New thinking

Supply chain rethink

The pandemic has forced companies to review and reset their supply chains.

Does this herald a more flexible and sustainable approach to sourcing goods?

Nobody was prepared for the Covid-related supply chain meltdown. Companies had little time to respond to widescale logistics upheaval, shortages, and changes in demand.

The speed and scale of disruption had a massive impact on supply chains, exposing weaknesses in critical areas.

In a 2020 survey of senior supply chain executives, global consultancy McKinsey & Company found that:

  • 73% of respondents had problems with their supplier base
  • 75% had problems with production and distribution
  • 85% struggled with inefficient digital technologies
  • 48% experienced delays in planning decisions due to remote working

Not surprisingly, the overwhelming majority of supply chain managers (93%) plan to increase resilience across the supply chain.

Among the most popular ways to build resilience are dual sourcing of raw materials, increasing inventory of essential goods, near-shoring, increasing supplier base, and regionalising supply chains, according to McKinsey.

Key challenges

While the most agile and cash rich companies have quickly moved to improve supply chain resilience, others are being hampered by limited finances and operational issues that may have begun long before the pandemic.

An article on Supply Chain Disruption by professional services company Accenture lists five key challenges:

  1. Multi-country disruptions
  2. Rising costs of supply chains and operations
  3. Lack of flexibility including technology
  4. Pressure to be more sustainable
  5. Talent gaps

The Accenture report states “businesses must navigate the financial and operational challenges of coronavirus while rapidly addressing the needs of their people, customers and suppliers”.

Being agile

One company to successfully adjust its supply chain during the pandemic is Amazon. At the height of the pandemic, facing increasing difficulties meeting demand for essential products, Amazon took swift action to overcome supply chain issues and mitigate risk.

According to CNBC, Amazon told third-party sellers that essential items like hand sanitizer and paper towels would take precedence in its warehouses while demand for these items was high.  The e-commerce giant also moved quickly to employ more staff as online retailing rocketed, although it still needed to overcome delivery delays and shortages of certain products.

Crucially, Amazon had already brought fulfilment operations in-house, enabling individual sellers to ship products to an Amazon warehouse before being shipped by Amazon to its ‘Prime’ members. The company has also continued to invest heavily in new technologies to streamline processes.

Of course, the ecommerce giant had a head-start on rivals, having become one of the dominant players in the market, one of the few sectors to grow during the pandemic. Nonetheless, the Amazon example demonstrates that taking bold action to reset supply chains can not only minimise disruption but also fuel strong growth.

Few organisations are in a position to make radical shifts in supply chain processes so quickly. However, companies that fail to address the key challenges exacerbated by the pandemic are at risk of being left behind.

So, what can you do now for greater supply chain resilience?

Understanding vulnerabilities

Willy C. Shih, Professor of Management Practice in Business Administration at Harvard Business School, says managers should first understand their supply chain vulnerabilities and then take action to improve robustness.

In an article titled Global Supply Chains in a Post-Pandemic World, published in Harvard Business Review, he says leaders “should not totally back away from globalisation” but should instead find ways to make supply chains work better.

He urges managers to delve deep into their supply chain, including distribution and transportation hubs, to identify vulnerabilities and categorise suppliers as low, medium and high risk. Leaders should then decide whether to diversify, with more regionalised supply where possible, or to stockpile. It could be argued the cost of holding extra stock outweighs the cost of disruption.

Investing in process

Another option is to invest in process innovation, especially if organisations are looking to switch suppliers and locations, or bring production in-house. By reducing productions costs through automation, for example, processes could be moved to more localised sites that may be less vulnerable to risk.

This could lead to a shift from massive production facilities serving global consumers to a network of smaller facilities serving regional markets.

A more flexible, localised and digitalised supply chain model should form part of a holistic solution, according to McKinsey.

In a report titled Resetting Supply Chains for the Next Normal, McKinsey experts Knut Alicke, Richa Gupta and Vera Trautwein urge supply chain managers to adopt a comprehensive approach to supply chain resilience comprising:

  • Agile mindsets and behaviours
  • Dedicated risk management functions to prepare long-term mitigation strategies
  • Regionalisation with greater emphasis on supplier footprint
  • Developing online channels and embedding digitalisation such as automation, end-to-end planning and shared service centres
  • Supply chain sustainability

A better future

The McKinsey analysts suggest the role of risk-management can be widened to include factors such as prolonged interruptions of cross-border flows, or social and geopolitical disruptions, which in turn may lead to reconfigured supply chains. The crisis, they argue, “has given companies a unique moment to reimagine operations to create a better future”.

Reimagining the supply chain is likely to lead to greater focus on not only on sustainability but also ethical responsibility. Prior to the pandemic, many companies were already placing more emphasis on audit and certification in this arena.

One firm leading the trend towards more sustainable and ethical operations is PT AJA Sertifikasi in Indonesia, part of AJA Group and a member of Praxity alliance of independent accounting and consulting firms. Sertifikasi provides certification for various supply chain operations including sourcing legal timber and sustainable palm oil.

Organisations that rise to the challenge by adapting quickly to mitigate risk and minimise disruption will not only build greater resilience, but may also achieve greater sustainability across the entire supply chain.

I originally wrote this article for Praxity Global Alliance, the world’s largest alliance of independent accounting and consulting firms.