global supply chains – Page 2 – The OM Blog by Heizer, Render, & Munson

OM in the News: Apple’s Supply Chain and Climate Change

Torrential rains flooded Guangzhou this year, where Apple has 71 facilities.

Few global multinationals have been more vocal and forthright in their ambitions to take on climate change than Apple. Yet Apple’s vast supply chain — comprising more than 400 facilities across 180 regions in nearly 30 countries– stands in the path of some of the most damaging effects of climate change itself, .

Based on global databases of power-generation, extreme weather, flood zones, economic impact and carbon emissions, the very regions most vulnerable to climate change are those with the highest concentration of manufacturers, writes Bloomberg,com (Sept. 26. 2023). This risk isn’t exclusive to Apple. Global companies including Samsung, Sony, and Dell procure from many of the same vendors.

Put simply, the belt of the planet where natural disasters will intensify most rapidly due to global warming — from floods and heatwaves to increasingly powerful cyclones — is precisely the one where Apple has built its manufacturing footprint. It’s most visible in a swath of Asia from India to Japan.

We’ve already seen the damage weather disasters can do to multinational manufacturing operations. Floods across Thailand in 2011 shuttered more than 14,000 businesses, throwing a wrench into global automotive and electronics supply chains that were dependent on low-cost manufacturing. It was the biggest flood disaster in insurance industry history, causing about $55 billion of losses and slowing deliveries of Apple computers as component suppliers were forced to suspend work.

Much of the world has since made efforts to prevent such a disaster. Toyota, a pioneer of JIT, raised the time it held onto its inventory from 30 days to 49 now. Apple’s inventory days increased from 5 to 11 since the 2011 floods. Overall, larger inventories make supply chains more resilient to disaster — but they also cost money because of capital tied up in warehouses. Despite this, the countries in Asia where Apple’s supply chain has been built are also some of those that will be most prone to floods. Power cuts pose similar risks to manufacturers. A heat wave last year left India’s grid on perilously thin margins as coal-fired generators ran short of fuel.

Apple’s plans for greening its manufacturing network illustrate the challenge. The company has called on its suppliers to follow its own path to zero-carbon power by 2030. Yet many of the countries on which it is most dependent have unusually high shares of fossil fuels in their grids, with coal accounting for more than 60% in China and Indonesia, and nearly 75% in India.

Classroom discussion questions:

What can Apple do at this point?
What technique in Supp. 11 in your Heizer/Render/Munson text can be applied to analyze potential natural disasters?

OM in the News: China’s Lithium Supply Chain Strategy

Lithium, a soft, silvery metal, is a component in the lithium-ion batteries that power electric vehicles and smartphones. By the end of the decade, demand could outstrip supply by some 300,000 tons, reports The Wall Street Journal (May 25, 2023).

Many Western companies have unwound their assets in Zimbabwe, which has been under U.S. and EU sanctions, but Chinese companies aren’t hindered by such concerns.

Chinese companies have long dominated lithium refining, but their hunt to secure a greater share of the world’s supplies of the metal is leading them to buy up stakes in mines throughout the developing world as they face increasing resistance in Western countries. It is a risky strategy. China is spending billions on stakes in nations that have histories of political instability, local resistance and resource nationalism. Projects often face protests, regulatory delays and even cancellations.

If China succeeds, however, it could secure access to 1/3 of the world’s lithium-mine production capacity needed by 2025. (It currently holds only 8% of the world’s reserves). China’s drive to secure a greater hold on the world’s lithium is fueled by concerns that its booming electric-vehicle industry could struggle to get access to supplies as tensions with the U.S. and its allies rise. Canada and Australia, with some of the world’s largest lithium reserves, have recently blocked new Chinese investments over national-security concerns.

In the past two years, Chinese companies have spent $4.5 billion acquiring stakes in nearly 20 lithium mines, most of them in Latin America and Africa. Those include investments in countries such as Mali and Nigeria, where they face security threats from terrorism, and places such as Zimbabwe, Mexico and Chile, which have tried to gain greater control over their mineral resources. Zimbabwe recently imposed an export ban on unprocessed lithium, effectively forcing foreign companies to process it there. Mexico just signed a decree to fast-track nationalization of its lithium reserves.

