From the filings: Supply chain lessons from the pandemic

When the COVID-19 pandemic disrupted supply chains around the world the year after U.S. tariffs hit American companies manufacturing in China, major multinational corporations deployed varying strategies to keep up production.

A survey of 715 supply chain professionals by Jabil, a Florida-based manufacturing service company, found the pandemic disrupted 78% of supply chains — more than any other event in the last decade.

Here, an in-depth look at the public filings of three major suppliers to a range of industries shows their varying strategies to keep producing during the pandemic, and how important sales to Asia have become.

3M credited emergency planning and breaking down silos in its organization with its ability to shift to quickly boost production of much-needed pandemic gear. Caterpillar kept manufacturing by finding alternative suppliers, spending extra to ship products and components via air freight, and building in extra inventory. It also stood by its partners by connecting them to financing when cash ran low. The existing policy of Arrow Electronics to locate production and design close to customers helped it work around the twin difficulties of tariffs and the pandemic.

“The more flexible the supply chain, the easier it was for companies to pivot,” said Haozhe Chen, Ph.D., associate professor of supply chain management at Ivy College of Business at Iowa State University. In addition, “those who have supply sources close to customers or markets seem to have suffered less than those that rely on distant suppliers.”

China continues its key role

Chinese demand boosted sales of all three industrial multinationals whose financial statements are cited here. The first nation to endure the COVID-19 pandemic, China was also the first economy to begin to recover. All three multinationals locate production close to consumers, especially in Asia where supply chains are tightly integrated.

With the infectious disease first emerging in China, a sudden halt to products and supplies out of China led many to speculate that supply chains were too dependent on the Asian nation.

“There is a lot of talk about moving production out of China and removing Chinese components from international supply chain,” Chen said.

The pandemic showed how difficult it would be to disentangle supply chains from China, in part due to the quick resumption of China’s factory production during the pandemic.

“It’s not about cost,” Chen said. “Few other nations can match the maturity of production in China.”

A recent trade agreement will make it even harder to break away from China without moving away from Asia. In mid-November, 15 Asia-Pacific nations including China, Japan, South Korea, and Australia entered into the Regional Comprehensive Economic Partnership, the world’s largest trade agreement by population and GDP, which will connect about 30% of the world’s production and raw materials. The deal is expected to tighten connections among these nations’ supply chains, as it gives tariff-free access to both markets and raw materials.

​The United States and India are not party to agreements that link to this free-trade zone. “Combining the pandemic with this free-trade agreement will make companies carefully think about how to design their supply chain,” Chen said. “It could bring cost disadvantages and unwanted complexity for companies that are located outside this region.”

3M: Emergency planning and breaking down silos

3M pioneered the N95 mask, the gold standard for filtering out airborne particles, and the manufacturer struggled to produce enough during the pandemic, which upended supply chains just as demand surged.

3M, the maker of Scotch Tape, safety, and medical equipment, has plants and distribution centers close to its customers around the world. But when global demand outpaced supply, the St. Paul. Minn.-based company worked with governments to lower trade barriers so it could import respirators from China, where they are prized by residents during intense winter air pollution, Chen said.

3M published prices of its most popular masks to dampen gouging, and terminated distributors that inflated prices. It also secured its supply chain to prevent its COVID-19-related products from being sold on the black market. The company set up hotlines to help users identify authentic 3M products and distributors. It removed 7,000 counterfeit websites, filed multiple lawsuits against suspected violators, and worked with law enforcement and tech companies to combat fraud online and off.

The company was on course to produce 2 billion respiratory masks in 2020, more than three times 2019 levels. It was able to do this because, after the SARS epidemic in the early 2000s, 3M built surge capacity into each of its respirator plants to handle global health emergencies, in effect assembly lines that remain dormant until needed. It activated these in January 2020 to double production and planned to double production again by the end of 2020 with support from the U.S. Department of Defense.

“Even with 3M’s accelerated production, the stark reality is that global demand for respirators far outpaces the ability of the entire industry to deliver,” CEO Michael Roman said on 2020’s first-quarter earnings call on April 28.

The company could rapidly shift its product mix — turning one plant to produce hand sanitizer in 72 hours according to 2020’s second-quarter earnings call on July 28 — because it had consolidated manufacturing, supply chain, and customer operations at the beginning of 2020. It also makes products related to the development of diagnostic tests, vaccines, and treatments for Covid-19.

The enterprise operations “team is enabling us to maintain strong customer service, streamline decision-making, and adjust faster than ever to the external environment,” Roman said on the April 28 earnings call, adding that the combination cut its production planning cycle times by 70%.

Monish Patolawala, 3M’s CFO, credited the team’s use of data and analytics with helping to drive down inventory levels as demand cratered for some automotive, aerospace, and industrial products.

While companies have long strived to break down silos, it is difficult to combine divisions with varying and sometimes opposing performance goals.

“Sales wants a lot of inventory to provide good customer service, but sourcing wants to lower cost, and production needs stability of supply,” said Chen of Iowa State. “For a large company like 3M, it’s a big job to take on.”

Caterpillar: Delivering at all costs, global production

Caterpillar is renowned for its precision logistics and for its dependability in supplying heavy machinery and parts around the globe.

But COVID-19 has had an impact “more severe and chaotic than any cyclical downturn we had envisioned,” CEO James Umpleby said on the April 28 earnings call for the first quarter.

In the third quarter, the company’s $9.9 billion in revenue was a 23% decline compared with the same period in 2019 as the pandemic slowed construction and dealers cleared inventory.

When the pandemic hit, Deerfield, Ill.-based Caterpillar was forced to suspend certain operations around the world due to supply chain problems, weak demand, and regulations. “Governments have closed suppliers with little or no notice, impacting Caterpillar’s operational efficiency,” Umpleby said on the first-quarter earnings call. This “created havoc with our manufacturing operations that we’ve overcome.”

The company “worked quickly to mitigate disruption to our supply chain by using alternative sources, increasing air freight as needed, redirecting orders to other distribution centers, and prioritizing the redistribution of the most impactful parts,” Umpleby said. The company added extra inventory to guard against supply disruptions.

These added costs ate away at profits, which dropped 56% to $2.2 billion in the first nine months of 2020 over the like period in 2019, on sales that had dropped by 25%, to $30.5 billion from $40.7 billion.

From the start of the pandemic, Caterpillar “kept a close eye” on suppliers’ financial health, connecting them to a third-party bank that could offer quick cash to help cover their own payments, CFO Andrew Bonfield said in the first-quarter earnings call.

Demand in China, where the pandemic lessened first, became a highlight for Caterpillar sales. Government spending on infrastructure and construction helped the recovery in China, the only economy expected to report growth for 2020.

Caterpillar’s Chinese subsidiary, formerly known as the Shandong Equipment Manufacturing Co. Ltd or SEM, produces SEM-branded wheel loaders and other equipment and sells throughout China and in 90 countries. “The Shandong plant has become a cornerstone of production, since it resumed quickly, with output destined for export, so will help U.S. plants to supply European markets,” Chen said. “It’s helping them to be more stable and serve the international market.”

Caterpillar has decided to invest in expanding services offerings, especially digital capabilities, which it sees as key to long-term profitable growth. Executives believe the need to maintain social distancing on job sites will accelerate automation, in this case of autonomous mining trucks, which reduce the need for miners to live in close quarters.

“Our focus on operational excellence, shorter lead times, and flexibility in manufacturing operations will allow us to react quickly to future changes in market conditions,” Umpleby said in the first-quarter call.