• Valedor Partners

The Ambidextrous Supply Chain

Updated: Sep 2

George E. Danner

When I was a kid, I had a very good friend who could play baseball equally well with both hands. He could throw and bat on either side. For a kid this seemed like having some strange magical superpower. As hard as I tried I could never match his rare skill. Now as I got older I was pretty good at sports, but my left hand was always weaker and less coordinated than my right. My right hand and my right arm were stronger and bigger than my left. Subconsciously I likely exercised my right hand and arm more as well. In other words, I allowed my left hand to drift into a sedentary lifestyle.

The same appears to be true for US domestic industrial firms, where the non-dominant supply chain is based in the US (if at all), and the dominant supply chain is in Asia or some other low- cost source country. We have allowed much of our industrial component production to be globally outsourced while simultaneously weakening all domestic sources of supply that were once vibrant. This is not a political argument against globalism, it is simply a factual observation of the behavior of firms for the last 3 decades. What is new, however, is a realization of how dependent US manufacturing firms are to supply chains that were founded on the assumption that transportation links between Asia and the US would never be compromised. That was a good, solid assumption...until it wasn’t. Now, firms that are dependent on globally scattered supply chains are feeling a swift and severe impact and have few options at their immediate disposal.

So when the worst of COVID-19 is over and the economy begins the slow and painful process of recovery, will we slip back to the old ways of global supply chains? Yes, undoubtedly many firms will. But a few forward-thinking firms might use this extraordinary disaster to re-think long held supply chain assumptions. Perhaps it's time to exercise that atrophied left hand to build a better performing athlete.


The Mental Model of the Low Cost Elsewhere


The herd mentality of industrial firms gave unwavering weight to the argument that sourcing components and materials from countries outside of North America results in a lower overall delivered unit cost of a product than the same product sourced inside of North America. I have been a personal witness to many of these calculations, some of which were thorough and accurate, many of them based on 3rd hand rules of thumb and shallow analysis that simply affirmed a subjective point of view. I believe that many of these outsourcing decisions were misleading at best to company leadership, and incorrect decisions to outsource were made (I am guessing that very few firms anticipated the leveling effect of tariffs and anti-dumping regulations that were enacted within the last decade). Yet, herd mentality is an incredibly strong force. Because this then gave rise to an entire ecosystem of industrial production in countries like China, the network effects of lower cost offshoring became a self-fulfilling prophecy.

I am not advocating for an equally blind pendulum swing back to “re-shoring”, a word that you are going to hear a lot of about in the next few years. Rather, I would prefer that thoughtful firms look closely at an ambidextrous supply chain, one that is equally facile with both domestic and international supply lines.


On Being Ambidextrous


In an ambidextrous supply chain, mirrored capacity is held on both sides of the ocean. On the domestic side the capacity can be active (actually producing some fraction of total output at all times) or it could be warm capacity (held in stasis but capable of rapid activation at any moment).

The argument against this is predictable: dual supply chains will be very costly to maintain, far outweighing any benefits they convey. I will readily admit that ambidextrous supply chains are not for everyone. But before you dismiss the idea based on purely qualitative counterarguments, consider the juxtaposition of outsourced costs versus domestic, as shown in the Figure below.



These risk-adjusted cost components are real, and must be accounted for in any fair analysis of the cost/benefit of supply chain decisions. My belief is that in a fair fight, domestic production is in many cases at or near geoparity (another term that will be popular) with its offshore counterpart. I encourage every firm to conduct an A/B test simulation of A: simulate a “day in the life” of my traditional supply chain, versus B: the same day in an ambidextrous supply chain using the same KPIs in both cases. Even if A wins this is a healthy exercise for any company that is serious about the science of competitive advantage.


Then there is the option value. Like holding a call option on a stock, such rights are quite valuable in an era of great uncertainty. The optionality of playing the arbitrage between offshore and domestic production works well when tariffs or strikes or weather events favor one over the other. Thankfully we have Real Options analysis methods at our disposal to numerically assess the option value of ambidexterity.


The term “mirror image” is perhaps misleading here. Domestic production could involve a much smaller form factor than say a much larger mass production complex that exists offshore. As appropriate, the domestic counterpart could be more like a pilot plant and could also involve 3D printing versus large metal-forming processes and infrastructure. As an industrial asset owner, you simply have many more technological tools at your disposal today than a decade ago.


Summary


The landscape of business competitiveness is forever changed with COVID-19. Forever.

The skills that are prized in this new era are agility and robustness. Those firms that will prosper are those that do everything in their power to bake these characteristics into their strategies. Consider ambidexterity as one measured step into this brave new world. Get started now.


Good luck everyone.

Disclaimer


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