Building Resilience In Supply Chains

Building Resilience In Supply Chains

15 Mar 2021 | Original

In the last two decades, supply chains have become increasingly globalized. Around the world, profit-seeking organisations have established low-cost country sourcing (LCCS) as an effective tool to realize cost saving targets. This led to the development of intricate supply chains spanning across multiple continents and countries.[1] On the one hand, global supply chains have enhanced efficiency (via just-in-time logistics management), and allowed for greater cost competitiveness (via low production costs). On the other, broad networks increased exposure to global disruptions. That is, the cost benefits of global supply chains are not without risks.

At the micro level, risks can originate from within a particular supply chain or company. This type of risk can impact the performance of a certain product or product line, but is unlikely to cause large scale disruption.[2] At the macro level, external or systemic risks stemming from economic, environmental, geopolitical, societal and technological developments can cause large-scale disruption, and have the potential to create a domino effect across companies and sectors throughout different countries. One example is the recent COVID-19 pandemic, which has caused a massive supply chain disruption around the world, leaving the global economy reeling in its wake. Indeed, COVID-19 has exposed the vulnerability inherent in global networks pushing risk mitigation and supply chain resilience to the forefront of corporate strategy.[3]

While in the short-term companies are clamoring to find quick solutions to stem financial hemorrhage, there is a clear need for building resilient supply chains in the medium- to long-term. Robust procurement strategies will require an integrated model that combines sustainability with traditional supply chain criteria such as price, quality and innovation.[4] The first step in this direction is to conduct a periodic risk analysis for each node in the supply network. Based on this analysis, businesses will need to diversify their suppliers and avoid overly concentrated sourcing (both in terms of companies and countries) to minimize the risk of potential disruptions. Another tool is the regionalization or near-shoring of supply chains. This strategy looks to sourcing goods regionally in order to shorten transportation routes and reduce supply chain risk as well as the environmental impact of distant LCCS.

The corporate need for resilient supply chains coincides with a rise in consumer demand for sustainable and environmentally-conscious products and production. Realizing the importance of sustainable sourcing of raw material for commercial viability, various businesses have prioritized social and environmental sustainability and are requiring suppliers to conform to environmental standards. Many have also incorporated sustainability certification as an effective way of building resilient supply chains.[5] This has allowed global firms to manage procurement risk and address consumer demand for sustainability in one fell swoop.

However, in order to build more resilient supply chains, corporate strategy must look beyond procurement, managing logistics and inventory are equally important. To mitigate logistical risks, businesses have to actively avoid reliance on a single port in a given region, even though this may be at the expense of efficiency.[6] Moreover, alternative transportation options and distribution solutions must be evaluated to ensure that freight costs are not geographically concentrated. In this regard, companies must invest time and resources in identifying and securing logistics capacity, estimating capacity and accelerating, and adapting flexibility on transportation mode.[7] Environmental sustainability must be prioritized to identify innovative transportation solutions which not only reduce costs, but also carbon emissions.

As for inventory management, mitigating supply chain and procurement risk may spell the end for just-in-time systems. In the last few decades, companies around the world have strived to minimize inventory across the supply chain and to use a safety stock buffer to manage supply variability. The recent pandemic has put the spotlight on the need to maintain additional inventories of critical items, especially strategic stock, i.e. raw materials or parts that are sourced from a single supplier and/or require a long time to produce/supply.[8] In order to ensure that customers do not face any supply shortage in disruptive times, businesses will also have to consider the creation of regionalized buffer stocks of essential parts, raw materials and/or finished goods in alternative distribution locations. Active scenario planning using predictive technological tools must also be undertaken to prioritize which products will be produced in the event of raw material or parts inventory shortage, particularly when one component is used to produce multiple finished goods. [9]

In conclusion, global supplier competitiveness coupled with improved accessibility has made LCCS integral to cost-effective procurement. But, as supply bases in all industries feel the impact of the COVID-19 pandemic, newer and more innovative supply chain management has become necessary, not only for recovery, but also to serve as a future preventative measure by building robust production mechanisms that are more resilient to disruptive forces. The effective implementation of this outlook towards solid procurement strategies will require consistent due diligence, clear objectives, and resource commitments.

[1] Chartered Institute of Procurement & Supply. Global Supply Chains. https://www.cips.org/knowledge/procurement-topics-and-skills/supply-chain-management/global-supply-chains/

[2] JLL. 2020. Mitigating risks by building resilient supply chains. https://www.us.jll.com/en/views/mitigating-risks-by-building-resilient-supply-chains

[3] Rennie, R. 26 June, 2020. 3 ways sustainable supply chains can build better business in a post-COVID world. World Economic Forum. https://www.weforum.org/agenda/2020/06/sustainable-supply-chains-covid-19-era/

[4] Ernst & Young. 2016. The State of Sustainable Supply Chains. https://www.ey.com/Publication/vwLUAssets/EY-building-responsible-and-resilient-supply-chains/$FILE/EY-building-responsible-and-resilient-supply-chains.pdf

[5] Rennie, R. (2020.) 3 ways sustainable supply chains can build better business in a post-COVID world. World Economic Forum. https://www.weforum.org/agenda/2020/06/sustainable-supply-chains-covid-19-era/

[6] JLL. (2020). Mitigating risks by building resilient supply chains. https://www.us.jll.com/en/views/mitigating-risks-by-building-resilient-supply-chains

[7] Alicke, K. et al. (2020). Supply-chain recovery in coronavirus times—plan for now and the future. McKinsey & Company. https://www.mckinsey.com/business-functions/operations/our-insights/supply-chain-recovery-in-coronavirus-times-plan-for-now-and-the-future

[8] JLL. (2020). Mitigating risks by building resilient supply chains. https://www.us.jll.com/en/views/mitigating-risks-by-building-resilient-supply-chains

[9] Deloitte. (2020). COVID-19 Managing supply chain risk and disruption. https://www2.deloitte.com/global/en/pages/risk/articles/covid-19-managing-supply-chain-risk-and-disruption.html