Supply chains after COVID-19: A conversation with Jim Tompkins

If there’s a supply chain Jim Tompkins hasn’t seen, it hasn’t been invented. As the chairman and CEO of the international consultancy he founded in 1973, Tompkins has been at the forefront of every supply chain management trend of the past half-century. He sees the coronavirus pandemic as a before-and-after event for supply chains worldwide, saying businesses that structured their product flows to emphasize optimization and efficiency will need to radically change their models to balance cost imperatives with resiliency. As he told Mark B. Solomon in an early April interview, the challenges will not be easy, nor will they have a finish line.

FreightWaves: What is your read for a meaningful resumption of end demand for businesses and consumers? And what, if anything, should supply chain practitioners be doing to get ahead of the curve if and when things open up?

Tompkins: When things return to “normal” the new normal will not be like the old normal. Demand will not immediately spring back. Supply will be unpredictable. The stay-at-home period will have long-lasting impacts, as will the level of unemployment. The foundation of the supply-demand synchrony will be upset, and the supply chain will not flow like we have come to learn or expect. Every decision will need to be addressed from the perspective of “volatility, uncertainty, complexity and ambiguity,” which we know as “VUCA.” This will beget a difficult balancing of risk and performance versus the cost of operations. Instead of optimizing our supply chains, we must “optionize” them by deploying solutions capable of evolving to whatever is happening at the moment.

FW: This began as a supply choke story out of China. It has since been overwhelmed by demand destruction due to the lockdown. Will supply chain professionals still consider this a watershed event given that the narrative has moved away from the supply challenges?

Tompkins: The impacts of COVID-19 will be talked about for the next 25 years or more. It peaked in China after people returned to their hometown for the Lunar New Year holiday. Then the stay-at-home order prevented them from returning to work. The much-needed raw materials and components for production were not available. Then the restarting of the supply chain evolved in waves as China struggled to get the upstream supply chain providers working. When those people returned, the transportation network had to be renewed, and the port workers had to return to reopen the ports. So there were many false signals as to when goods were going to start flowing again. Thus, the emphasis for January and March was all about supply, but then as the Chinese supply returned, demand in the Western world was upset by the spread of the virus. The Western supply chain was finally able to restore its supply, but then its demand became very erratic. Demand for toilet paper, sanitizer, frozen dinners, beef jerky, etc. went through the roof when the demand for impulse purchases disappeared. This major impact on supply reliability, and then demand reliability, resulted in dysfunctional supply chains, and chaos ensued.

As the impact of the virus subsides, no one is sure how the unemployment rates, company bankruptcies and the impacts of VUCA will play out. This, plus the individual links trying to adjust their supply chains to incorporate resilience, will result in an ongoing level of VUCA rippling throughout the economy. There will be further disruptions as companies reevaluate their supply base, try to enhance their visibility and transparency, rethink their demand planning process, and enhance their risk management program. All of this will result in never-ending disruptions.

FW: There have been multiple exogenous events over the past 12 years that have demonstrated the importance of supply chain resilience. Yet on March 10, less than a month ago, a group of resiliency experts spoke about COVID-19 as if supply chains had still not learned their lessons. Given how the crisis has evolved, will this event make an imprint on how supply chains are developed and managed?

Tompkins: I got off a plane on March 11, 2011, at O’Hare Airport and watched the reports of the Tohoku (Japan) earthquake and the tsunami crashing ashore. The water took out neighborhoods as if they were model railroad cities. The disruptions crippled the global automotive supply chain, and it was predicted to have a lasting impact on visibility, resilience and risk management. But as the images faded from memory, so did our focus on the key lessons learned from a brittle supply chain. Resiliency and risk management was overcome by the financial drive to cut costs. Thus we were ill-prepared for the impacts of COVID-19. 

This will leave a mark. The school and business closings, travel bans and stay-at-home orders have made an enormous impact. It will result in supply chains learning their lessons and adapting to the realities of how they are developed and managed.

FW: U.S. government officials have blamed China for not only creating conditions that allowed the coronavirus to germinate and flourish, but for downplaying its severity and underreporting its impact. Will the geopolitical blowback persuade businesses to reposition their supply chains away from China?

Tompkins: I have no opinion on who is to blame. Having said that, risk management and reevaluating the supply base will result in some repositioning of supply chains. This will not be done to punish the Chinese. Rather, it will be based on the need to protect the supply base so as not to be exposed to a brittle supply chain.

FW: Health care accounts for nearly 20% of U.S. GDP.  Supplies ranging from medical thermometers and hand sanitizer are typically sourced from China. Will the priority and urgency to prepare for future pandemics result in much of the health care supply chain nearshoring to the U.S.?

Tompkins: Medical supplies are outsourced to China because of cost. These economics will be evaluated to deploy more resilient supply chains with greater options, but we will not see a major shift back to the U.S. unless it is seen as being the most economical solution. We do not want to further increase the cost of health care by avoiding the reality of economics. However, we want to manage risk and make the overall best supply base decisions.

FW: E-commerce fulfillment and delivery has seen its profile elevated dramatically during the crisis. What steps do manufacturers and retailers need to take to get ahead of this?

Tompkins: While some segments are growing from a 20% e-commerce penetration to 25%, this growth is not as significant as the impact on segments like grocery, which has grown from 2% to double-digit percentages. The facts are that stores are not designed to accommodate 10% of their shoppers being surrogate shoppers, or having even 5% of their orders fulfilled through the “buy online pick up in store” (BOPIS) model. The impact on the stores themselves and their supporting supply chains are huge. Micro-fulfillment, backroom robotics and a transformation away from a “case” based supply chain to an “each” based supply chain are solutions that retailers should explore to ensure minimal disruption to their operations and to continue to meet customer demands. A more in-depth explanation of these solutions can be found in this blog post.

FW: If we presume that physical distancing will be with us for some time even after the current restrictions are loosened, will this hasten the acceleration of robotics in the warehouses and DCs?

Tompkins: We will continue to see an increase in robotics usage in warehouses and DCs not just in response to physical distancing, but to help manage rising costs and the ongoing labor shortage. Robotic applications will be one of the fastest-growing material-handling categories.

FW: If you were to advise a multinational business on how to reposition their supply chains ahead of future pandemics, what message would you want to leave with them?

Tompkins: It is all about VUCA. Pandemics, trade wars, economic changes, weather events, lifestyle changes are all happening more frequently. This trend will continue in the increasingly complex and connected world we live in. Surviving and thriving in a state of VUCA requires total reinvention of supply chains to stress optionality, risk management, visibility and resilience.