Modern manufacturing management principles lay a lot of emphasis on having inventories to the bare essential. Inventory management stipulates that stock arrives when needed for production. The aim is to cut down costs, increase efficiency.
Inventory management obviously requires close coordination with the suppliers. What this assumes is that the entire supply chain operates at a high degree of efficiency. Efficiency spread across each of the segments in the supply chain. The manufacturing unit where the materials are being manufactured, the transportation be it by road or ship or air, the subsequent clearances and transportation of the goods to the domestic manufacturer.
It is, what is termed, a lean management process. Inventory management is said to be inspired by the Japanese business practice of Kaizen - meaning change for the better. And it was indeed changed for the better with better cash flows, less deadstock, less holding costs. It was always however a high-risk game.
The pandemic highlighted the risks starkly. The pandemic initially brought in its wake a crippling hit on manufacturing. Demand reduced. Whole swathes of the economy were impacted. Essential inputs and raw materials were in short supply. Trade, both domestic and international, was disrupted.
This was exacerbated by the short supply of containers. The movement of containers is determined by import and export - where this is not happening, or there is a mismatch, shipping containers lie dormant in various ports. The shipping container crises were followed by shipping vessels getting delayed in various ports because of congestion. This has created further challenges. The turnaround time of vessels has soared. The cost of shipping goods has dramatically increased.
What all this meant was a body blow to just-in-time inventory management. Raw materials and consumer goods were simply not reaching the destination. Manufacturing suffered. Just in time inventory management was undoubtedly the last link in the supply chain - it turned out to be the weakest link. The entire supply chain was disrupted. This brings us to the question as to why nobody foresaw this fallout of the pandemic.
The US reacted in February 2021. A US presidential executive order highlighted the need for 'resilient, diverse, and secure supply chains to ensure our economic prosperity and national security'. The Executive Order directed a study to be conducted in four critical areas - semiconductor and advanced packaging, large capacity batteries, critical elements and materials for the defence department, and pharmaceutical and active pharmaceutical ingredients. The executive order recognized that 'Pandemics and other biological threats, cyber-attacks, climate shocks, and extreme weather events, terrorist attacks, geopolitical and economic competition', and other conditions can reduce critical manufacturing capacity and the availability and integrity of critical goods, products, and services.
Following the Executive Order, a Report ‘Building Resilient Supply Chains, Revitalizing American Manufacturing and Fostering Broad-Based Growth' has since been submitted in June 2021 and makes interesting reading
For instance, as regards semi-conductors the report highlights the critical role semi-conductors play in technology - it calls them the DNA of technology. It highlights the fact that semiconductor manufacturing capacity depends on foreign sources especially Asia creating a supply chain risk. It highlights that semiconductor manufacturing is geographically concentrated and the fact that the investment required is huge.
As for recommendations, it suggests the need to promote investment, fund the creating of helpful incentives, strengthen the domestic semiconductor manufacturing ecosystem, support small and medium-size businesses, engage with allies and partners on semiconductor supply chain resilience. The report similarly highlights issues in each of the other commodities identified.
There are lessons in this for India. At the outset, there is a need for a comprehensive white paper on the subject. This would mean clearly identifying sectors that are critical for the country.
It is also essential that we clearly identify critical goods within each sector. Goods that are essential for the economic security of the country. The sectors which have been identified for the PLI scheme could be a useful starting point. The scheme currently spread across 16 sectors emphasizes the local supply chain and developing key downstream operations.
Atmanirbharta is going to be a process, a journey. In the meantime, it is essential that we identify multiple source countries for any critical product. We should ensure that dependency on any one country is never there - even if this means having to pay more. The government should step in to assist the Indian importer in this regard.
Securing supply chains becomes even more critical now when we are pursuing vigorously free trade agreements. The larger aim of such agreements is to be part of the global value chain. With the opening of trade, there will be greater dependencies - and greater dangers of disruption in supply chains and consequential damage to domestic manufacturing and retail sales.
Indian exporters were badly impacted last year because of the shortage of containers. There is a dire need to invest in the manufacturing of containers domestically. We cannot be held hostage to some manufacturers and some countries. Any disruption in the supply chain adds to costs.
Globalization has to work in sync with Atmanirbharta. It is necessary that we strike the right balance. India has an ambitious USD $5 trillion targets. To achieve this, it will need to be a part of the global value chain, and importantly, also insulate itself against supply chain disruptions.
— Najib Shah is the former chairman of the Central Board of Indirect Taxes & Customs. The views expressed are personal
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