Supply Chain Risk – Supply Chain Resiliency – Knowing Where You Are Vulnerable and Doing Something About it
Supply Chain Risk and Supply Chain Resiliency are very real threats to companies as they try to recover from the pandemic, or any other disruption. It’s a topic that most companies don’t spend a lot of time on. They expect their Tier 1 suppliers to manage this reliably deliver just in time with high quality and low cost. Over the last 50 years, supply chains have evolved into complex global networks that few companies understand beyond their Tier 1 suppliers. In 2018, global trade soared above $19T which is 25% of global GDP according to the World Trade Organization. Every company we work with buys international goods to build and deliver their services and products. Companies are facing more disruptions in their supply chains because of contagion, geopolitics, tariffs, trade tensions, natural disasters, port strikes, etc. And yet, companies have less supply chain visibility than ever before. The current trends indicate disruptions are going to increase in frequency in the future. They significantly increase supply chain risk and each major disruption in the supply chain can require months to recover.
Larger companies in the pharmaceutical, aviation and automotive industries have supply chain risk teams that are focused on modeling and understanding these risks as well as creating contingency plans. As companies have become leaner, many of them have dissolved their supply chain risk management groups. The majority of middle market companies don’t have risk management teams and pay lip service to supply chain risk management. Due diligence is done on a supplier prior to on-boarding and companies don’t pay much attention to risk factors again – unless there is a problem. While this has worked to some extent, every disruption increases supply chain costs. If companies were to do a proper Total Cost of Ownership (TCO) analysis they would find out how much their products and services truly cost. The COVID-19 pandemic has amplified these points to a level that no one has experienced. Supply chain performance will become a key differentiator in the future. Changing buying habits, such as eCommerce will require companies to be more focused on supply chain visibility.
This is where understanding Supply Chain Resiliency is important. Supply chain resiliency is defined as the supply chain’s ability to be prepared for and recover from disruption. The recent pandemic has caused major supply chain disruptions that will take many quarters to recover, and maybe years depending on the industry. Every company needs to develop a supply chain strategy which requires understanding the risks in their supply chains and mitigates those risk with contingency plans. Not an easy task given today’s global supply chain risk profiles as shown in the graphic below:
These are just some of the elements to consider. The list is much longer and requires careful consideration when putting together a supply chain strategy that takes into account supply chain risk and supply chain resiliency.
The most recent disruption, COVID-19, has caused massive supply chain disruptions. The supply and demand mismatch has caused significant changes in lead times and component availability as shown below.
Some lead times for various products have increased 20-300% and expediting costs have skyrocketed. The green line indicates normal supply chain lead times and the grey line shows how they have significantly increased. This slide is discussed in more detail in “Managing Your Way Through 2020” and is part of our Re-Opening Your Business series of articles that outline best practices we have gleaned from our experience, our clients and other professionals we work with.
Companies need to develop a clear picture of the recovery of their industry and its impact on their business. Every industry will have a different recovery pattern and while we don’t know what will really happen, companies need to put together a forecast with trigger points that define various sets of actions should one of those up or down triggers be hit – Scenario planning. Once done, we recommend the development of the following:
- A detailed Sales, Inventory and Operations Plan ( SI&OP ) and movement to weekly sprints
- Collaboration at a new level
- Meetings with each supplier to discuss your plan and their ability to support it
- Detailed discussions with customers to know what they need and when
- Detailed discussions about the supplier’s risks – financial, capacity, throughput, lead times, upstream supplier risks they have, etc.
- Identification of critical components further upstream and meeting with those suppliers to develop a plan to deal with those risks
- Development of alternate manufacturing/supply strategies to level out supply disruptions/lumpiness that are uncovered
Short term, companies need to derisk their supply chains for the balance of 2020.
Longer term, supply chain strategy needs to include supply chain resiliency as a strategic pillar. Supply chain disruptions are likely to increase in frequency which will require supply chain leaders to be transformative in the following areas:
- Edge technologies that will provide more supply chain visibility
- Supply chain mapping and nodal simplification
- Organization design and people skills
- Business processes
- Collaboration with suppliers and customers
- Supplier diversification
- Mitigating supply chain risk – Control Towers
Supply chains can be differentiators in the market place and those companies that are innovative and transformative will perform significantly better than their peers when the “New Normal” happens.
This article is part of Group50’s Reopening Your Business series which provide insights and best practices to senior leaders in manufacturing and distribution.
If you would like to have a more in-depth discussion about supply chain strategy, risk, resiliency and or transformation, feel free to call a Group50 supply chain subject matter expert at (909) 949-9083, send a note to firstname.lastname@example.org, or request more information here.
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