Supply chains are delicate systems, made up of many moving parts. A problem with one can quickly have a domino effect on others, leaving a business hamstrung, unable to serve its customers and counting a heavy cost.
Nothing has exposed this more ruthlessly than the COVID-19 pandemic and other global events and disruptions. At the start of the pandemic, almost overnight, some businesses began to struggle as parts, components or materials stopped flowing and distribution seized up. Some reset quickly, but had to accept a badly battered bottom line as the price of keeping operations moving. In 2020 alone, supply chain disruption due to the COVID-19 and geopolitical tension is estimated to have cost US and European businesses $4 trillion (USD).
The end of the pandemic might be in sight, but companies could feel the supply chain impact into 2023 and possibly beyond. It’s essential that everyone learns the lessons so they’re ready for the next disruption.
To better understand how businesses coped with the pandemic and what they’d learned, we held 30 interviews with clients across sectors and markets.
If there’s one overriding lesson from those who got it right, it’s that a major upheaval doesn’t have to signal a major crisis in the supply chain. The way to avoid it is by understanding the supply chain and its risks and weaknesses to make it more resilient, and by looking hard at costs across the business.
In this first in our series on post-COVID-19 operations, we show that the sweet spot of higher resilience and lower costs is not just possible, but vital.
Making a supply chain resilient means first understanding it in minute detail. It’s only then that vulnerabilities and risks down the chain become clear, along with what it takes to reduce them. In normal times, this can be a low priority, as the focus is on how to increase or keep up with demand, not look for potential supply issues. Even if businesses understand supply chain risks, they’re often prepared to tolerate them, and do so without a fallback position or plan B to mitigate them.
The consequences of this become clear when risks become reality. Clients told us about uncertainty right through their supply chains as volatility struck. One construction leader told us: ‘Contracts are fixed, as they were negotiated pre-pandemic, but costs have increased in the Tier 1 raw material supply chain and some contractors are struggling financially and on the brink of collapse. They’re asking for more stable and visible demand.’
This scenario points to the need for several steps before the next crisis scenario arrives.
To spot potential weak spots, you need to see them. To do that you need to be able to map every part of the supply chain. Not just your immediate suppliers, but the web of businesses they rely on. Real-time information will help you respond faster to interruptions. Our work with Philips on a new global management organisation that understood and streamlined order management for its medical supply chain, meant they were able to bolster resilience while saving €40 million a year through reduced inventory and optimised distribution.
Look at the world through your suppliers’ eyes. Assess the interdependencies between your suppliers and their suppliers. Where are they vulnerable, how might that affect you, and how can you help them? One client told us: ‘We’re now starting to analyse connections and interconnections long down the road that will affect us eventually, which we weren’t before.’ Measures like working with suppliers to find back-up suppliers or, in some cases, ordering and paying for stock in advance could give them, and you, extra certainty.
In the heat of a crisis, it’s important to avoid knee-jerk decisions that could bake in costs and tie you into contractual binds long after the worst upheaval passes. Policies, contingency plans and playbooks, based on analysing scenarios and wargaming, will give you a guide to roles, procedures and governance, help maintain calm and lead to better decisions.
Removing unnecessary cost from the supply chain and operations is sound business, even if some neglect it in good times. Having other options in reserve also gives you headroom in a crisis. These options enable you to absorb higher costs in some areas to maintain continuity, but still preserve margin because you can bring overall costs down elsewhere. The process of taking cost out is never one-size-fits-all though, and it’ll be necessary to choose and customise standards and tools, like lean thinking, data-driven cost optimisation and product cost engineering.
Transform and energise your enterprise with a smart supply chain
Analyse every component, commodity or material in your supply chain to understand its real cost. This insight into all the markets and trends that feed your business could help you renegotiate better deals with suppliers at the right time, or at least understand the potential for them. This can be a way out of the apparent choice between short-term contracts that squeeze cost but sacrifice reliability, and long-term deals that lock you out of lower-cost opportunities, for instance when prices drop across markets. By hedging commodity prices, an aluminium foil supplier we worked with saved £2 million in six months, and will save £4 million over three years. Plus their supplier also now benefits through a more transparent ‘open book’ approach.
Getting extra transparency through ‘should-cost’ modelling and product cost engineering could also take you a step further into redesigning your product. This would mean not just avoiding over-reliance on a vulnerable supplier but reducing or switching materials, and actually improving the process and product.
Our experience shows that you don’t have to face an uncomfortable trade-off between resilience and cost in your supply chain. Firm control of, and a ‘Plan B’ for, every critical element in the supply chain makes it more capable of resisting disruption, and makes you more capable of controlling cost. It’s the best of both worlds.