On February 24, 2021, President Biden signed an executive order (EO) for a comprehensive review of critical US supply chains. The order’s objectives are wide-ranging and include increasing the resilience, diversity, and security of US supply chains and, by extension, revitalizing domestic manufacturing capacity, bolstering research capabilities, and creating jobs.
Within 100 days, four federal departments will provide the White House with supply-chain risk assessments for semiconductor, high-capacity battery, strategic materials (for example, rare earth elements), and pharmaceutical supply chains. In parallel to the initial 100-day sprint, the EO mandates a 12-month comprehensive review and risk assessment of the industrial bases relevant to seven federal departments (Agriculture, Commerce, Defense, Energy, Health and Human Services, Homeland Security, and Transportation).
The EO’s requirement of a comprehensive review is bold and ambitious given the complexity of global supply chains. Our research has shown that the average large company has more than 5,000 suppliers across tiers (Exhibit 1), meaning each industrial base named for review in the EO will potentially consist of hundreds of thousands of suppliers that need to be discovered and assessed.
To deliver on the objective, the government will need to establish a clear strategy for what resilience in US supply chains means (for instance, what events should supply chains be prepared for? What are the delivery and cost expectations when those events happen?) while using novel data and analytical methods to illuminate supply chains and identify risks at a scale rarely, if ever, attempted in the private sector.
In this article, we offer several lessons learned from our experience conducting supply-chain risk reviews that we believe could be useful to the government as this effort is launched. We also share questions we believe would be helpful for government leaders and their industry counterparts to answer as they undertake this effort.
Lessons we have learned from assessing risk and building supply-chain resilience
From our experience helping companies and the federal government build supply-chain resilience, we offer four lessons we have learned that we believe are important as the government undertakes this effort.
Global supply chains are stretched, and US supply chains face additional headwinds
Over the past several decades, organizations have improved levels of supply-chain service, cost, and inventory through globalization and initiatives designed to reduce inefficiencies. While this evolution has delivered productivity, it has also resulted in unpredictability. McKinsey Global Institute research from August 2020 shows that, due to supply-chain issues, companies can expect a production line stop that is greater than one month approximately every 3.5 years. Risks have become more concentrated, with our research showing that 180 product categories have consolidated largely to a single country of manufacture since 2000 (including products of interest in the EO, such as computers and communications equipment, as shown in Exhibit 2). Trends are also not improving the situation—for instance, we found that about 80 percent of global trade flows through countries with declining World Bank political stability scores.
Supply-chain headwinds unique to the United States exacerbate these vulnerabilities. The McKinsey Global Institute found market expectations of US manufacturing companies are higher than elsewhere in the world, with US firms expected to deliver a 12 to 14 percent return on capital versus 9 percent or lower for Asian and European firms. This expectation has in part led to US domestic demand for high-end manufactured goods being satisfied by imports, a trend found only in the United Kingdom and the United States among high-income countries. The result is longer US supply chains and, in some cases, more opportunities for unpredictable events and disruptions.
Risk, resilience, and rebalancing in global value chains
As the government conducts supply-chain reviews under this EO, understanding the trends and implications of increasing fragility will be critical to setting the strategy for strengthening and rebuilding US supply chains.
Cracking the supply-chain risk problem requires new data and analytical methods
The volume of information on supply chains is large. Discovering the thousands of suppliers involved in making a complex product requires merging data from company websites, third-party databases, press reports, and other sources. Determining which points in the supply chain are vulnerable requires even further aggregation of information sources given the breadth of risks envisioned in the EO (ranging across cybersecurity, single source, climate, and many more).
Faced with this complexity, we often see organizations settle into one of two failure modes:
- Let the machine do it. Given the amount of information available, organizations will attempt to use automation (and, on occasion, artificial intelligence) to identify risks. That approach can result not only in a large amount of noise but also in risk managers triaging a regular stream of tactical issues (for instance, a fire or flood in a location) versus strategic issues (for example, is the supply chain becoming more vulnerable and less reliable overall?).
