THIS WEEK IN WASHINGTON
April 30, 2020
Should our critical health care needs be manufactured in the U.S.?
An interview with Joe Carson – A Supply Chain Expert
 
by Steve Gordon , Total Spectrum Managing Director
And Congressman Erik Paulsen ( R-MN) (2009-2019), Total Spectrum Strategic Consultant
 
The COVID-19 crisis has exposed potential vulnerabilities when part of a company’s supply chain is outside of the U.S., especially for critical industries like health care.
 
In March, Senator Dick Durbin (D-IL) and Senator Lamar Alexander (R-TN) introduced bipartisan legislation to safeguard America’s medical supply chain and address shortages due to our country’s dependence on foreign made medical equipment. Joining Senators Durbin and Alexander in sponsoring this legislation were nine Senators, including Senators Roy Blunt (R-MO), Patty Murray (D-WA), Mitt Romney (R-UT), Doug Jones (D-AL), and Tina Smith (D-MN).
 
They pointed out that 40 percent of finished drugs and 60 percent of active pharmaceutical ingredients are manufactured overseas, primarily in China and India. The proposal directed the National Academies of Sciences, Engineering, and Medicine to assess the dependence and vulnerabilities that the U.S. has to critical medicines, medical devices, and medical equipment sourced from or manufactured in foreign counties.
 
This proposal was enacted as part of the CARES stimulus legislation.
 
Last week we reached out to Joe Carson for his thoughts and a clarification on the issue. Mr. Carson has served as a transformational supply chain agent for the last 30 years. His previous leadership positions included Chief Procurement Officer at Lucent Technologies and at Micron Technologies, in addition to other roles as a Vice President of Supply Chain Management, Operational Excellence Executive, and Chief Strategy Officer. He is currently the Chief Executive Officer of Spend Strategies LLC. Joe received his undergraduate degree in electrical engineering at the Georgia Institute of Technology and earned an MBA from Duke’s Fuqua School of Business.
 
EP: Joe, thank you for agreeing to visit with our readers. You have been a Chief Procurement Officer for two major technology companies – Micron and Lucent Technologies – so I’m sure the terms supply chain management and supply chain risk management have been part of your world for a great number of years. But start please by defining what both terms mean.
 
Joe Carson: These two topics - supply chain management and supply chain risk management - have become even more interrelated as supply chains have become more dispersed and therefore have introduced more risk into their businesses. Supply chain management is the linking together of all the products and services that go into a final product. Think of a toaster: the supply chain for a toaster not only includes all the sheet metal, dials and heating elements that are part of a toaster, but also includes the factory where it is assembled, boxed up, and finally the trucking company that gets it to a store near you. Supply chain risk management considers all the potential threats that affect the continuity of supply. That includes the visibility to world events that could possibly interrupt the flow of that toaster along its way to your local store, and the planning that goes into alleviating the impact of those risks. Prospective risks could be a factory fire at the store that makes the dials, a labor strike at the shipping port it had to pass through, or yes, even a global pandemic that closes the plant where it is made.
 
SG: Senators and Congressmen from both sides of the aisle have begun to make us aware that a significant amount of the key ingredients used to manufacture pharmaceuticals and much of the medical equipment we are using in our fight against COVID-19 are manufactured in China. How did we get here?
 
JC: Let’s back up a little bit… all the way to the late 90’s. Then, the economics became favorable to move a bulk of one’s manufacturing to Asia, specifically China. I saw this firsthand as a CPO of a then-leading telecom company. We saw amazing savings – in the 30 – 40% range. After the dotcom bust, even more savings were needed. These pressures prompted the push to find local Asian-based sub tier suppliers to feed components to the previously moved manufacturing. This process, known as “localization,” identified the nearby, mostly Chinese, suppliers to service the outsourced overseas manufacturer that were making these products for us. This method of leveraging localized suppliers brought another tranche of exceptional cost savings. These savings allowed many companies to survive the recession of the early 2000’s, and then later in 2008, when economies also needed an extra cost cushion. Unfortunately, those profits came at the cost of increasing the risk that we are experiencing today. Our ultimate supply chain, down multiple tiers, became invisible and therefore unmanageable.
 
SG: But to be fair, I presume you agree that American manufacturers of all sorts of products found that they could not compete in a global marketplace because of the high cost of federal and state regulations. Many manufacturers didn’t go to the Far East to gain profits, but to just stay competitive. If I understand correctly, your focus is on the supply chain of products that are clearly central to the health and security of Americans – things we need during the COVID-19 emergency.
 
JC: That’s right. I believe that it is in our national interest to focus on the supply chain for pharmaceuticals and critical medical equipment. We can tackle the cost and technology issues that stand in the way of shortening those supply lines to ones for which we have direct control in a crisis. These problems are solvable with innovation and focus.
 
SG: What has the battle with COVID-19 exposed and revealed about the problems inherent with having a significant portion of a company’s supply chain outside of the U.S.?
 
JC: Several weak links become apparent with COVID-19, but these newly exposed vulnerabilities need to be viewed in the context of the events we were dealing with before the virus began. Over the past year or so, U.S. supply chains were busily adjusting their supply chains due to their current exposure to China’s supply chain dominance, highlighted by the Administration’s tariff negotiations. Some companies had already begun thinking about either near-shoring or on-shoring more of their purchases, either in-whole or in-part.
 
