The Future Is Not What It Used To Be - Part 2
‘Business as usual’ is not a phrase that is currently valid.
In Part 1 of the article we discussed the need for a more robust examination of risk and reviewed the lessons to be learnt from the winners and losers from previous events that could helps us to survive this crisis and be prepared for the next one. A key element of getting prepared is making sure that we have a supply chain that we can rely upon. The resilience of the supply chain must be assessed thoroughly, and risk-impact estimates and remediation strategies continually updated.
In this second part, we expand our thoughts on the changes necessary to build and manage a resilient Supply Chain
It is apparent that for many organisations, the globalisation of manufacturing has created a scenario where supply chains are unprepared for disruption. They’re either too localised into specific regions, where they will be subject to the same political, economic, social and natural disaster risk, or span multiple continents and tiers to the points where end-user businesses won’t be aware of associated links to other environmental, human rights abuse and other moral and sustainability issues.
As procurement teams struggle to cope with the Covid-19 global pandemic, crucial information is often not available to them. As a result, their response to the disruption has been reactive and uncoordinated, and the impact of the crisis is crippling many of their business’s.
Procurement professionals must take the initiative in assessing the resilience of supply chains in the wake of the coronavirus outbreak.
A decades-long focus on supply chain optimisation to minimise costs, reduce inventories, and drive up asset utilisation has removed buffers and flexibility to absorb disruption.
COVID-19 illustrates that many companies are not fully aware of the vulnerability of their supply chain relationships to global shocks.
Despite numerous supply-chain upheavals inflicted by disasters in the last decade — including the eruption of a volcano in Iceland, the Japanese earthquake and tsunami, Thailand floods, and Hurricanes Maria and Harvey — most companies stillfound themselves unprepared for the Covid-19 pandemic. Seventy percent of 300 respondents to a survey conducted in late January and early February, immediately following the Covid-19 outbreak in China, said they were still in data collection and assessment mode, manually trying to identify which of their suppliers had a site in the specific locked-down regions of China.
Supply chain professionals, as a part of Category Management, need to reassess what sort of returns are they expecting to achieve through sourcing from fewer destinations (bundling ordering) and offset these against the risk of failure. Every organisation should evaluate what level of returns they can forego to achieve diversification.
The companies that invested time in mapping their supply networks before the pandemic will be better prepared. They have better visibility into the structure of their supply chains. Instead of scrambling at the last minute, they have a lot of information at their fingertips within minutes of a potential disruption. They know exactly which suppliers, sites, parts, and products are at risk, which allows them to put themselves first in line to secure constrained inventory and capacity at alternate sites or suppliers.
While companies closely track their direct suppliers — the tier ones — they can be blind to their suppliers’ factories, the tier twos, and those further down the chain. Bain & Co estimated that up to 60 per cent of executives have no knowledge of the items in their supply chain beyond the tier one group.
Many companies in this current crisis are justwaking up to this.
The Financial Times notes that “300 of the world’s top 500 companies have facilities in Wuhan, Hubei’s capital”. About1,800 manufactured parts originate in the quarantined areas of China centred around Hubei province. Many companiescould have been affected by shortages for capacitors and resistors – tiny things that nobody cares about - inexpensive but critical components used in the printed circuit boards of high-tech consumer electronics.
The visibility created by supply chain mapping is not only considered to be key to optimising supply chain efficiency and agility during normal production but when critical supply chain disruptions hit, this visibility becomes crucial to understanding the impact of the disruption on the rest of the chain.
Finally, as part of Category Management inventory management (key components, values, locations and ownership) should be reviewed together with critical contracts which should spell out expected recovery times and methods during disruptive events.
Managing the Demand
Production stoppages in China and Europe are disrupting supply chains across the world. However, the problems will not become acute until demand starts to return
As the crisis has come under control in China and Europe the drop in demand for goods among the countries most affected by Covid-19 has eclipsed the supply-side factors.
The pandemic has, after all, taught us that we can get by without ceaseless shopping for consumer goods, social events and going on long-haul flights for holidays.
Understand market stimuli and assess realistic final-customer demand
A crisis may increase or decrease demand for particular products, making the estimation of realistic final-customer demand harder and more important. Businesses should question whether the demand signals they are receiving from their immediate customers, both short and medium term, are realistic and reflect underlying uncertainties in the forecast and changes in consumer behaviours. The demand-planning team, using its industry experience and available analytical tools, should be able to find a reliable demand signal to determine necessary supply—the result of which should be discussed and agreed upon in the integrated sales inventory and operations planning (SIOP) process.
The following supply chain actions are necessary in order to both survive in the short term and thrive in the longer term:
Look to de-risk the supply chain by considering on-shoring, local and global diversification
Optimise risk and cost
Conduct a risk analysis for the supply chain and include any appropriate risks as identified for the Company
Any crisis might be unique to the company, the industry sector or geographically
There is a need to consider the effects on the supply chain from other industry sectors i.e. you might be procuring from a supply chain that is highly dependent upon another industry sector that has been affected to a different degree
Create transparency on multitier supply chains, establishing a list of critical components, determining the origin of supply, and identifying alternative sources.
Assess the risk of interruption and identify tier-2 and beyond risk
Estimate available inventory along the value chain
including spare parts and after-sales stock—for use as a bridge to keep production running and enable delivery to customers.
Assess realistic final-customer demand and respond to (or, where possible, contain) shortage-buying behaviour of customers.
The past is no longer the basis upon which to predict the future
Work with SIOP (sales, inventory & operation planning) to predict true demand and thus the required supply
Use market intelligence, agencies and databases to better predict final customer behaviour and demand
Optimise production and distribution capacity to ensure employee safety to understand capacity levels both in workforce and supplies
Identify and secure logistics capacity,
Estimate available capacity
be flexible on transportation mode and collaborate with other parties to leverage capacity
Manage cash and net working capital by running stress tests to understand where supply-chain issues will start to cause a financial impact.
Run supply chain stress tests on major suppliers’ balance sheets
There have already been plenty of parallels between the response to the coronavirus and the required response to the climate crisis, that is a global and cohesive effort to minimise the impacts of the pandemic.
In a similar fashion to Covid-19, failure to act on other global crises such as climate change is set to destroy livelihoods, shrink the economy and disrupt business practices and profitability. In the immediate aftermath to the coronavirus outbreak, many thought leaders are encouraging chief executives to focus on the robustness and resilience of their supply chains to respond to future challenges, whether they be pandemics, natural disasters, political upheaval or climate-inducedcrises.
It is likely that supply chains will no longer be predominately cost driven activities for businesses, where they channel their procurement towards cheaper labour and materials located in one or two low cost locations. Instead, businesses may well be willing to pay a premium to future proof their supply chains, by spending more on mapping and directingprocurement towards certified and sustainable sources that are better equipped to deal with the challenges posed by social, economic and political upheavals, climate change and natural disasters.
Article by Rob Aston, Principal Consultant at ConsultAvila.
At ConsultAvila we are a team of experienced professionals who work closely with our clients to solve complex business problems. We have a track record of delivering SUSTAINABLECHANGE at pace in manufacturing companies. Our principal offerings are: Business and Operations strategy - from design to delivery; Business turnaround and programme recovery; End to end supply chain restructuring and cost reduction; and, Integrated business planning and inventory optimisation.