For many companies, supply chain excellence has long meant developing the most cost-effective way to deliver a product on time to your customers. While detailed modeling and analysis are often completed to design these “optimal” supply chains, it has usually only been done for a relatively narrow range of supply and demand variability options. When the COVID-19 pandemic hit, many businesses learned the hard way how this tight focus limited their abilities to cope with a sudden shock to their supply chains. The pandemic has proven that the definition of supply chain excellence must be expanded beyond cost effectiveness and on-time performance to also consider supply chain resilience.
A resilient supply chain maximizes an enterprise’s ability to produce and move goods when business is booming while also avoiding potential disruptions by sensing and pivoting in response to changing conditions and unforeseeable variables. It senses when conditions and demands vary from the anticipated in real time. It pivots to nimbly change course in response to the unexpected. Further, a resilient supply chain will also use advanced technologies like artificial intelligence (AI) to push relevant data to people trained to interpret and act on the information thus reducing, or perhaps even eliminating, the impact of potentially calamitous supply chain shocks.
Companies need to evaluate how resilient their supply chains are in order to determine their strengths and vulnerabilities in light of unanticipated shifts and future crises. These evaluations or “stress tests” would resemble the banking stress tests that came into being due to the Great Recession and shifted banks’ focus away from short-term profit toward the long-term resiliency. These risk management exercises have helped the banking industry weather the current pandemic much better than it did the global financial crisis of 2008–2009.
The supply chain version of these stress tests would feed into the development of a plan that sets the course for improving supply chain resilience, with an emphasis on the flexibility needed in the uncertain times ahead. These stress tests would examine supply chain resiliency along a number of different dimensions, including geography, planning, suppliers, distribution, manufacturing, product portfolio/platforms, and financial/working capital. Let’s take a closer look at some of these key dimensions.
Our recent experiences of companies we have “stress tested” in two interconnected industries, consumer packaged goods (CPG) and retail, have shown that resilience can be particularly challenging to achieve in planning. Planning that occurs at an accelerated pace and utilizes advanced technology can help companies navigate shocks to the supply chain. Most CPG companies, however, struggle to switch to accelerated planning (moving from monthly to weekly or daily planning), with nearly half being unable to do so for more than 40% of their total sales. They also are underleveraging technology for their planning efforts; only one in six use demand-sensing technologies or analytical tools for more than half of their sales. Retailers, too, have shown limited capabilities to switch to accelerated planning and are similarly challenged by underutilization of technology and tools.
Retailers and CPG companies also face similar difficulties in working with their suppliers. For example, having alternative sources of supply can help improve resiliency. By prequalifying possible alternative manufacturing providers, CPG companies could ramp up manufacturing in alternative locations during unexpected shocks or disruptions. However, the majority of CPG companies have prequalified alternative manufacturing contracts for less than 20% of their core stock-keeping units (SKUs). For their part, many retailers have constrained their ability to be resilient by depending on a small pool of suppliers for the majority of a given category’s spend.
Supply chain resiliency can also be improved by increasing insight and visibility into downstream supply chain partners. While retailers have strong outbound logistics networks, they lack visibility and control of their inbound transportation networks—a group that includes their CPG partners! Both retailers and CPG companies have very limited visibility into their second-tier suppliers, which leaves CPG companies relatively blind to potential raw material disruptions and component shortages.
The high-tech industry also faces constraints in the supplier dimension that inhibit its resiliency. Companies in the high-tech industry face a somewhat unique supply chain challenge because most of their products are designed around a specific processor. Processors cannot be easily substituted once designed into a product, and since a design is typically employed for two to five years, supply chain redundancy alternatives will be limited. Fortunately, extensive effort is put into ensuring processor supply chain disruptions rarely occur (outside of instances of governmental intervention). Yet the threat of catastrophic supply interruption is real, as companies worldwide have shifted their manufacturing to China—initially for cost reasons, and now because of the vast high-tech ecosystem that has been developed there.
Accentuating the risk posed by the single-country component ecosystem for the high-tech industry is the prevalence of contract manufacturing, which has become standard practice in the high-tech industry. Now, most high-tech companies lack visibility into the base of component suppliers. Even those high-tech companies that source key components themselves rarely focus on components beyond the top 20 or so of their bill of materials. Instead they rely upon their manufacturing partners to manage that portion of spend and any supply visibility and/or delivery challenges that may exist. This creates a major risk not only for the company but also for the entire industry. Increasingly, it will also create risks for the many other industries that rely upon high-tech products, such as the automotive, consumer, medical, and industrial sectors.
We know that every border that has to be crossed to move raw materials, components, and finished goods introduces any number of risks for the supply chain. Selling in the same country where you manufacture thus reduces risk for some percentage of your sales. This strategy has been a boon to those companies that sell their products in the low-cost countries that they have come to rely on for goods production.
Another way to reduce risks and supply interruptions is by designing and making simpler products that use relatively few parts or components. Similarly—though it sounds counterintuitive at first—products designed and built with ingrained software can actually reduce manufacturing complexity by making it possible to modify the built-in functionality of a product with the flip of a virtual switch. Under this strategy, customers pay only for the features that they value, increasing product flexibility and sales options without increasing manufacturing complexity—essentially, this brings the “software-as-a-service” business model into the physical world of objects like automobiles and appliances.
Finally working capital can be wielded as a strategic weapon and help increase resilience in the supply chain. It can be used to lock in supply by, for example, using it to make mass buys of raw materials or of common components that are used across a company’s products. It can even be used to lock in suppliers through strategic supplier management efforts such as investing in a key supplier’s capabilities and facilities.
Overcoming constraints and identifying opportunities
Clearly, traditional approaches to supply chain management are no longer sufficient. Cost and performance remain important, but it is also critical to identify opportunities in the supply chain to reduce risk exposure through increased flexibility and redundancy. The supply chain strategy must evolve if we are to take any positives away from the COVID-19 pandemic and emerge stronger, more competitive, and better able to thrive when faced with the next crisis.