“Everywhere You Look, the Global Supply Chain Is a Mess”
– Wall Street Journal, March 19, 2021
Over the last year, we’ve all seen the headlines. In many areas, our global supply chains are recovering from pandemic-related disruptions, including shutdowns, labor shortages, supply shortages, and transportation disruptions. At the same time, we continue to experience a pandemic-driven rise in consumer demand—which only adds to a backlog, as manufacturers face a variety of supply shortages.
Markets are feeling the impact, and executives continue to cite supply chain disruption as a major factor in missed earnings and weaker forecasts. As our global economy continues to grow and scale, the pace of supply chain disruption is not expected to slow. And that means re-evaluating and challenging your pre-pandemic best practices or status quo.
Managing the Capacity Crunch
Even if these types of events don’t directly affect your supply chain, you still feel the impact. And you still need a strategy for dealing with major disruptors as well as the lingering effects:
- Global capacity crunch
- Long lead times
- Demand volatility
- Supply shortages
- Price volatility
Of course, a lot of the capacity constraints in manufacturing and in transportation are related to disruption from the pandemic, including life-saving efforts to produce and distribute vaccines. But some are related to geopolitical and trade compliance issues.
For example, we all saw Brexit coming. Why didn’t we do something about it? Well, we did; we stockpiled inventory. And that makes good sense as a strategy for mitigating risk when there’s going to be uncertainty. But it also creates fluctuation, as suppliers to those companies faced a sudden surge in activity and demand. And demand fluctuation—even up—is a risk. It’s a good one, but it’s still a risk.
If you don’t have a good strategy in place for dealing with upward or downward swings of demand, you’re going to find yourself scrambling.
Supply chain works beautifully when everything works as predicted and expected, but when things get disrupted, it creates havoc. And that havoc causes people to react and respond in different ways. Some people are well prepared and have plans in place for the various things that can happen. Other people aren’t. And you can’t be prepared for everything. Few people, if any, were prepared for the pandemic—and if you were, you probably would have been fired for stockpiling.
When those kinds of unexpected events hit a supply chain organization, it creates chaos. In addition to the immediate need to find and qualify alternative suppliers, as well as manage the inventory you do have, you have to take a step back and ask: “Do we really have the right supply chain risk management program? Do we have the agility to increase or decrease our capacity when events occur?”
Striking the Right Balance Between ‘Best Practice’ and Risk
Trends and improvements to supply chain practices have benefitted business and economies tremendously. But best practices carry risks as well, and we’re just beginning to confront those risks.
If you focus too much on cost and efficiency and lose focus on risk, your competitive advantage could very quickly turn into a disadvantage.
Interestingly, part of the risk we see today can be traced to decades-old supply chain best practices, such as reducing inventories with “just-in-time” inventory strategies, reducing costs with low-cost country sourcing, and outsourcing many parts of what you do to suppliers with scalability and expertise while focusing on your core competency. The people who figured this out and put these strategies in place early had a competitive advantage.
Those best practice concepts work brilliantly—unless there’s a big problem. If you get out of balance by focusing too much on cost and efficiency while losing focus on the risk, then your competitive advantage could very quickly turn into a disadvantage. So, it’s not only about preventing what can happen—because that’s too costly to be reasonable. It’s about having a plan for how you deal with unforeseen risk and a strategy for mitigating it.
Reinvesting in Supply Chain Risk Management
In 2021, we’re seeing organizations recalibrate their supply chain strategy to adjust for the disruptions of 2020. They’re reinvesting in their supply chain risk management programs and assessing their risk with the goal of building supply chain resilience. New strategies include:
- Returning to a decentralized distribution model
- Building redundancy into the supply chain, including manufacturing capabilities and locations, and retaining multiple suppliers for a given commodity or service
- Reshoring or “nearshoring” manufacturing that was previously offshore
- Investing in technology and collaboration across the supply chain network to enable real-time, end-to-end visibility and monitoring
Resilience Can Turn Disruption into Competitive Advantage
At its heart, risk management is about having a program in place that gives your supply chain organization the resilience to respond and recover from disrupting events. That means articulating and understanding, as a company, “What’s our appetite for risk?” Then put resources behind a risk management program so you can deliver and perform an appropriate level of due diligence and have a sound strategy for managing, mitigating, and monitoring.
Our supply chain optimization team can help you develop a framework for supply chain resilience that provides you with:
- Visibility – created by technology and integration across the end-to-end supply chain network
- Agility – created by supply chain strategy enabling redundancy and alternatives
- Collaboration and communication – on an ongoing basis across supply chain partners and cross-functional stakeholders
- Control – supported by an effective supply chain risk management program and enabling processes, tools, and technology to support tactical execution
As we look beyond today’s headlines and the immediate impact of pandemic-driven disruptions, now’s a good time to recalibrate your organization’s risk tolerance and risk mitigation strategies—and to reinvest in a risk management program.