With COVID-19, we saw the consequences of long supply lines that originate far away in foreign countries where we do not have the access when we needed it. In some cases, companies did not even have the visibility to be able to see who their suppliers are deep down in their supply chain. In our toaster example, we may know who finally assembled it, but would not know the maker of the screws that went into the sheet metal that went into the toaster. Alas, even without the lowly screw, the toaster is not built! Absent that visibility, and with supply managers sheltering in place at home, traditional communication tools such as emailing and hoping for a response were unproductive and inefficient at best. This may be inconvenient when speaking of a toaster, but dangerous when what we need is a ventilator for a loved one, or personal protective equipment for medical staff.
 
Also revealed though is the amazing example of spontaneous American ingenuity. When we found ourselves short of masks and ventilators, many American companies changed their production lines to produce the needed supplies in what seemed like an overnight transition. Make note of that capability. This ability to pivot a factory in a crisis could serve us well for the next one.
 
SG: Could you define and talk a little about supply chain risk management? Specifically, describe please how companies can manage the inherent risks of supply chains.
 
JC: This is a complex topic, but it can be summarized by three key elements:
 
1.   Instant awareness of global events that might impact the supply chain. These could be major events like a tsunami or an earthquake but could also be very local events like a factory fire or sub tier supplier financial default. These news feeds could come from a variety of sources, in multiple languages, so ultra-fast sensing and translating is essential.
2.   If one of your suppliers (or a supplier to your supplier) is affected, then it is critical to have the ability to communicate with them in real time to determine how long it will take them to recover and ensure they do not miss a shipment to you.
3.   Use this data to marshal the internal company resources in order to respond to a disruptive event. Coordinate with other supply chain team members and communicate to customers.
 
The best of the best companies use these leading edge practices – from how they leverage technology for specific and tailored newsfeeds, to how deep and accurate their visibility is into their supply chain. With these in place, supply chain risk management teams would be ready to leap into action.
 
SG: There will be time for reflection and adjustment once the COVID-19 crisis is under control. What should some of the takeaways be?
 
JC: I am sure there will be many but will list out a few.
 
Although globalization works well in predictable times, every country must have scalable supply chain elements in place that can be called upon during black swan events like COVID-19. Medicines and medical supplies are the most notable examples from this disruption. Not all medicines or even equipment can be stockpiled forever either. They must be replenished and refreshed. We need domestic supply lines that can be scaled to feed and replenish our needs.
 
The effort to coordinate private and public sector assets is an immense undertaking. Matching supply with local needs across state lines and at the federal level to serve 326 million people takes extraordinary coordination. Even with impressive coordination, I am sure we will look back and find areas for improvement for the next time. Those should be captured and institutionalized.
 
While we all have our own lists for things-to-do-better, we cannot exclusively base those plans on a repeat forecast of a highly contagious virus as experienced this time. The next national crisis will almost certainly be something else with its own response needs. Our ability to scan our environment, sense potential risks and prepare for the unplannable, at scale, needs to be a consistent skill set.
 
SG: I have heard you talk about the program you call the United States S.A.F.E. supply chain. How will your program help us secure the US supply chain? How will your program help private companies help the U.S. Government so we don’t have supply chain problems with healthcare companies like we did during this COVID-19 crisis?
 
JC: I believe our nation’s obligation to keep Americans SAFE would be best served by focusing on four key areas represented by the acronym S.A.F.E. - Source, Activate, Fabricate and Extend. Although I have focused on our problems in the U.S., these same principles are most likely valid for any country that has found itself in the same predicament.
 
Source - Identify our future critical needs and develop U.S.-based sourcing plans accordingly. Several hurdles will need to be addressed to support capital equipment cost issues and access to raw materials.
 
Activate – As with COVID-19, quickly engage and coordinate an All-of-America approach with the appropriate sources of supply. Since each event will be different, the planning effort and fast execution will vary.
 
Fabricate – Where not stockpiled, re-mission private and public assets to manufacture what Americans need at whatever scale is required.
 
Extend – Coordinated logistics and AI-driven exchanges that quickly match supply with demand needs. Also extend our vision to the next crisis and ensure planning is in place.
 
I recently published an article on this topic where you can read about this idea in more detail.
 
EP: What role does the federal government have in helping to encourage healthcare companies to relocate key parts of their supply chain back to the U.S. or very friendly allies?
 
JC: After this is all over, we will need the continued coordination of the federal government, in coordination with the states and friendly allies. I see a few areas of investment.
 
We saw many Americans who were suddenly displaced. We also witnessed unexpected and unplanned shortages of manpower elsewhere in the economy. Over the short-term, help is needed to coordinate these temporary shifts in the labor market and keep as many people earning a paycheck as possible. Longer term, as more of the supply chain is moved back here, reskilling labor and helping match those freshly skilled to newfound openings will need synchronization.
 
Tax incentives should support investments in brick and mortar factories, factory automation technology, and automation capital equipment. These factories need to be in place and have the capability to either help support our stockpiles or be reassigned during a crisis.
 
Over the short term, supply lines still need raw material from other parts of the world. Raw materials called Rare Earths used to make batteries and computer touch screens are so difficult to obtain that they will need to be included in trade negotiations. Other more mundane raw materials just need transportation back to the U.S. and stored for use by the newly on-shored factories. These shipments would also support American air and sea carriers that have struggled during the pandemic.
 
I hope these observations are helpful. If readers have any further questions, they can feel free to contact me at joecarson@spendstrategies.com or through my LinkedIn profile.
This e-newsletter is produced by Total Spectrum/SGA and Total Spectrum Georgia. The views expressed herein may include subjective commentary and analysis that are the views of the editors and authors alone. Information in this e-newsletter is obtained from sources believed to be reliable, but that cannot be guaranteed as independently investigated or verified. Information in this e-newsletter is not an endorsement, advertisement, recommendation, or any type of advice, political, legal, financial, or otherwise. With questions about the content of this e-newsletter, please contact Total Spectrum Georgia.