- Rely on expertise-driven targeting. Drowning in data, organizations rely on experts to narrow the scope and make the assessment manageable. That approach can give a false sense of security, deprioritizing critical issues that later surprise the organization.
Successful organizations move beyond these failure modes by merging the efforts of their machines and their experts. Automation and machine learning aggregate and structure large volumes of information, while experts review and refine the machine outputs to tune the results. When this process is done correctly, a well-trained machine can help target valuable and irreplaceable expert time to the most critical areas of supply-chain vulnerability.
That targeting is critical as experts need to be able to dive into the nuance of vulnerabilities to develop effective mitigations. For instance, the United States is largely reliant on overseas production for semiconductors and printed circuit boards. However, the underlying drivers for that reliance are different for each product—semiconductors need clusters of knowledge and capital, whereas printed-circuit-board production is a lower value-added activity driven more by labor costs. Understanding the root cause of these vulnerabilities is critical to understanding what to do about them.
Many organizations have successfully developed and advanced solutions. For example, a large commercial aerospace manufacturer developed a platform for real-time monitoring of key suppliers to warn of risk areas and give early indications of potential disruptions, allowing for more supply-chain visibility and correspondingly targeted responses. Metinvest, a group of 30 steel and mining companies based in Europe, has implemented a holistic business solution across all its entities, which includes monitoring of production capacity, inventory, and accounting, among many other functions. These efforts allow rapid criticality assessments by ensuring clean data streams, robust visualizations, and real-time monitoring.
To identify the wide range of risks required by the EO, the government will likely need to deploy this expert–machine teaming approach at a scale rarely attempted.
Demand for supply-chain talent is outstripping supply
The evolution of the supply-chain function from primarily a cost center in corporations to a function that needs to balance cost, reliability, uncertainty, geopolitics, and other factors has increased the demand for high-quality supply-chain talent. As of May 2020, more than 50 percent of supply-chain executives said they expected to hire more supply-chain talent from the market. This increased demand for hiring also comes with 90 percent of executives saying that they need more digitally capable supply-chain practitioners, either through reskilling or hiring. Reskilling is no small task; supply-chain practitioners well equipped to tackle the complexities of successful risk assessments and mitigations will need to possess not only the analytical capabilities to navigate data but also the operational know-how to work inside the supply chain to design and implement effective interventions.
This demand means that the right supply-chain expertise is hard to come by—the government will likely need to draw on the full range of its own talent, its private-sector partners, and other sources of expertise to achieve the goals of this EO.
Supply-chain-resilience capabilities are needed for the long haul
Supply-chain risk reviews are often born out of a crisis, with organizations mobilizing rapidly to conduct a review to avoid further issues and recover from the immediate emergency. Though understandable, this results in missed opportunities to use the crisis to build durable capabilities. Supply chains change rapidly; as industries evolve, that can affect a broader swath of the economy than many appreciate (for instance, today’s semiconductor shortages).
The government has a unique opportunity under this EO to build a capability that will serve the nation for decades. The best organizations understand the actions that should be taken immediately to resolve an ongoing crisis while also devoting time to design a more comprehensive supply-chain review that is sustainable, repeatable, and will give business intelligence to the organization for years, not just in the immediate crisis. These organizations use crises as opportunities to fully examine the vulnerabilities throughout the supply chain and develop thoughtful and considered long-term resilience. They define and incorporate resilience metrics in their supply-management functions, alongside more typically measured elements, such as on-time delivery, inventory levels, and operating costs.
Key questions for department leaders to consider
Based on our experience and lessons learned, we offer perspectives on four questions that we believe are critical to the success of this executive order.
What are the strategies and standards for departments to conduct assessments?
The effort described in the EO is immense in scope and scale, requiring the seven federal departments to produce supply-chain reviews that can be integrated into a national strategy to improve the resilience of US supply chains. A clear standard for what “good” looks like in each departmental assessment can eliminate confusion and facilitate the integration exercise. A few key actions could help enable the development of that standard.
