Companies need to become more resilient in their supply chain strategies but without sacrificing cost-effectiveness, warn experts
The Covid-19 crisis has been a wake-up call for supply chain professionals, on whom marketing teams are often so dependant.
According to a study by the Boston Consulting Group (BCG), for years, companies have focused on eliminating redundancy in sourcing to reduce fixed costs and promote efficiency. Greater efficiency, however, came at the expense of diminished flexibility and effectiveness – a tradeoff the pandemic-induced supply chain disruptions have made painfully clear.
And the disruptions are not yet over. BCG predicts that as the global economy emerges from the pandemic, supply chains will continue to face severe challenges:
Product portfolios and offerings have exploded in size and diversity.
Production and supply networks have become increasingly complex.
External pressures, including regulations and trade barriers, have intensified.
Customer segments have become more volatile, with rising service requirements.
Multiple stakeholders are demanding action to promote sustainability.
“In the face of such challenges, many companies struggle to optimise supply chains from end to end, leading to major impact on value delivery. To address these issues, companies need to become more resilient without sacrificing cost-effectiveness,” the study states.
“A resilient supply chain allows companies to be responsive to customer needs and maintain high service levels while also keeping net working capital and costs under control.”
Three pillars to absorb supply chain shocks
BCG says three pillars should support a company’s efforts to absorb supply chain shocks: Redesigning the global network; Setting new parameters for supply chain buffers; and Proactively managing suppliers. Examining these in more detail:
Redesigning the Global Network. A resilient network for supply, manufacturing and distribution achieves flexibility through selective applications of redundancy, such as dual sourcing.
Other approaches include ‘near-shoring’ (as opposed to ‘offshoring’) to reduce dependence on complex global logistics and vertical integration to bring manufacturing for critical components in-house. A comprehensive risk assessment can provide the basis for determining how to balance flexibility, efficiency and effectiveness when redesigning a global network.
Setting New Parameters for Supply Chain Buffers. To promote resilience, a company needs to develop an effective multi-echelon inventory strategy, which typically leads to new inventory targets in the supply chain’s high-volatility nodes.
In addition, companies should evaluate resetting their capacity utilisation targets and identify triggers that signal when to add capacity, or activate ready-to-use capacity based on utilisation trends.
It is also essential to align order fulfilment strategies (whether “make to order” or “make to stock”) to customer needs.
Proactively Managing Suppliers. Resilient companies assess the criticality of suppliers and adjust supplier relationships to ensure resource availability. They also gain transparency into multiple tiers of suppliers so that they can fully assess upstream risks.
To gain visibility into the reliability of suppliers, they monitor traditional KPIs such as “on time, in full” and other risk KPIs such as credit ratings and geographic concentration. They also require suppliers to share relevant information on a periodic basis.
“Companies that succeed in establishing real-world resilience will be rewarded with smoother supply operations in the face of both normal volatility and severe disruptions,” the study’s authors emphasise.