Liu Shaoxuan: Recommendations of Three Major Policies on Supply Chain Risk Management During EpidemicTime：2020.05.09 Publisher：EMBA Office
The global impact of the coronavirus epidemic has had a significant impact on the world economy, politics, trade and supply chain. It is this crisis that has given rise to the urgency of supply chain risk management. How to manage the supply chain in an uncertain environment has become one of the urgent problems for Chinese entrepreneurs.
01 Environment: Supply Chain Risks Are Full of Uncertainty.
The only constant in this world is change. We are in an environment full of uncertainty. Regarding the sources of uncertainty, Liu Shaoxuan used the STEEP analysis as an example, pointing out that people are in an unfathomable world influenced by five factors: social, technological, economic, ecological and political-legal.
He categorized uncertainty into three groups: the known that we know, the unknown that we know, the unknown that we do not know. For example, a coin will definitely fall to the ground due to gravity when it is tossed, which is "the known that we know". One side of the coin will be facing up, but we don't know which side. This is "the unknown that we know". The sudden outbreak of the epidemic is "the unknown that we do not know".
Based on the STEEP analysis, Liu Shaoxuan believes that for enterprises, different risks impact the supply chain differently. Some risks are high and some are low, and enterprises have different risk control ability. The biggest challenge in management is uncertainty, which is also the management of "the unknown that we know" and "the unknown that we do not know”.
02 Manage the Unknown That We Know. Pay Attention to the Laws Behind the Data.
How to formulate effective and targeted strategies according to the classification of different risks? Liu Shaoxuan pointed out that the core of managing the "unknown that we know" is to collect and analyze data to find out the laws behind the unknown that we know. The decisions we make are likely to backfire if we only focus on the surface of the data, rather than getting in-depth insight into the real information contained in the data.
He further pointed out that the bullwhip effect in the supply chain is prevalent. The fluctuation of supply chain upstream demand is often greater than that of supply chain downstream demand. That is to say, the uncertainty of demand fluctuation will be continuously amplified during its transmission from the consumer end to the upstream of the supply chain.
There are many reasons for the bullwhip effect, including independent demand forecast in the supply chain, batch ordering, panic buying during shortage gaming (for example, people were fighting for goods during the epidemic). Enterprises may misjudge the real situation of demand fluctuation if they do not understand the bullwhip effect.
Therefore, to be able to see the big picture is very important to manage the unknown that we know in the supply chain. "What you see may not be what you are really facing: understanding the position of your enterprise in the supply chain and paying attention to the end consumers of your products."
03 Manage the Unknown That We Do Not Know. Invest Limited Resources Into the Bottleneck Link in the Supply Chain.
How to manage the unknown that we do not know? Liu Shaoxuan pointed out that a supply chain is not determined by its strongest link, but by its weakest link. Therefore, one method is to establish a supply chain mapping and find out the bottleneck link in the supply chain through the risk exposure model. He believes that enterprises should put limited resources into solving the bottleneck problems in the supply chain. Only when the bottleneck problems are solved can the management of the whole supply chain be improved.
He suggested that, from the perspective of a supply chain, targeted, effective and scientific resumption of work and production in the epidemic depends on when the epidemic will be controlled in some seriously-affected foreign countries, rather than an enterprise itself or China's control of the epidemic. Because a slight move in one part may affect the whole supply chain. A product cannot be made if any link or part is missing. Only after the bottleneck problems are solved can the supply chain be truly restored to resume work and production.
The second method is to shift from the old "event-oriented" thinking to "effect-oriented", that is, to simulate and analyze the possible results, to monitor the key indicators in real-time, and to find possible laws through limited situation analysis. He stressed that enterprises should use the effects as a “filter” and shift their unlimited attention on potential events to limited attention on enterprise effect, which is helpful for enterprises to prevent accidents before they happen.
Liu Shaoxuan cited the impact of coronavirus as an example. He said: "For supply chain enterprises, especially export-oriented manufacturing enterprises, what they need most now is probably scenario planning. Different epidemic trends in the future will have a great impact on the decision-making and strategy of the entire supply chain of an enterprise in the future."
He analyzed that there are three scenarios for the epidemic.
The first scenario is the worst. If the vaccine is not developed in the next 9 or even 12 months, the epidemic may last for one year, which will have a great impact on the entire supply chain of an enterprise.
The second scenario is the best. If the whole world can control the epidemic in a short time as China did, the story will be different then. In this scenario, the demand may quickly recover, and enterprises must pay attention and make plans in advance.
He cited the first “Singles’ Day” in 2009 as an example. At that time, China's supply chain management had a problem of insufficient transportation capacity. Many consumers placed their orders on the "Singles’ Day", and it took them several months to receive the products they ordered.
He pointed out that many air transport enterprises were experiencing operational difficulties and their production capacity was greatly affected during this epidemic. When the epidemic is controlled, there is a high possibility of a short-term gap in transportation capacity when everyone wants to quickly deliver goods to international or domestic customers. Relevant enterprises should make response plans to avoid a repeat of the first “Singles’ Day” in terms of supply chain management.
The third scenario is also the most likely one. The epidemic will not be at its worst for a long time, nor will it be controlled very soon. Each country might take different time in controlling the virus. At this time, the supply chain management of an enterprise should be prepared for the flexible exchange and switching of production capacity in different products and markets, as well as the timely sourcing of suppliers, the search for new suppliers and the preparation for switching.
