Supply Chains have grown in length and complexity as companies expanded around the world in pursuit of margin improvements. According to a McKinsey study, since the year 2000, the value of intermediate goods traded globally has tripled to more than $10 trillion annually. However, these choices can sometimes lead to unintended consequences if they are not calibrated to risk exposure. In this blogpost we will dive into the concept of Supply Chain resilience and how you can create a resilient business with a modern Supply Chain.
The definition of Supply Chain resiliency
The concept of Supply Chain resiliency traces its roots back to the work of C.S. Holing, an ecologist who first noted the characteristics of a resilient ecological system in 1973. Since then, the notion of resilience has been applied to fields as diverse as psychology, systems thinking, disaster management, and, more recently, Supply Chains. For some, resilience is a reactive capability that occurs after a disruption or shock has taken place. Others see resilience as more proactive efforts toward helping the firm prepare for disruption. Considering these different observations, it is not surprising that there is confusion surrounding this key concept.
We define Supply Chain Resilience as:
“The ability of a Supply Chain to both resist disruptions and recover operational capability after disruptions occur.”
As mentioned above, viewed from this perspective, resilience consists of two critical but complementary system components: the capacity for resistance and the capacity for recovery. The distinctions between Supply Chain resilience, risk, and uncertainty are often blurred and unclear. On top of that, some use risk and uncertainty interchangeably, implying that these two concepts are the same. Yet, this is not the case. While linked, they are separate and distinct concepts.
Supply Chain networks are typically designed for efficiency, cost, and market proximity, but not necessarily for transparency and resilience. Now they are operating in a world where disruptions are regular occurrences. Averaging across industries, companies can now expect Supply Chain disruptions lasting a month or longer to occur every 3.7 years, and the most severe events take a major financial toll.
Risk exists so that firms must deal with the possibilities of encountering situations that can adversely affect them. However, not all future events are equally unknown. Experience offers some insight regarding what events could occur, the probability of their occurrence, and the impact. Firms can predict the likelihood of these events over a set time to help them determine how to react if they were to occur. Events with a greater likelihood and significant potential impact require greater preparation.
93% of Supply Chain leaders plan to increase resilience
Every Supply Chain leader seeks an optimally designed network to reduce costs while improving its resiliency, efficiency, customer service levels, and competitive advantage. Furthermore, business and Supply Chain leaders understand that changes in demand, service expectations, market costs, and reverse logistics can affect the effectiveness of Supply Chain networks. Hence, it could be a business advantage to periodically re-evaluate the Supply Chain design or determine whether a restructure is needed. However, this can be quite costly and time-consuming when done manually. According to a McKinsey survey, 93% of global Supply Chain leaders plan to increase resiliency, and 44% would increase resiliency even at the expense of short-term savings.
Most companies are still in the early stages of their efforts to connect the entire Supply Chain with a seamless flow of data. Digital technologies can deliver major benefits to efficiency and transparency that are yet to be fully realized. Companies now have access to new solutions for running scenarios, assessing trade-offs, improving transparency, accelerating responses, and even changing the cost structures.
Supply Chain complexity is rising
The need to source products from farther around the globe and move them faster while delivering at lower cost has increased complexity and risk while making it harder to respond to sudden disruption. Companies have typically managed their Supply Chains with relatively stable networks, policies, and modes of transportation. This can be challenging in a world of uncertainty. Old ways of planning driven by static assumptions around Supply Chain design are no longer enough. There is an increasing acknowledgment that resiliency necessitates building optionality in nodes, modes, and flows of Supply Chain designs.
We also live in a world of accelerating change, where the future is less and less a copy of the past. Some would argue that change has been accelerating. This sudden acceleration is the product of radical shifts in the growth of computational power and network capacity. For example, an iPhone has nearly 6000 times more transistors than the i486 chip that powered PCs in the late 1980s. Global internet traffic amounts to more than 46,000 gigabytes per second, a nearly 40-million-fold increase since 1992.
Demands are shifting
Both business-to-consumer (B2C) and business-to-business (B2B) companies expect to see meaningful shifts in the shape of future demand. This will affect commercial models. During the COVID-19 pandemic, many households prioritized buying goods (especially basic products such as groceries) over services (such as restaurants and hair salons, many of which were closed anyway).
