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ASCM Insights

Making Sense of Change in Supply Chain

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Change is a constant in life, but truthfully few of us like it. Changes can be sudden or gradual — and they often come from chaos, create chaos or both. A smoother approach to change is emerging, though. The process includes a cosmology episode and subsequent sensemaking. A cosmology episode is a sudden loss of meaning, followed eventually by a transformative pivot.

Theorist and University of Michigan professor Karl E. Weick explained back in 1985 that representations of events normally flow together in a way that makes sense. When a process deviates from the norm, that sense becomes lost — thus the cosmology episode. In response, the individuals or organizations involved need to evaluate the situation and take the appropriate actions to adapt. As part of this, they participate in sensemaking, which, as it sounds, is simply making sense of the situation.

Sensemaking is about more than just understanding — and understanding in some cases might not even be possible. For example, sudden changes linked to disastrous events are difficult to make sense of; whereas gradual changes linked to less catastrophic occurrences, such as a market shift, are easier to comprehend. Thus, the goal with sensemaking is to evaluate the current situation; test this evaluation with others through data collection, action and conversation; then refine or abandon the evaluation based on its accuracy.

Because situations are not always what they appear, the sensemaking process can take a while and any resulting actions should not be based on gut reactions. Instead, the actions should be specific to the episode, and the first action won’t be the end of the process. Often the action necessary is fraught with anxiety, frustration, financial woes and giving up of long-standing practices or beliefs.

All organizations encounter cosmology episodes at one time or another. Typical examples include the introduction of a new and better product by a competitor, the resignation of a key plant manager, unexplained product failures at a prime customer, a supplier quality problem that halts production of needed shipments, a new government regulation that threatens market share, a mass shooting two blocks away from the organization’s headquarters, and so on. Each one is different and not part of the regular operation of an organization.

Although thorough analyses and well-thought-out plans are essential, even the best plans often fail to anticipate the unusual effects of cosmology episodes. Therefore, business leaders need to be prepared to recognize and effectively deal with disruption.

Sensemaking and outsourcing

In addition to the everyday cosmology episodes, there are some interesting examples of more far-reaching and impactful events. One particularly timely cosmology episode in supply chain is the shift first toward outsourcing and now reshoring or nearshoring. Starting back in the 1970s, outsourcing happened gradually and without fanfare. Sometimes companies didn’t even notice the industry trend until they were experiencing some financial distress and needed to seek out other options. In other cases, outsourcing started as a temporary option for expanding capacity during high-demand periods.

Sensemaking in this instance was fraught with complexity. Although offshore outsourcing helped companies reduce labor and material costs, some did not see the benefits of working with a far-away team that might not have the experience and expertise of their employees. Ultimately, a number of factors pushed businesses to change. As organizations grew, they became more diverse, especially as they added service functions to handle the increased scope and complexity of new products and marketing programs. This drove the need for expanded manufacturing facilities — often at substantial investment. At the same time, they were expanding their customer bases, often to include markets in other countries with different product and service requirements. This then led to the need for more varied communication and transportation capabilities. Competition increased, putting pressure on prices. The retail industry especially was undergoing major changes, as discount stores were offering comparable merchandise at lower prices. Finally, government regulations were increasing.

All of these factors were beginning to affect the financial well-being of some organizations. As they searched for answers, some of the more innovative companies recognized the possibility of using foreign suppliers in low-labor-cost areas that had well-established manufacturing capabilities. They also saw the opportunity to purchase goods at lower costs at an acceptable quality level. Although this meant reorganizing to manage these remote suppliers, as well as additional expenses to establish a global supply chain, decision-makers felt the added cost and complexity were worthwhile. This was how sensemaking happened, and this was the beginning of the outsourcing movement — a series of events that would change the world.

The first reaction for most was to reduce operational costs. They looked internally, and programs such as lean and just-in-time were designed to squeeze out any inefficiencies. Retailers put pressure on suppliers to reduce prices. While these steps provided some relief, they weren’t enough, and companies gradually turned to offshore outsourcing as the panacea. Initially, only a few of the more daring — or desperate — companies outsourced to foreign suppliers. As their efforts seemed to be working, more followed. Business publications took notice and wrote about the successes. Consultants offered services to help companies make the transition. Consumer demands for lower prices added to the pressure.

Once a business leader opted to make the change to offshore outsourcing, a series of steps happened. The initial reaction was to find any supplier that could meet the needs. However, as sensemaking progressed, companies realized they needed to do more than sign just any supplier; they had to evaluate suppliers, negotiate with them for favorable terms, then continue to measure and monitor performance. Organizations built out their logistics capabilities to assure a steady and timely flow of goods to their own facilities and on to customers.

There also were a variety of other concerns, such as quality issues, child labor and sustainability. As companies expanded their data-gathering and -interpreting capabilities, they became more comfortable with the idea of outsourcing, and sensemaking was achieved.

Reversing course with reshoring

Then another cosmology event happened: reshoring. In the early 21st century, companies review their offshoring strategies. Sustainability activist groups pressured organizations to consider foreign suppliers that were not governed by the same regulations as those in the United States. Concerns about child labor and forced labor resurfaced.