Chile, along with Bolivia and Argentina, is also discussing the creation of a lithium cartel, similar to that of OPEC. Despite the challenges they face, Chinese companies have advantages over their Western counterparts. CATL, for example, is a battery giant, with the political backing of Beijing and a strong network of companies along the supply chain.

Classroom discussion questions:

1. What other rare earths and minerals are needed in the EV and electronics global supply chain?

2. What is the U.S. strategy for dealing with these minerals?

OM in the News: Countries Compete to Lure Manufacturers From China

China may be losing its place as the center of the world’s supply chains

Countries are jostling to grab a piece of China’s manufacturing action as tariff battles and worsening U.S.-China ties jolt companies into reordering global supply chains. Executives are circling the globe looking for factory space or local tie-ups to reduce their dependence on China—and governments are pulling out the stops to welcome them.

At stake for low- and middle-income countries eager to help is the chance to turbocharge economic development and create millions of new jobs, writes The Wall Street Journal (March 25, 2023). India, Mexico, Vietnam, Cambodia, the Philippines, and others are competing on subsidies, tax breaks and other perks to convince businesses that their country is the next best thing to the manufacturing machine that China has honed.

China cemented its dominance of global manufacturing over the past 50 years. It has also grown its share of higher-value manufactured goods, such as cars and complex electronics, at the expense of rivals including Germany and Japan. But this dominance risks being whittled away. Companies have been stung in recent years by the supply-chain disruptions caused by Russia’s invasion and the pandemic. Many are seeking to fashion more diverse supply chains in the hope that they will prove more resilient in future crises.

Foreign direct investment into China in 2022 fell 43% on the year to $190 billion. And China’s share of U.S. goods imports fell to 17% in 2022, from a high of 22% in 2017.

Rerouting global supply chains away from China won’t be an easy process. Would-be rivals need to overcome challenges such as higher transport costs, outdated equipment and processes and subpar infrastructure. In the competition for a bigger slice of global manufacturing, countries are competing not just on cost and geography, but on who can offer companies the choicest perks while meeting their own development goals.

Cambodia revamped its laws in 2021 in an effort to attract more foreign investment, pinpointing manufacturing in advanced technology, machinery and spare parts, and electronics. Vietnam offers tax holidays to companies willing to invest in poorer areas of the country. India announced $1 billion in incentives to persuade companies to make more computers and tablets in the country. Mexico’s big advantages are its proximity to American consumers and membership in the USMCA trade agreement, which we discuss in Chapter 2.

Classroom discussion questions:

What does this “reordering” mean for reshoring and nearshoring?
Who benefits most from the move to expand beyond china?

OM in the News: China’s Dominance in the Rare Earth Supply Chain

The minerals, metals and rare earths needed for the green and digital transitions are shaping up to be the oil of this century—complete with a race to secure raw materials and production capacity at home or in friendly locations.

China has the early lead, writes The Wall Street Journal (March 9, 2023), dominating production of many critical materials including lithium and rare earths. Over the past years, China secured deposits around the world and invested heavily in the domestic manufacturing of clean technologies such as electric vehicles, batteries and solar panels. As the graph shows, China has a clear lead in the rare earth supply chain.

Western nations have now made it a top priority to secure a supply of these materials. The West has been tempted by the economic opportunity but also chastened by the recent semiconductor shortages, Europe’s efforts to replace Russian energy imports, and Beijing’s support for Russia after it invaded Ukraine.

Going back to President Trump, the U.S. signed executive orders for critical minerals– and has had recent success in starting to build local supply chains. The European Union’s latest effort—a Critical Minerals Act—aims to kick-start mining, processing and recycling in that region. There is one area where the EU act is right on the money—accelerating permitting. Permitting has been a key challenge for companies investing across geographies and sectors including mining, processing, power lines, solar, wind and batteries. In the EU, ambitious permitting reforms appears to be be the biggest hurdle to getting political agreement on that bloc’s local production of EV batteries. Limiting or overriding local opposition is rarely a vote-winning stance.