To start, the National Security Council and National Economic Council could partner with each of the departments tasked in the EO to develop a strategy for the resilience of supply chains in that department’s purview: What risk events should the supply chains be ready for? What is the delivery expectation for the supply chains in those events? What is the cost of building resilience into the supply chain (not only operating costs but also investments in inventory)? Answering these questions, at least directionally, can help departments calibrate their assessments of what vulnerabilities are critical, concerning, or marginal as they conduct their reviews.
Beyond the strategy, elements of this standard may include data sources to draw on, analytical methods to use, measurements for characterizing risk, and reporting mechanisms. Typically, these elements have more impact when they incorporate raw data and analytical dashboards along with more traditional documents and slides.
How can these assessments cross departmental boundaries to aggregate the best perspectives, data, and expertise?
The EO directs the seven departments to lead assessments of six industrial bases relevant to these departments over the next 12 months. However, supply chains in these industrial bases may not fit neatly into any one department—for example, both the Department of Defense and the Department of Energy will likely have data relevant to assessing battery supply chains, and many departments may have relevant information for assessing supply chains for information and communications technology. Characterizing a view of total risk will also rely on aggregating assessments across departments (for example, the total risk of fragility in the US battery supply chain may be more than any individual departmental assessment alone would indicate).
Two potential pathways may help supply comprehensive perspectives to the departments leading each industrial-base assessment:
- Encourage each “lead” department for assessments (for example, the Department of Energy for high-capacity batteries and the broader energy industrial base) to identify and coordinate with staff from other departments who have a stake in those supply chains and industrial bases. This coordination can include establishing a single fact base, data set, analytical approach, and recommendations for supply chains and parts of the industrial base where there is overlap.
- Centralize information sharing through a supply-chain center of excellence, which is staffed by “detailees” from the departments but managed by a designated coordinating agency. This center could be responsible for collecting data across the government, procuring useful data from private-sector providers, merging those data with government data, and providing a central data warehouse for departments to use in their assessment. This central team could also provide analytical guidance and coaching to department teams to help standardize work and ensure the best analytical practices are used in each department’s assessment.
How can the government tap the private sector to support data and talent needs?
Many in the private sector are eager to help the government in this exercise and are working to conduct risk reviews of their own supply chains. Opportunities may exist to include the private sector as a partner in obtaining both data and talent (for example, when the Department of Defense undertook its industrial base assessment to satisfy EO 13806, industry associations and private companies provided data and input).
On the data front, the government could request industry information that will accelerate each department’s assessment, with a strong bias toward information that can be digitally consumed and sorted, rather than requiring hours to read. For instance, the government could ask companies in each industrial base to submit in a standardized manner data on difficult-to-obtain products or materials to complement and validate the government’s own analysis of where challenges exist in the supply chain.
For talent, the government could also invite industry associations or companies in certain industries to give briefings or even to embed staff within government teams. That could help provide the government with a head start on their analysis by sharing what the industry already knows and has found in the relevant supply chains and industrial bases.
How can the effort produce a significant and durable change?
The United States relies on global supply chains that have been built over more than 75 years, starting from the end of World War II. Understanding this evolution and what the next 75 years could look like for the US economy will almost certainly require a US supply-chain-resilience capability beyond the yearlong effort described in this EO.
As the White House and the departments undertake the effort, considering how to build for the long term may help focus resources on efforts that can deliver long-term benefits. Developing a “two-speed” capability may be the answer: a regular, more real-time review of emerging risks in the various industrial bases combined with an annual step back and more strategic review of how global supply chains are evolving and what actions the government needs to take in response.
Additional elements to unlock long-term capability may include government-wide data and analytics capabilities to support resilience assessments, clear standards and governance for conducting these assessments, and a clearly assigned owner for sustaining US supply-chain resilience on a long-term basis across the entire government.
The US government has begun what will be a multiyear journey to improve the resilience, competitiveness, and sustainability of US supply chains. The next 12 months present a unique opportunity to build a new and leading capability within the government. We hope these observations and perspectives on key questions can be helpful to those driving the effort.
