Continued lockdowns in China, protests and now apparent crackdowns highlight an important truth concerning the supply chain. You need to know the supply chain inside out. And it must be robust and resilient.
Nassim Taleb, the author of the Black Swan, put it well. Taleb said that nature gave us two lungs because nature (or evolution) understands the need for redundancy. In an interview with the then-future British Prime Minister, David Cameron, Taleb said that if “economists managed Mother Nature, they would give one lung to everyone,” and we would take it in turns to share it.
It is like the Graeae from Greek mythology— three sisters who shared one eye between them.
The supply chain was traditionally run like that. Not enough resilience was built in, creating inheriting instability.
The old way of running the supply chain was as vulnerable as the Graeae — when Perseus stole their eye, they were forced to do his bidding.
The three Graeae had a sister — the infamous Medusa. And when the Ukraine crisis erupted following Covid lockdowns, it was as if the supply chain turned to stone — just like the hapless victims who gazed upon the eyes of Medusa.
This is why auditing the supply chain matters — not just understanding who your suppliers are, but understanding their suppliers and suppliers to the suppliers.
And as we suggested in our white paper on auditing the supply chain, we need to act upon the findings once we have audited the supply chain.
And one of the ways we must respond to the supply chain audit is to identify fragility — areas of the supply chain that lack redundancy that work fine just as long as things are working just right.
We do not comment on the rights or wrongs of what is happening in China — that is a topic for which the reader can make up their own mind.
But what is clear is that a supply chain with significant exposure to China is fragile.
Reducing reliance on a region takes time. China is the main source of many rare earth minerals. These minerals are simultaneously cheap and important. They are also poorly named. At least, if they are rare, it is only because they are so cheap that investment into mining them has been relatively modest. See Rare earths are not that rare.
One can say ‘ditto’ for other commodities we source from China. Indeed for many metals and minerals we buy from China, the country isn’t even the original source, instead refining, for example, is carried out there
There are cost advantages — at least there can be — of having a single source for many of the metals and commodities that are so important.
But the supply chain is fragile, and when it breaks or tears, it takes too long to fix — like the Graeae, we are vulnerable.
But the supply chain audit can reveal further nuance — when you study the supply chain in depth and factor in not only the cost of transporting goods over long distances but the cash flow implications of having to wait for lengthy transport shipping timings, the advantage of local supply becomes clear.
Waiting for goods to arrive when they are on a boat from China ties up cash — and can create massive problems in matching supply with demand and ramping up supply when required rapidly.
To read our white paper on auditing the supply chain, see this link.