Liu Shaoxuan pointed out that when faced with the unknown that we do not know, we should shift our attention to the unknown events to the analysis of its limited impact on the enterprise, and then look for the direction and strategy that an enterprise should be going for through scenario planning and simulation of different scales.
Of course, it is also important to monitor the changing trend in real-time after formulating a strategy. Enterprises need to find the core indicators and then monitor them in real-time. Only in this way can an enterprise continuously update the dynamic scenarios, change with time, flexibly arrange its production capacity and adjust its decision-making and strategy.
04 Suggestion: Restructuring of the Global Manufacturing Industry is Irreversible. China Must Seize Three Policy Priorities.
The developmental trend of the global manufacturing supply chain mainly focuses on three issues: what changes have taken place and are expected to take place in global manufacturing mobility? Why is there such mobility? And what are the internal drivers of these decisions? Liu Shaoxuan believes that “the global supply chain layout is driven not only by manufacturing costs but also by many other factors, such as logistics costs, availability of supply, quality and quantity of labor force, government incentives, public infrastructure, etc."
Liu Shaoxuan reviewed the four major shifts in global manufacturing in history. "At the beginning of the 20th century, Britain transferred some of its excess capacity to the United States. In the 1950s, the United States moved some traditional manufacturing industries such as steel and textile to Japan and Germany. In the 1960s and 1970s, Japan and Germany transferred the production and processing of labor-intensive industries to the Four Little Dragons of Asia (HK, Singapore, South Korea and Taiwan). By the 1980s, Europe, America and the Four Little Dragons in Asia had further transferred labor-intensive industries to developing economies in Asia, with mainland China being the most prominent representative."
Today, China has become the center of the global manufacturing industry and the core node of the supply chain in many industries. However, Liu Shaoxuan reminded that the global manufacturing industry is going through a new round of transfer starting from 2016, in which there are four major trends worthy of attention.
Firstly, labor cost is the most important reason for the transfer of a company's production from China to ASEAN countries. Enterprises who are after cheaper labor costs and cost-effectiveness are leaving China, especially industries with high standardization and modularization.
Secondly, some manufacturing industry has returned to European and American countries. "But this does not mean that manufacturing will return to the United States and Europe in large quantities," said Liu Shaoxuan, pointing out that manufacturing continues to flow out of developed countries in Europe and the United States, especially the 15 European countries. When multinationals choose their production and manufacturing bases, China remains the most attractive country. However, what’s different from the past is that "China is now attracting some industries with higher added value which require higher technical skills."
Thirdly, for many industries, labor cost is no longer a decisive factor for manufacturing mobility. Market demand and risk management and control have become the most important driving factors. The most important driving factor for companies that have moved their production to North America (especially to countries outside the United States) is market demand. Their factories are located closer to their target consumers, to better adapt to the changes in market demand, and to provide services to consumers at a faster speed and with higher quality. Besides, in the past two years, Sino-US trade frictions have led many multinationals to take risk factors into account when making capacity planning and new capacity investment.
Finally, Vietnam and Mexico became the biggest beneficiaries in this round of manufacturing mobility. More than 50% of the labor-intensive production capacity transferred out of China has been transferred to Vietnam. Take mobile phone production as an example, China was the world's largest mobile phone producer in the past. Many enterprises have now moved their mobile phone factories to Vietnam. Many enterprises didn’t move their factories back to the United States but to Mexico just to be closer to the North American market.
Faced with the restructuring of the global manufacturing supply chain and the impact of the coronavirus epidemic, how should China respond? Liu Shaoxuan proposed three policy priorities.
"Firstly, of the three primary drivers of China's economic growth, two are currently facing big problems." On the one hand, impacted by the epidemic, the global economy is slowing down and demand is declining. China's export-oriented manufacturing enterprises should be prepared to live a hard life for a long time. On the other hand, compared with the past, the economic benefits of investment are declining.
Therefore, the focus of the policy is to promote consumption first. This not only plays a role in promoting economic recovery but also in "expanding the market" which is an important means to retain high value-added production capacity in the context of global manufacturing restructuring. "If China is the largest market for a product, some enterprises have a strong incentive to keep their production capacity in China where their target consumers are to better serve the clients and consumers in this market."
Secondly, the government should alleviate the tax burdens on enterprises, especially for export-oriented enterprises.
Thirdly, in the long run, the restructuring of the global manufacturing industry is the inevitable trend. The Chinese government should create a better external environment and policy conditions to help Chinese enterprises to go global. On the one hand, as some manufacturing capacity is transferred to markets outside China, suppliers in China need to follow up in a timely manner. On the other hand, global supply chain capacity distribution will see a trend of regionalization and decentralization in the future. Chinese enterprises should get close to their target consumer groups, have a deeper and better understanding of the needs of those target consumers, and meet the needs of consumers with faster speed and more flexibility.
"The future has arrived, just unevenly distributed," said Liu Shaoxuan, pointing out that we are already in an era of great changes that haven’t been seen in a century. Many things are happening quietly, and people in it have not felt the changes, but the changes have started and the future has come. Only by constantly learning and improving one's ability can one maintain an advantage in the ever-changing market in the future.