We may also get a G-7 critical minerals buyers club of the Group of Seven advanced democracies to secure supply from mineral rich countries in Africa, Asia and Latin America. Reduced Chinese supply—if it happens—will force Western policy makers and voters to face the trade-off between the carbon benefits of wind energy or electric vehicles and the environmental and pollution costs associated with manufacturing those technologies.

Classroom discussion questions:

Why are countries and companies so concerned about “rare earths”?
What is the main benefit in dominating the mineral supply chain?

OM in the News: Sprawling Supply Chains and Sustainability

Companies are rushing to more closely track materials across their sprawling supply chains ahead of expected new human rights and environmental laws, reports The Wall Street Journal (Jan. 24, 2023). Businesses, including consumer-goods company Unilever, clothing retailer H&M, and Renfro (which supplies socks to Ralph Lauren), say they are turning to technologies to help gather data on their supply chains and track materials.

Last year, H&M began rolling out a traceability platform for its recycled polyester and man-made cellulosic fibers, such as viscose, that can contribute to deforestation. It uses blockchain technology (see Chapter 11) to track and verify the use of sustainable fibers in garments. H&M has more than 600 commercial product suppliers who make their products in over 1,500 factories in Europe, Asia and Africa. The company says: “The closer we get to our 2030 goal for all our materials to be either recycled or sourced in a more sustainable way, the more traceability we gain.”

A host of supply-chain regulations went into effect in recent years and more are on the way, exposing companies to potential penalties and public criticism if found to be negligent. Many businesses, especially small and midsize ones, have a limited view of their supply chains and are struggling to broaden their oversight.

New European Union rules require larger companies operating there to identify, prevent and remedy risks to human rights and the environment in their supply chains, such as minimum age requirements, worker safety, pollution and biodiversity loss. There are a host of other regulatory developments threatening to affect companies’ supply chains. These include modern slavery laws in the U.S., such as the 2021 Uyghur Forced Labor Prevention Act.

Unilever has a sprawling global supply chain, with around 54,000 suppliers in 150 countries. The company tracks commodities such as palm oil and soy with satellites, geographical data and photos. But software that simply manages supply-chain data isn’t a silver bullet as it is difficult for companies to self-police the information they get from their suppliers. One startup, Wiliot, provides tiny tracking tags the size of postage stamps that can follow goods as they move, helping companies ensure materials aren’t coming from areas at risk of deforestation.

Classroom discussion questions:

What other regulations in the US and the EU govern industry sustainability standards? (Hint: see Supp. 5 in your Heizer/Render/Munson text)
Why are supply chains so difficult to manage with respect to human rights and the environment?

OM in the News: China, Covid-19, and Production Hiccups

For nearly three years, one of the most dreaded possibilities among China-based manufacturers was if workers contracted COVID-19, reports Supply Chain Dive (Jan, 13, 2023). Under the country’s stringent zero-COVID policy, even a few positive cases in or around a factory could shut down an entire operation for days.

Employees prepare crayfish products along an assembly line at a plant in Hubei, China. Many factories there are facing new strains as swaths of workers are out sick with COVID

But in the last several weeks, the script has flipped. The Chinese government began lifting its zero-COVID policy, easing travel restrictions and ending mandatory quarantine measures for those infected. The change led to a sharp spike in cases. Between Dec.19- Dec. 26, cases rose more than 67%, with more than 251,000 confirmed cases that week alone.

With so many people falling ill so quickly, many factories throughout the country found themselves short staffed and struggling to maintain normal operations. In the sudden absence of control measures, not only are workers out sick, others have also been staying home to avoid infection, or in some cases, working while infected. Some companies have had to prioritize or shift orders as a lack of workers impacted the ability to maintain normal factory production schedules.

