COVID-19 has shown us how fragile our supply chains are. Francisco Polidoro, associate management professor at the McCombs School of Business at The University of Texas at Austin claims that they don’t have to be.
In a paper published by the Academy of Management Review, he suggests companies use redundancy as a way to fortify their operations against unforeseeable events.
Polidoro, with co-authors Curba Lampert of Florida International University in Miami and Minyoung Kim of the University of Kansas, proposes branching your supply lines.
“With branching, the idea is to have a kind of redundancy by design. It makes you more resilient. If you wait until your value chain is disrupted, it may be too late,” Polidoro said. “You invest in flexibility before you need it.”
Apple Inc., for example, assembles iPhones in China. When the pandemic began shuttering factories, Apple struggled with both manufacturing and distribution. Their design process was also impacted as communications were disrupted.
Other companies are seeing similar troubles, particularly those in pharmaceutical and medical devices. China is the sole source for key ingredients and manufacturing for many companies, including 200 of the Fortune Global 500.
The researchers claim that if these companies had practiced branching, they would have prevented many of the shortages and losses they are dealing with now. Branching is a trade-off between efficiency and flexibility; it is the difference between a somewhat higher cost for making a phone versus being able to make it at all.
“When you design your operations to optimize economies of scale, you’ve accounted for standard issues that could go wrong,” Polidoro said. “Then a nonstandard event occurs that you have not accounted for, like a pandemic, a trade war or closing national borders. All of a sudden, the decisions that optimized your operations may lead to unprecedented disruptions.”