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Building resilient supply chains today means building them differently. The reasons include not only global or regional emergencies, amply covered elsewhere, but also a few critical, lower-profile pressures that may prove to be even more transformative.
How can companies (and governments) minimise the hit to revenues and profits when so many costs of doing business have risen so sharply?
Just-in-time delivery, a longstanding focus of global supply change management, was largely left by the wayside during the COVID-19 pandemic. Since then, there has been a general acceptance that business sustainability—not just the green kind, but also the existential kind—requires a more complex series of trade-offs.
The encouraging news is that businesses are finding ways to offset new costs through innovation, novel ways of working, new efficiencies, and new capabilities among their people. So, how can companies (and governments) minimise the hit to revenues and profits when so many costs of doing business have risen so sharply?
Digital technologies need a new mindset
First up, sharing. It may sound counterintuitive to businesspeople who have cut their teeth in the latter part of the 20th century and early part of the 21st, but sharing more with others—your suppliers, your distribution network, and sometimes even your competitors—is likely to pay dividends in the new era of supply chain management.
Digital technology, capability and usability are now at the stage where new efficiencies and breakthroughs in fields such as product development are achievable if companies share physical and digital assets. These include sharing operational overheads such as warehousing, freight and distribution, pooling data for better product development, and collaborating for sharper-eyed forecasting with real-time information to predict changes in demand.
The global chip-making industry, for example, has gone from its 2021 boom into a very different phase, with several key companies warning of a downturn in demand and financial performance. True, geopolitical issues swirl around this industry, which some see as vital to national interests, but there are other factors at work, too. The notion that, as pandemic restrictions eased, gamers would put down their consoles, schoolchildren would return to their classrooms, and homeowners would finish their kitchen renovations should not have surprised anyone.
Shared data can provide whole ecosystems with early warnings of the ebbs and flows of demand. New sets of KPIs can reward efficiencies and commercial wins. Responsive contract terms keyed to data flows can alert parties when a new agreement is needed—and can do so more quickly than corporate lawyers could. Rapidly maturing digital twin technology can transform product development and distribution. This isn’t the future, but the present.
Read more: A Return to Grace? Leveraging supply chain agility to rediscover globalisation by Ken Cottrill, Writer; Editor, Independent
Another engine of potential competitive advantage is the environmental, social and governance (ESG) revolution. Properly understood, ESG is not about burnishing brands; it encompasses a wide range of issues, including business continuity and viability—something leaders have faced head on as pandemic- and geopolitical-related disruptions showed businesses how vulnerable they can be.
Companies that build sustainability in from the start can achieve both carbon and cost reduction.
Pressures are mounting. Many businesses have already committed to reducing their carbon footprints under the expansive requirements of the Greenhouse Gas (GHG) Protocol’s Scope 3 definition, which covers emissions generated in a company’s upstream and downstream value chain. And starting next year, larger German employers must show they have systems in place to check for human rights abuses in their supply chain.
These forces are creating opportunities for companies that move quickly. For example, an analysis from earlier this year suggests that while R&D accounts for 5% or less of the total cost of a product, it influences up to 80% of that product’s resource footprint. Companies that build sustainability in from the start can achieve both carbon and cost reduction: an apparel maker halved its packaging’s carbon footprint, while cutting its cost by 20%.
Supply chain transformation—the task
Moving to a substantially new supply chain management model is a large and complex task, clearly falling within the CEO remit. Supply chains consist of “tiers” based on their closeness to you or your final product; a 2021 McKinsey survey showed that only 2% of businesses believed they had a complete picture of their suppliers reaching the third tier and beyond.
Fully overhauling the supply chain network of a globally active business is a very heavy lift. But supply chain transformation programmes can achieve significant impact by developing in-house capabilities, sharpening scenario planning and deepening relationships with suppliers.
An early step is to build a sophisticated, industry-specific model based upon an expanded definition of the value delivered by the supply chain. This type of model attempts to quantify the impact of all the network-related factors that affect an organisation’s performance, from changing input prices and supply disruptions to the cost of carbon emissions. It allows leaders to examine critical network design trade-offs—such as regionalisation versus globalisation or onshore versus nearshore operations—and helps them understand the likely impact of key uncertainties.
From here, an index of competitiveness can be created, with some of the parameters remaining flexible to reflect volatility in, say, shipping costs. Supplier scouting and screening comes next, with potential partners assessed against a prealigned set of metrics such as each supplier’s product categories, customers, revenue and capacity.
New chains, new faces
As businesses face the challenge of reconfiguring their supply chains for resilience, increasingly sophisticated tools and processes can help them make more optimal choices, investments and divestments—and make these moves at the right time.
More than ever, success will depend on how well supply-chain leaders combine collaboration, holistic thinking, adaptability, careful influence and a clear narrative.
But technologies alone cannot achieve their promise without human talent. Strategically critical tasks, such as finding new partners and gradually sharing more information with them, involve soft skills and a new level of problem solving and relationship management. New approaches, new metrics and new management practices will also be essential.
That raises the bar for supply-chain leaders. More than ever, their success will depend on how well they combine collaboration, holistic thinking, adaptability, careful influence and a clear narrative. Together, they can build the culture of supply-chain creativity companies will need so that profits can grow, even in times of adversity.