As companies contend with the challenge of absent workers, many are also facing the issue of falling input orders, causing them to cut production ahead of the Chinese New Year. The upcoming Chinese New Year also creates the possibility of a new wave of cases as millions of migrant workers travel from the country’s manufacturing hubs to their hometowns. Production interruptions could continue for at least the next 6 months, possibly longer if a new variant emerges.

In the meantime, it is critical for U.S. and European companies that source or produce in China to maintain communication with their local teams in the country. Supply chain executives need to get updates on day-to-day production plans, so they’re aware of updates or changes to accommodate for worker absences. They should also prioritize which orders must be completed before the holiday versus which could wait, and to create contingency plans if not all orders can be completed in time.

Classroom discussion questions:

What are the options for U.S. firms with production in China?
Why did China alter its Covid policy so abruptly?

Good OM Reading: Rethinking Global Supply Chains

Firms have spent the past 30 years trying to make global supply chains as lean and efficient as possible, only for them to break down completely during Covid. Now, some experts, believe, the case for savings, efficiencies and just-in-time strategies no longer stands up. “The global supply chain is too long,” says the James Richard, author of the new book SOLD OUT: How broken supply chains, surging inflation and political instability will sink the global economy. “When you have that many moving parts, it breaks under its own weight. All the plans put in place by supply chain managers served to cut down on inventory, time and effort but failed to take into account the hidden cost.”

One of the biggest risks is climate change, and this has particular ramifications for supply chains. Extreme weather conditions can lead to material shortages as food, wood and mineable materials are harder to harvest or access. Floods, fires and storms can upset logistics too, causing delays or losses. Bringing supply chains closer to home is one way to make them greener. Some believe there is always a local supply chain that’s readily available. That helps to reduce prices and with logistics. Considering the carbon footprint of having things delivered from hundreds or thousands of miles away and bringing it down to 10, 20 or 30 miles away, there is a huge difference.

Covid highlighted the fragility of these long, global supply chains. As countries, particularly China, shut down in 2020, companies like Jaguar resorted to flying parts over in suitcases as they became harder to source. now many brands are exploring the possibilities of more localized supply chains.

“Globalization failed because we stressed the supply chain too much. It became too long,” says Rickards. He thinks that in 2023, and beyond, companies will become far more selective about which countries they do business in and with. “What we will have is a new world where we will trade with our friends but many countries won’t be in the club,” he says. “Certain groups will trade with each other, outsource to each other, but China won’t be in this club. Anyone not in the club will have to go their own way.”

Supply chain managers will need to seek out new partnerships as sources of raw materials and, wherever possible, find what is needed nearby. It also means that organizations will have to get much smarter about information sharing.

Prof. Howard Weiss has graciously agreed to provide Guest Posts in the coming days while I am travelling. Thanks, Howard.

OM in the News: Apple Tries to Make Its Suppliers Sustainable

Apple is adding pressure on suppliers to get on board with its carbon-neutrality goal, highlighting the difficulties in tackling greenhouse-gas emissions from global supply chains, reports The Wall Street Journal (Oct. 26, 2022). The iPhone maker said that it would review the work of suppliers to specifically decarbonize their Apple-related manufacturing, such as by running on 100% renewable energy, and track their yearly progress as it strikes supply agreements. Apple already requires suppliers to report overall emissions from their operations and energy purchases, respectively known as Scope 1 and 2 emissions.

Close to 30% of Apple’s suppliers haven’t committed to using 100% renewable energy in the production of the company’s goods. In 2020, Apple set a goal to reach carbon neutrality across its entire business by 2030, aiming to cut emissions by 75% and develop carbon-removal projects for the remaining 25% of its footprint. The gap underscores the challenge large companies face in getting their supply chains in line with their climate change goals.

Scope 3 emissions, which cover suppliers and the use of a company’s products, account for the overwhelming bulk of a company’s carbon footprint. A big problem facing companies like Apple with global supply chains is that their suppliers are largely dependent on countrywide sustainability goals. For instance, most energy available to Apple’s Chinese suppliers comes from coal. “The truth is, no company or their suppliers are on track to reducing all three scopes of emissions. Current environmental circumstances require efforts most companies cannot humanly meet,” said one industry expert.