As a result, pent-up demand could lead to a spike in spending on services as and when normalcy returns. What is still unclear is which services will return and in what form. For example, consumers have been spending more on home-based products, such as streaming and meal delivery. Will those preferences stick, or will consumers revert to their pre-pandemic habits? Or something in between? How quickly will travel and related services recover, and what will consumers expect from these experiences?
The expectation for seamless on-demand delivery will likely require companies to collaborate with the ecosystem in networks. Also, we will see that they will require a personalized experience, which could increasingly replace more traditional, isolated channel strategies. Few companies will be immune to these shifts.
The Supply Chain should be an integral part of the business strategy
For companies competing on a global scale, things can change quickly. All too often, Supply Chain strategy and business strategy have been kept separate. Driven by greater global complexity and the enormous stress that has been placed on networks, from higher customer expectations to dynamic delivery solutions, companies should challenge the traditional thinking that the Supply Chain exists simply to meet the commercial needs of the business. Instead, Supply Chain considerations should become central to business strategy.
The business must be agile in responding to change
Supply Chain agility can be defined as: “The ability to respond rapidly to unpredictable changes in demand or supply.” Many companies are at risk because their response times to demand changes or supply disruptions are too long. Two key ingredients of agility are visibility and velocity. Supply Chain visibility is the ability of all members of the Supply Chain to see from one end of the pipeline to the other. Visibility, for example, implies a clear view of upstream and downstream inventories, demand and supply conditions, and production and purchasing schedules with clear lines of communications and agreement on “one set of numbers.”
Velocity is defined as: “Distance over time.” To increase velocity, time must be reduced. Here we are talking about “end-to-end” pipeline time, i.e., the time it takes to move product and materials from one end of the Supply Chain to the other. It is not just velocity that matters in the creation of agile Supply Chains. It is acceleration. In other words, how rapidly can the Supply Chain react to changes in demand, upwards and downwards? These are the basic foundations for improved Supply Chain velocity and acceleration: Streamlined processes, reduced in-bound lead times, and non-value-added time reduction.
Utilize the digital capabilities of Supply Chain planning
Companies, that utilize the digital capabilities of Supply Chain planning, will be much more resilient, better equipped to handle challenges and compete more effectively. What does that mean in practical terms? What is the point here? Firstly, it is not the first time that Global Supply Chains have experienced a disruption and it will probably not be the last time either. But how do you actually prepare for the next ” disruption ” or for some companies – an obvious opportunity to sell more.
Supply chain planning is still, in many companies, based on a 60 year old paradigm. It assumes, that you predict demand and then massage it into the rest of your supply chain. The premise for doing this is, that you are able to create a precise plan that you can execute. But in that, there is one challenge: the lack of being resilient and uncertainty of whether the plan can be kept at all. In the military the terminology “no plan survives first contact with the enemy ” is used. The same goes for the Supply Chain. It is difficult to predict uncertainties. Uncertainties like what future demand looks like, whether deliveries are on time etc. are difficult to estimate. Some companies try to compensate by working with security stocks.
What can you do instead? Our suggestion is that you start working with the resiliency in the way you do your planning, in other words create a resilient planning model. What do we mean by that? The technologies (cloud-based) should be utilized to a greater extent. Also, you should start working with the planning mindset of the company. This means, practically speaking, that you should work with scenario planning (several scenarios at once) and work with your forecasting accuracy. You can work with your forecasting accuracy by automatically taking into account, as examples, seasonal fluctuations, weather, order sizes and the impact of campaigns. Machine learning combined with human fine-tuning can help improve the demand model over time.
Work with a “Digital Twin”
Another initiative would be to create a physical supply chain and align decisions across the supply chain by working with a “digital twin ” i.e. a digital model of your current Supply Chain. With the digital model of the supply chain you will be able to simulate, how resilient your Supply Chain will be facing a certain variation and uncertainty. It will be possible to test how the Supply Chain will react under different scenarios. It is not possible to guard 100% for the unknown unknown. What you can do is to invest in a planning model and technology that has already incorporated advanced algorithms that are based on a delivery performance towards the markets and at the product level. Technologies that also consider the company’s financial goals such as minimizing working capital, maximizing margins and reducing the risk of an obsolete inventory. It’s about having the technology that constantly helps in making these trade-off decisions.
Companies, that try to plan in the “normal” way will have big challenges in the future. On the other hand, companies that utilize the digital capabilities including automation, advanced algorithms and machine learning will be much better equipped to handle the challenges and compete more effectively.
If you would like to learn more about a digital twin, checkout this blogpost.