FEATURED STORY OF THE WEEK
Next-Generation Supply Chains: Best Practices for Future Resilience
In 2020 and 2021, the world learned a harsh lesson about our shared dependency and the inherent vulnerability of modern global supply chains. For decades, supply chains have evolved from mostly domestic and linear operations to become global, interdependent networks that prioritize cost efficiency. It is this relentless focus on efficiency that has made this ecosystem vulnerable; the internationalization of supply chains to take advantage of favorable economic conditions abroad made COVID-19 restrictions and climate-related events all the more disruptive.
As a result, only 21% of supply chain leaders believe their supply chain networks are highly resilient today, Gartner reports. It’s critical these leaders become better prepared for future disruptions—through redundancies (i.e., “backup” supply chains), better inventory management, and a digital-first approach, among other methods.
In this article, we examine the causes and effects of modern supply chain disruptions. Then, we outline potential pathways to greater responsibility and resilience in sourcing practices, including five methods supply chain leaders can adopt to bring about better and greater frequency of positive business results.
Understanding Modern Supply Chain Vulnerabilities
Before the COVID-19 pandemic, both supply chain partners and end consumers had enjoyed years of peak efficiency in global supply chains. These results came about from a status quo-focus on driving down costs, made possible by each supply chain partner focusing on efficiencies within their own operations.
As a result “Supply chains have contorted into multilayer ecosystems, with each node managing its own input costs and inventories and third-party logistics partners acting as the connective tissue,” as Forbes described in November 2021. This approach, which decentralizes overall supply chain management, has made maximizing cost reduction and operational efficiency more achievable.
Essential protections like supply chain visibility, viable redundancies, and maintaining inventory have fallen to the wayside a result. “Generally, firms don’t address supply chain risk with the same gusto as other areas of the business,” Forrester describes. “The end result is that the firm is more vulnerable and susceptible to adverse market reactions and decreased customer retention.”
Today, 58% of supply chain leaders believe that resilience creates additional structural costs to the supply chain network, according to Gartner. But a combination of recent crises—labor shortages, extreme weather events, and of course, the global COVID-19 pandemic—have demonstrated just how critical those efforts are to the resilience of modern business, despite the additional cost.
Pathways to Resilience
Supply chain leaders will face higher operational costs upon prioritizing resilience and agility. But its critical business leaders approach these factors with the same concerns they would with the risks from cybersecurity threats, labor shortages, or other vulnerabilities that receive substantial focus today.
“Supply chain risk is business risk,” Forrester describes. “If the mechanisms, processes, and partners that power our value chain suddenly come to a grinding halt and we’re unable to deliver to our customers, then effectively, we have no business.”
Fortunately, supply chain leaders are beginning to take these responsibilities seriously. Gartner found that “resilience and agility in the supply chain [are] the two main priorities for almost all organizations, with about 90% planning investments to make their supply chain more resilient over the next two years.”
Digital capabilities that support better risk analysis, inventory management, communication, and visibility mean resilience and agility are within reach. Most importantly, new technologies and strategies will facilitate less individualistic, more collaborative supply chain networks that make protecting against future disruptions a shared interest—for the sake of everyone’s bottom line.
5 Methods That Facilitate More Resilient Supply Chains
Although cost efficiency will remain a business priority in supply chain management, priorities like business continuity, risk visibility, and better inventory management must gain greater focus among existing and future supply chain leaders. Striking this balance is difficult, but critical to true resiliency—as well as customer service and business growth.
Here we identify five areas of focus for supply chain leaders hoping to achieve greater agility and resiliency. Consider these strategies as you prioritize digital transformation at your own company and within your supply chain partner network.
1. Diversify Sourcing Geographically
Globalization is characterized by distant international sourcing from economies that make cost reduction possible—despite the often longer journey and increased risk. Recent semiconductor shortages exemplify the flaws in this method. Taiwan and South Korea alone make up 70% of the semiconductor chip manufacturing market, Forbes reported in December 2021; disruptions in those countries related to COVID-19 put the entire market in turmoil as a result.
Manufacturers who rely on these and other resources can mitigate these risks by diversifying sourcing, namely by creating supply chain redundancies. For example, supply chain leaders who “reshore” sources closer to their own manufacturing or retail channels make this possible.
In this way, supply chain makers can facilitate new, domestic markets when sourcing, encouraging local production of critical materials and resources. For example, when Ford launched its new electric vehicle (EV) battery development center in Michigan, they were able to meet the growing demand for electric vehicles domestically without relying on foreign suppliers of EV batteries.
2. Maintain Inventory
Reducing stored inventory and relying on a less costly, “just-in-time” sourcing strategy is common among supply chain leaders today. The risks are clear—a single disruption to existing supply chains results in immediate inventory shortages, sending ripples up the supply chain and even to end consumers.
Storing and maintaining inventory—rather than transitioning goods immediately into production or consumer sales—adds costs to supply chain operations. However, it allows companies to hedge against supply chain risks that might otherwise drive customers away and put them out of business.
Instead, supply chain partners can work together to optimize their use of inventory stockpiles at certain junctions or “nodes” within their supply chains. In doing so, supply chain leaders ensure continuity when disruptions occur at any junction; They can adapt their sourcing strategy before disruptions impact end customers as well.
3. Minimize Supplier Risk
Increasing inventory alone will not be enough to mitigate disruptions, especially when those disruptions are widespread, unpredictable, and ongoing (e.g., the COVID-19 pandemic). In addition to optimizing their use of regional suppliers, supply chain leaders can create redundancies in their global supply chains to further minimize supplier risk.
Risk analysis and strategy starts with asking the right “What if?” questions, thereby identifying scenarios that can drive critical supply chain disruptions and deficiencies. In addition to identifying these scenarios—such as global pandemics, extreme weather events, or political turmoil—supply chain leaders can mitigate risks associated with all partners, subcontractors, equipment, and routes that might create additional disruptions.
Leading software can assist via predictive analysis and “risk networking,” whereby supply chain leaders can measure the quality of potential partners based on the experiences of other companies who work with them. These tools can factor in dozens of variables into their analyses to support decision making associated with selecting suppliers and redundancies.
4. Take a Digital-First Approach
As indicated, new digital tools make selecting suppliers and analyzing risk easier and more cost effective for sourcing teams. Consider another example: digital twins allow supply chain leaders to visualize a digital facsimile of their existing supply chains and test their resiliency against simulated disruptions.
Digitization can enable its own layer of resiliency through enhanced traceability of goods, containers, and vehicles; it can increase resiliency through shared cybersecurity protections as well. As digital tools become more collaborative, they can optimize the costs and operational requirements of resilience between supply chain partners; they can facilitate greater trust between them as a result.
5. Improve Communication and Visibility
Historically, visibility within extended global supply chains has been poor. Fortunately, changes in both regulations and business best practices are driving an evolution in how sourcing professions visualize and hold accountable the entirety of their supply chains.
Digital tools make the real-time flow of vast amounts of information between partners a possibility. Greater visibility and corresponding methods of communication mean supply chain partners can build closeness even as they collectively mitigate risks associated with potential disruptions. When partners share “a single version of the truth,” they reinforce their long-term business relationships, even when disruptions temporarily break the supply chains that bind those businesses together.
The Path to Resilience is Collaborative
Collaboration between supply chain partners is consistent across all five of these best practices. As we emerge from the shared crises of the past three years, ongoing collaboration will be foundational to ensuring resilience in supply chain ecosystems we build for the future.
Partner with Uvation for Supply Chain Transformation
The consultants at Uvation are here to help as you transform your own supply chain initiatives. Book an online session with a supply chain expert and take your first step towards a resilient future.