Still, Apple said that more than 200 suppliers have said they would power all Apple-related production with 100% renewable energy by 2030. Among the suppliers to make the commitment is Foxconn, which is the biggest assembler of iPhones and has operations in China, India and other regions. Others include Corning, Nitto Denko, STMicroelectronics and Taiwan Semiconductor Manufacturing.

Apple’s Scope 3 emissions stood at 23.1 million metric tons of carbon-dioxide equivalent in 2021, declining from 27.3 million in 2017. In 2021, the company’s Scope 3 emissions accounted for more than 99% of its carbon footprint. Since many of the lagging suppliers are in emerging markets where there is a lack of access to renewable energy or affordable contracts, companies with sprawling supply chains like Apple need to encourage collaboration. “Engaging low-maturity suppliers requires close partnership and collaboration, all while supply-chain organizations grapple with conflicting priorities such as supply disruption and inflation,” said another industry leader.

Classroom discussion questions:

Why is it hard for suppliers to meet the standards Apple is setting?
Will Apple be able to reach carbon neutrality by 2030?

OM in the News: Decoupling of Supply Chains

“Covid-19, Russia’s invasion of Ukraine, and rising geopolitical risks in Asia have thrown a wrench into global supply chains,” writes The Wall Street Journal (Sept. 20, 2022). That has reinvigorated the push to put key supply links back onshore—particularly those currently located in China. A full “decoupling,” meaning the breaking of economic links with China, remains unlikely, but supply chains would become less integrated than in the past.

Two proposed laws in Europe are the latest case in point. The EU just set forth a ban on products made using forced labor. (It doesn’t name China but forced labor in the Xinjiang region is clearly a main target.) Recent U.S. legislation puts the onus on importers to prove that products from Xinjiang aren’t made with forced labor—an incredibly high bar. Such rearrangements could be challenging in some cases: For example in the solar supply chain, which is dominated by China. Xinjiang is a major producer of polysilicon, a crucial precursor of solar cells.

Another proposal from Europe tries to directly address such dominance, which also extends to the processing of lithium and other minerals critical for green energy applications. That law would attempt to speed up domestic production, processing and recycling of such raw materials. “Lithium and rare earths will soon be more important than oil and gas,” said EU’s Commission president. China processes almost 90% of rare earths and 60% of lithium.

All of this follows similar moves in the U.S. A recent law provides incentives for domestic manufacturing of clean-energy products such as batteries and solar panels. The U.S. is also implementing policies to encourage the onshoring of semiconductors and biotechnology. Such onshoring will take years and a full-scale relocation of manufacturing jobs back to the West is unrealistic. Friendlier or closer countries such as Vietnam and Mexico will probably be big beneficiaries—particularly those that already have free-trade agreements with the U.S. or the EU.

The rapid globalization of the past few decades seems likely to take a pause. Businesses, consumers and governments will gain a measure of reliability and peace of mind—but they should be prepared to pay up too.

Classroom discussion questions:

What are the benefits and dangers of the new U.S. and EU laws?
Is the globalization era ending?

OM in the News: Will “Reshoring” Fix Supply Chain Woes?

Efforts by the U.S. and other countries to fix supply-chain problems by boosting domestic production aren’t likely to be effective, according to a report from the International Monetary Fund, which says diversifying sourcing is a better solution. “Policy proposals to reduce dependence on foreign suppliers, especially in strategic sectors, have gained prominence, including in major markets such as Europe and the U.S.” reports The Wall Street Journal (April 13, 2022).

Such policies “are likely misguided,” IMF economists said, and “supply chain resilience to shocks is better built by increasing diversification away from domestic sourcing of inputs. The resilience of trade through the pandemic suggests that such proposals may be premature, if not misguided.” The IMF noted that trade has bounced back remarkably quickly, and that countries unaffected by shutdowns were often able to quickly increase their capacity to supply other regions.

