Decades of economic integration have led to greater specialization, efficiency, and quality through global value chains. McKinsey Global Institute’s research shows our interdependence, with all regions relying on trade for key products. The COVID-19 pandemic, Russia’s invasion of Ukraine, and other geopolitical conflicts have highlighted the vulnerabilities of global interconnectedness, causing regional disruptions. Supply chain issues, like the semiconductor shortage, have impacted industries worldwide. Future rivalry for global influence may further strain supply chains, posing challenges to economic and national security. Countries must now balance resilience with economic development.
A resilience mechanism for uncertain times
A national, integrated approach to addressing critical supply chain disruptions could be replicated globally or regionally, aiming to enhance resilience. This is crucial for sectors like defense that are vital for national security. A comprehensive approach should include four key elements.
- Institutional body
An overarching institutional body responsible for managing the strategic reserve and coordinating efforts across ministries and directorates through a single governance structure.
- Critical supply chain at risk mapping
A tech enabled methodology to understand national industrial supply chain vulnerabilities by identifying critical products—necessary for individual and national survival—and assessing the associated supply risk to estimate the minimum industrial capacities required for effective risk mitigation.
- Supply chain resilience framework
- Contingency planning
Levers to boost critical supply chain resilience before a crisis include an early warning system to anticipate disruptions, smart strategies for a multiskilled workforce, recalling retirees, and providing a clear demand signal for key sectors by highlighting future demand and investable bottlenecks.
- Diversification
Before implementing complex or costly measures, diversification can reduce national risk by starting or increasing imports from lower-risk sources.
- Minimum capacities mechanisms
For products where diversification is insufficient or impractical to mitigate high or medium risk, three additional options should be considered.
- Cost-effective and efficient storage of products
- Capacities that allow a rapid increase of production in times of possible crisis situation— that is, ever-warm production lines
- Last-resource actions to build national capacities, such as developing new domestic production of critical products of high or medium risk
- Operational enablers
- Key elements to support the strategic reserve’s operations include public-private levers (tax policies, public procurement, subsidies), legal and regulatory frameworks, a technology platform for trade flow data analysis, and an outreach programme to engage industry, academia and public institutions.
An ever-warm production capacity: A potential approach to mitigate critical supply chain risk
Developing ever-warm industrial capacity in critical sectors offers a flexible, low-complexity resilience mechanism for urgent needs and temporary crises, such as supply shortages. This involves partnering with industrial organizations to ensure access to production capacity, with partners committing to deliver specific quantities within a set timeframe. Compensation, through a “reservation fee,” covers precrisis costs like inventory and maintenance, and postcrisis costs such as switching and penalties. Feasibility depends on existing companies’ ability to manufacture, adapt, or expand production. Sustained commitment and investment are necessary, and we have identified three operating models based on urgency.
- Latent production capacity
This model guarantees access to additional capacity for crisis events, suitable for immediate delivery within three months.
- Reconversion of production lines
This model involves repurposing production for alternative uses, suitable for delivering additional capacity within three to 12 months.
- Priority access to production
This model involves redirecting existing capacity, offering flexibility for any delivery speed. Building ever-warm capacity requires ongoing partnerships between institutions and industrial organizations, careful partner selection, and continuous monitoring to ensure preparedness for crises.
Ever-warm learnings
Instances of ever-warm production capacity arrangements for critical industrial supply chains are few, but notable examples include the EU FAB network in Europe and the Biomedical Advanced Research and Development Authority in the U.S. The EU FAB, developed by HERA, creates reserve manufacturing capacities for vaccines, ensuring 700 million doses annually through partnerships with pharmaceutical companies and CMOs, ready for public health emergencies.
The study of ongoing ever-warm examples can offer lessons for effectively implementing robust ever-warm industrial production in the future. Considerations include:
- Be clear from the start:
Develop exhaustive and clear contracts covering the crisis declaration process, quantity and timeframe commitments, price structures pre- and post-crisis, and protection against international takeovers or geopolitical scenarios.
- Keep communication lines open:
Traditional contracting may not work; instead, use open dialogue with industrial companies before and during the contract. Include risk-sharing provisions and develop an effective conditions package.
- Embrace diversification:
Diversify among companies, exploring those with vertical integration or consortium structures. Assess diversification by company footprint and geographical presence, not just quantity.
A more resilient supply chain to strengthen national security
An integrated approach to resilient critical industrial supply chains can help the EU manage trade dependencies, enhance industrial capacity in critical sectors, and leverage collective strengths. Smart resilience strategies, like ever-warm industrial capacity, are vital for national security sectors such as defense, and essential products like antibiotics and fertilizers. Seamless collaboration between industrial and public entities, strong partnerships, and well-designed contracts are crucial for successful implementation.
Click to read more: https://www.mckinsey.com/industries/aerospace-and-defense/our-insights/strengthening-national-security-through-a-more-resilient-supply-chain
