idea is not to remove global suppliers from the field, as this is not only impossible for certain categories of material but may be detrimental to overall supply chain risk. Rather the goal is to create a network of suppliers that can flex and collaborate through a trusted co-determined future relationship with a major government agency. Many global suppliers would be pleased to be part of such a U.S.-centric network to get access to our markets. We have begun discussions with a couple of U.S. Senators. There are bills and proposals floating about this idea right now, but it is very early in the process.
On the Move Towards Regional Supply Chains. In the short-term, as the discussions and debates about onshoring continue, I think we will see the move towards regional sourcing. For example, within North America, Mexico has relatively low-cost labor. Canada has relatively low-cost natural resources. The United States has very low-cost capital resources. If those three countries come together, they as a block could likely become much more self-reliant. This may happen across the globe with regional actors coming together to create regional ecosystems that facilitates trade flows, fortifying the supply chains, and bring actual productions physical closer with more control and less reliance on a wider pool of external actors.
On Technology. Traceability begins with a solid master database. You need to have good quality data. There needs to be a system of data governance. We also need to automate the capture of this data. According to an interview we did, when the Strategic National Stockpile received PPEs the folks working in the warehouse would take a picture of the palette on their cell phones and load them up to the database. We need to use bar codes and QR codes. Once you have this data, then you need to be able to organize it and track it in real time. One of the technologies we hear about is control tower. A control tower is basically a dashboard that shows the status of material in the system, where it is, how it is being consumed, and where it is being shipped. This is not expensive technology. I wrote a book called The Living Supply Chain that talks about a company Pulse that developed a real-time control tower. They had 29 factories all over the world. They could see every bit of inventory in real-time and know where it was. We must be thinking about this data and material visibility. It is equivalent to driving your car down the street with no speedometer or no gas tank or no GPS. Right? You do not know where you are going. You do not know how fast you're going. You do not know if you are going to be running out of gas anytime soon. We need this data to be able to operate these global supply chains and to be able to respond and plan accordingly.
On Going Forward. We need to identify funds to create and formalize a national response center staffed by a director. This center would coordinate national emergency responses working with departments and agencies across the federal enterprise to ensure more effective and better managed responses. There is a need to really rethink the Federal Acquisition Regulations (FAR). I think the FAR is way too complex. It is an incumbrance to the federal government’s ability to adopt modern sourcing and supply chain practices. I think that needs to be re-written, if you will, to accommodate the realities of the 21 century and beyond.
Complete Interview:Dr. Rob Handfield on Achieving Supply Chain Immunity