The Biden administration wants to boost domestic production and encourage the reshoring of industries that have moved overseas, saying it will both create U.S. jobs and better insulate the nation against shortages from goods imported from other countries, such as semiconductors.

The IMF suggests a severe crisis in a single large global supplier (one roughly the size of China) would cause the average country’s economy to shrink by 0.8%. However, if that country had diverse supply chains running through a large number of countries, the economic damage would only be half as large.

Even the country at the heart of such a crisis would be better off with diverse supply chains, they said. By doubling down on domestic production, the country’s factories may have their own domestic suppliers disappear in a crisis, whereas if they had diverse international suppliers they would have a fallback option. Also important, the IMF said, is making sure that supplies in one country can be quickly substituted for another.

Some companies have already begun undertaking such efforts, like GM, which is seeking to reduce the number of different types of semiconductors that it uses so supplies that are disrupted from one factory can more easily be substituted by production elsewhere, or Toyota, which has sought to make more of the components of its cars easily substituted across different models.

Classroom discussion questions:

Why does the IMF say that reshoring is not a perfect solution?
What difficulties does the U.S. face in reshoring attempts?

OM in the News: Four Million Dead Chickens

The horrific war in Ukraine has captured not only headlines for the past month, but our hearts and souls as well. Today’s blog wants to share our grief over the devastation and loss of lives in Ukraine, but also address the impact the war has had on global supply chains.

Piles of chicken corpses are spread across a farm property in Ukraine

“The war,” reports The Wall Street Journal (April 8, 2022), “has already disrupted Ukraine’s prodigious exports of wheat, sunflower oil and other produce, boosting global food costs.” It has also halted production at Europe’s largest poultry farm in a southern part of Ukraine that has experienced some of the heaviest fighting.

That facility, which exports about one billion eggs a year, is just one of several to have been hit in the region. The one farm has lost almost four million chickens to thirst and starvation since the war began. On March 1, Russian mortars took out the local power station, cutting all electricity and crashing the automated system that feeds and waters the farm’s chickens. The farm has 11 generators that need three tons of diesel a day, but fuel is no longer being delivered to the farm. With power rationed, the chickens began to die of thirst and starvation.

The chicken factory’s difficulties are emblematic of the broader impact Russia’s invasion is having on Ukraine’s agriculture sector. The industry not only plays a crucial role in feeding the world but also represents the biggest contributor of the country’s economy, raising the specter of a slow recovery if and when peace returns. Known as the breadbasket of Europe, Ukraine is also responsible for 10% of global wheat exports, 14% of corn exports and about half of the world’s sunflower oil.

Now, Ukraine’s agricultural industry is in turmoil. The war has closed ports, deprived farmers of fertilizer and fuel, destroyed equipment and displaced workers. That has resulted in soaring grain prices, piling pressure on developing economies already struggling with food-cost inflation. Global food prices hit a new record high in March, the U.N. said this week. Higher grain prices in particular also threaten a knock-on impact on beef and other meat as producers rely heavily on grain to feed livestock and poultry. The higher costs mean some of the largest food companies in the U.S. will likely continue to raise prices on consumers for products from cereal to deli meat.

Classroom discussion questions:

Will this war impact U.S. supply chains?
What will be the long-term effect of the invasion on global markets?

Guest Post: A New Take on Postponement

Our Guest Post today comes from Dr. Drew Stapleton, Professor of Operations Management at the University of Wisconsin La Crosse.

When we speak about postponement strategies in OM (Chapter 11 in your text) we are usually referring to a firm’s strategically postponing the addition of some sort of value down the supply chain until the firm can better assess actual demand. It is essentially the opposite strategy of speculation where a firm forecasts demand, produces to that forecast, and hopes they got it right.

For instance, United Colors of Benneton originally followed a Speculation strategy, forecasting demand of the popular styles and colors for the fall fashion season in the US, and shipping the textiles from Genoa, Italy, in April or May. The containers would come into the port of New York/New Jersey into a Free Trade Zone (FTZ) and await the fall season before releasing the goods to the US market. If they forecasted, or speculated correctly, all was well. But when they did not, they ended up sending most of the inventory to markets for pennies on the dollar, taking huge losses.