Then came some political disruptions amid the United States’ trade war with China in 2016. Tariffs were imposed on Chinese products. The objective was to force China to increase its purchases of U.S. goods. While the net effect of this encounter is inconclusive, it did compel companies to rethink their positions with Chinese companies. As the costs of doing business there rose, several organizations began moving supplier base to other Asian countries, most notably Vietnam.

Unforgettably, the COVID-19 pandemic struck in early 2020 and effectively shut down the world — in some cases multiple times. Lockdowns in China to combat the virus severely restrained the flow of goods to companies throughout the rest of the world. Labor shortages in the maritime and transportation and logistics industries caused backups at ports around the world. Delays in shipments resulted in a depletion of inventories, which were already being managed at minimal levels as manufacturers grappled with outbreaks and quarantines as well as odd demand swings. Some delays were so pronounced that retailers could miss an entire season’s sales.

Now adding to the turmoil is Russia’s invasion of Ukraine in 2022. Companies doing business in Russia had to rethink their positions. Many elected to curtail or discontinue operations. The world, especially Europe, is still grappling with how to function without copious oil and gas supplies from Russia. In addition, Ukraine is a major supplier of agricultural products as well as some critical manufacturing components. Recipients of these products are still feeling the effects of the interruption.

With the global market becoming less reliable, the U.S. government put additional pressure on U.S. companies to move their supplier bases closer to home. Companies are beginning to rework their total cost analyses to include the cost of disruptions, a factor that would carry considerable weight.

Sensemaking for this cosmology episode was again complex. Although pressure from activist groups was an influence, the real cause of reshoring was related to disruption in the supply chain. Offshoring helped companies save on some product and labor costs, but these savings would be offset by transportation costs and losses from missing key selling seasons. When critical components were affected, the government urged companies to reshore to shorten supply chains and lessen dependence on foreign suppliers in the interest of national security. However, in order to reshore, companies would again need to invest time and effort into evaluating new local suppliers or invest money in new facilities and infrastructure to bring manufacturing and other outsourced operations in-house.

As with the initial decision to offshore outsource, some companies required a longer time to decide their course of action here. Some executives jumped in right away, while others expected the trend to wane as the pandemic improved. However, two years into the pandemic, the trend is still going strong and even appears to be accelerating. The construction of new U.S. manufacturing facilities skyrocketed 116% throughout the past year, dwarfing the 10% gain on all building projects combined. Intel and Taiwan Semiconductor Manufacturing are building massive chip factories in the Phoenix area, and aluminum and steel plants are popping up all across the U.S. South, including in Alabama, Arkansas and Kentucky. Ingersoll Rand also reopened a shuttered factory in New York to help meet the demand for air compressors related to increased semiconductor and steel output.

A recent poll of more than 1,600 executives found that seven out of 10 U.S.-based manufacturing companies are planning to invest in new production capacity closer to their home bases as a result of the global upheavals of recent years. These companies intend to use more automation, especially robotics, to make their supply chains more resilient.

The U.S. government also is lending its support to the reshoring movement. With bipartisan support in both the House of Representatives and the Senate, Congress passed the CHIPS Act in July 2022. Among other provisions, this bill allocates $52 billion for semiconductor manufacturers to use to build new or improve existing semiconductor factories, invest in workforce training, develop wireless broadband networks, and support regional economic development hubs. It also includes a 25% credit for companies investing in semiconductor fabricators in the United States.

Other businesses are opting for nearshoring or nearsourcing — or switching to suppliers in Canada, Mexico or Central America. However, this still requires building a new network of suppliers and, in some cases, working with suppliers that have less-relevant experience than previous Asian suppliers.

Because the pandemic has been so monumentally disruptive, many countries will need to reconsider the delicate balance between onshoring and offshoring to survive future crises while supporting a consumer-driven economy and sustainable resources. Some are advocating that the goal should be to become completely independent of foreign suppliers, but this would be an extreme change from the global supply chains of today. Others advocate for a blend of local suppliers that will offer less disruption and foreign suppliers that offer cost savings. Plus, economists point out that few countries, if any, could shut down foreign trade and still offer an acceptable standard of living to its citizens. In a speech in South Korea, U.S. Secretary of the Treasury Janet Yellen used the term “friend sourcing” to put added emphasis on the need to realign supply chains with trusted sources.

This cosmology episode and the related sensemaking are still in progress, so the best answer remains to be seen. However, it is certain that this cosmology episode will bring about some type of change, and supply chain managers will have to build a whole new world of supply chain.

About the Author

Richard E.Crandall, PH.D., CPIM-F, CIRM, CSCP Professor Emeritus, Appalachian State University

Richard E. Crandall, Ph.D., CPIM-F, CIRM, CSCP, is a professor emeritus at Appalachian State University in Boone, North Carolina. He is the lead author of “Principles of Supply Chain Management.” Crandall may be contacted at crandllre@appstate.edu.

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