Once United Colors shifted to Postponement, they shipped the textiles in white or gray, still in April or May. They then monitored the fashion districts around the world like London, Paris, and Milan to determine the popular fashions and colors. Once they better ascertained demand they dyed the textiles at the port’s FTZ and then released the goods to the market with a much better prospect of maximizing their profit.

We are starting to see a new form of Postponement – that of automobile manufacturers shipping their inventory without key features due to the computer chip shortage. The dual supply chain challenges of Covid and the Russian invasion of Ukraine have disrupted global supply chains. Many auto manufacturers cannot get needed computer chips. For instance, Ford is shipping Explorer SUVs without all of its chips to address the tight inventory of vehicles available at their dealerships– sending vehicles without rear-seat controls for A/C or heat. The idea is to postpone adding that feature until the chip shortage eases and the customer can return for chip installation in the next 2 years.

Some features will not be able to be added at a later date. For example, the start-stop feature on the Ford F-150 trucks cannot be installed once delivered. Instead, the automaker is giving their customers a choice – get the truck without the feature now – and a $50 credit – or wait until the chip supply eases.

Either way, we now see manufacturers postponing adding value– but rather out of necessity and not out of better demand assessment and supply shortages.

OM in the News: Bad Supply Chain News for EV Makers

Last year was the year of electric vehicles—global sales are likely to have hit a record, in turn pushing up battery demand. Now too much of a good thing is causing problems: Many key battery materials, including but not limited to processed lithium itself, are in short supply and prices are rising sharply.

Adding to the geopolitical risks for global auto makers, writes The Wall Street Journal (Jan. 24, 2022), is the supply chain concentrated in a country determined to make itself the EV capital of the world: China.

Lithium is the most spectacular example: Prices of lithium carbonate have quintupled in China from a year earlier. Other battery materials from nickel to cobalt have also been rising and could remain elevated as new supply will take time to come online. The rapid rise in demand for EVs has also created shortages in some lesser known components that go into batteries. For example, supplies of binder material polyvinylidene fluoride or PVDF—used to enable connections between electrodes—will likely be insufficient to meet demand until 2025.

Shortages are adding to already substantial concentration risks regarding China’s dominance in the EV supply chain. Most of the value chain for mining materials like lithium and cobalt is in China. China in general has more than 60% market share in the chemical processing and refining of critical battery minerals and that might be above 80% for some materials like cobalt and graphite. While other countries will also invest in more localized supply chains, China’s head start—in part due to years of generous EV subsidies which helped nurture a robust battery supply chain upstream—means it will remain dominant for the next few years at least.

Securing material supplies is also getting more important for car makers. They will increasingly need to either vertically integrate or establish joint ventures with battery suppliers. Tesla, for example, signed an agreement with an Australian mining firm this month to secure graphite supply.

EV sales have been speeding ahead, but the supply chain has a lot of catching up to do. That will cause a lot of headaches for EV makers in the months and years ahead—and potentially geopolitical jitters.

Classroom discussion questions:

How can OM managers address this supply chain problem?
What are the geopolitical issues involved?

OM in the News: The Problem is China

Residents waited at a testing site in Tianjin, China, where VW and Toyota announced they would temporarily suspend operations because of lockdowns.

Companies are bracing for another round of supply chain disruptions as China, home to 1/3 of global manufacturing, imposes sweeping lockdowns in an attempt to keep Omicron at bay. The measures have already confined tens of millions of people to their homes. At least 20 million people, or 1.5% of China’s population, are in lockdown, mostly in the city of Xi’an.

The country’s zero-tolerance policy has manufacturers — already on edge from spending the past 2 years dealing with crippling supply chain woes — worried about another round of shutdowns at Chinese factories and ports. “Additional disruptions to the global supply chain come as companies are already struggling with rising prices for raw materials and shipping along with extended delivery times and worker shortages,” writes The New York Times (Jan. 17, 2022). If extensive lockdowns become more widespread in China, their effects on supply chains could be felt across the U.S.

China used lockdowns, contact tracing and quarantines to halt the spread of the coronavirus after its initial emergence in Wuhan. Now four of China’s largest port cities — Shanghai, Dalian, Tianjin and Shenzhen — have imposed limited lockdowns to try to control virus outbreaks.

The combination of intermittent shutdowns at factories, ports and warehouses around the world and American consumers’ surging demand for foreign goods has thrown the global delivery system out of whack. Transportation costs have skyrocketed, and ports and warehouses have experienced pileups of products waiting to be shipped or driven elsewhere while other parts of the supply chain are stymied by shortages.

The spread of Omicron is foiling hopes for a fast recovery, highlighting not only how much America depends on Chinese goods, but also how fragile the supply chain remains within the U.S. Delivery times for products shipped from Chinese factories to the U.S. West Coast are as long as ever — stretching to a record high of 113 days in January– up from fewer than 50 days in 2019. Continuing problems exist at other stages of the supply chain, including a shortage of truckers and warehouse workers to move the goods to their final destination, and an only partially successful push to make the Port of Los Angeles operate 24/7.

Airfreight could also become more expensive and harder to obtain in the coming weeks as China has canceled dozens of flights to clamp down on another potential vector of infection. That could especially affect consumer electronics companies, which tend to ship high-value goods by air.

Classroom discussion questions:

What strategies can operations managers in the U.S. take at this point?
Summarize all the factors contributing to SCM woes.

OM in the News: Everybody Now Wants Supply Chains to Be ‘Resilient”

Container ships sit moored outside a terminal in Hong Kong , reflecting the disruption of global supply chains.

Supply chains as front-page news? That would have seemed unlikely—until the pandemic exposed many of the vulnerabilities in the far-flung networks that connect manufacturers, suppliers and buyers around the globe.

At first, the impact mostly reflected rapidly shifting patterns in demand, whether in PPEs or work-from-home and consumer products. But a subsequent spending boom left companies struggling to find import capacity on key trade lanes. Flotillas of container ships waited outside ports, wreaking havoc on shipping schedules, and importers struggled to hire enough truck drivers or warehouse workers to move all the cargo. As bottlenecks spread across the economy, they in turn exacerbated the shortages, as companies resorted to excess ordering and stockpiling.

The disruption exposed deep interconnections in supply chains, and just how dependent some sectors like the auto industry were on a few semiconductor factories in Taiwan, or the pharmaceutical sector on Chinese ingredients and chemicals. This challenged companies and governments worldwide to question their dependence on distant suppliers and logistics links that might be prone to interruption.

As a result, “resilience” has become the new watchword, writes The Wall Street Journal (Dec. 11. 2021) . How quickly can a company or a country bounce back from an interruption in the supply of critical products, components or raw materials? What if China suddenly cuts off U.S. access to rare-earth minerals, semiconductor chips or the ingredients used to make antibiotics and other drugs? But if we equate resilience with domestic self-sufficiency, we would have to relocate chip packaging, materials supplies, tool sources and much more from across Asia and Europe.

So who doesn’t want a resilient supply chain? But while there are some things that companies and governments can—and will—do to increase their ability to respond to future shocks, these will all come with costs. For instance, if better resilience means a more geographically diversified supply base, we will get some of it from “China +1” strategies that many companies are already implementing. Politically sensitive gear such as telecom and computing equipment have been in the lead, with firms shifting production to Southeast Asia and Mexico.

Will Americans pay higher prices for goods made in the U.S.A.? That is still a hard sell, so the real question is: how much of that kind of production will move back into the country? Not only will the finished products likely be costlier, but somebody has to pay for the transition costs—the move, the training, bringing in suppliers.

Classroom discussion questions:

Describe the supply chain risks listed in Chapter 11.
What are the difficulties in making supply chains more “resilient”?