SUPPLY CHAIN RISK ESCALATION: A Risk Management Approach

Supply chain risk is getting and has gotten much global attention, beginning with the pandemic. Disruptions are continuing and becoming global trade threats. Geopolitics and a potential bipolar trade war have elevated risk recognition since supply chain risk is enterprise risk. 

There is more, and they vary by industries, markets, and other delineators. And risks are becoming macro. For example, climate change threats and the impact of decarbonization are increasing. 

What is needed is to see supply chain risk as a series of rolling events. It is not about discrete actions. Disruption is ongoing. Four years and counting. And their impact is escalating. That increases the need for risk management. Identify. Assess. Mitigate. And doing it recognizing the size and complexity of the end-to-end supply chain. 

With the end-to-end size and complexity and with the extended participants of supply chains, general risk mitigation is not adequate. A broader yet targeted approach is needed. 

With that supply chain reality, addressing risk requires an approach, a strategy. It is not to react by moving from task to task in an attempt to fix it.  And that is what this is about—how to identify, assess, and mitigate supply chain risk.

For starters, there are questions:

·       What are the risks?

·       How do they affect me?

·       What do I do about them?

Before we get too far, a note. Not all firms see risks. They may be risk and change adverse or have risk blindness. Also, topics, such as freight rates, are misdirection to not seeing and understanding what all is happening. Firms miss the supply chain uncertainty and its effects--inventory and more.   

The term covers broad issues and narrow topics. Insurance companies talk about supply chain risk in terms of assets. Others talk about sources for particular products. Some take a near-apocalyptic view. These diverse interpretations make identifying risks more challenging and interesting.

Surprisingly, many supply chain risk discussions exclude the actual supply chain. They do not recognize logistics infrastructure, logistics service providers, and how products move through supply chains. Many times, a picture, such as a ship, is used to show the "supply chain". As a result, they overlook risks.

These also do not present the information supply chain and how it affects the movement of goods and commodities. Nor are Incoterms mentioned and what they mean to buyers versus sellers controlling the passage of goods. Yet, such details can create risk.

Supply Chains. Three segments must be recognized in your risk endeavor—

·       Upstream/inbound

·       Downstream/outbound

·       Intermediate

Upstream is where suppliers and their suppliers are. Downstream is customers or stores. Intermediate is how and where you position your network for inventory and other activities.

In turn, the four key components of supply chains are -

• Product/material/commodity/component sources
• Suppliers
• Logistics infrastructure
• Logistics service providers 

Supply chains originate upstream at their sources; those are often suppliers and their factories. For commodities, such as food, there are multiple sources, the actual farms and the locations where the food is processed, chilled, frozen, or however treated. In those cases, both places should be included in the supply chain scope. So, the review should go from the start of the supply chain and continue through to final destination delivery.

• Causes. There are many kinds of external and internal risks-- organizational, operational, strategic, and commercial. Causes can be pervasive. These disrupt the availability of products or their flows. They vary by products and industries and include -

  • Geopolitics
  • Terrorism
  • War
  • Climate change
  • Weather
  • Natural disasters
  • Inadequate logistics infrastructure
  • Logistics service providers bankruptcies, mergers, or other actions that impact the supply of and ability to provide needed services
  • Infrastructure breakdowns
  • Bottlenecks / Congestion
  • Suppliers
  • Markets
  • Prices
  • Company management
  • Logistic service providers that do not operate and perform as needed 
    • Improper or unmanaged outsourcing
    • Regulatory
    • Strikes
    • Combinations of the above

    Risk is also caused by the trade parties. Buyers and sellers in their pursuit of the best prices or their lack of understanding of supply chains create risk.

    Model. The supply chain risk model blends principles of supply chain management.

    
    
    

    The model reflects--

    1) Security. Supply chains should be protected from external forces, loss, deterioration, contamination, theft, and other vulnerability issues.

    2) Accountability. This goes beyond sales agreements and Incoterms. It is the responsibility for the safe flow through the supply chain and encompasses many stakeholders.

    3) Visibility. Knowing where items are throughout the entire movement is critical. Technology plays a vital role in facilitating traceability, trackability, and chain of custody. It is also important if there is a recall or safety issue, and the cause must be traced back.

    4) Product / Logistics Specifics. Products may require special handling for logistics infrastructure and service providers. The necessary temperature, humidity, cleanliness/sanitation, weight, heavy lift, and other factors must be properly utilized.

    5) Sourcing This is more than buying or many suppliers in a region. It includes multiple sources and risk diversification.

    6) Supply Chain Best Practices. Supply chains involve more than managing freight and logistics components. Best practices manage flows for protection, including integrated process, supplier performance, segmentation, and time compression.

    7) Chain of Custody. This one is often overlooked. There are many parties involved in international orders and shipments. How the product moves with and through all these players is challenging. It is especially important for products such as pharmaceuticals and foodstuffs, ingredients, and food-grade items.

    Methodology. Risk detection has three steps—analysis, validation, and assessment. Deliverables are mapping, macro and granular determinations, and priorities. This approach combines data analytics, supply chain expertise, and confirmation. It elevates results from conceptual to actionable.  

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    Step 1) Analysis

    Analysis has two parts--

    A) Data analytics. Internal data is not enough. With the geographical scope, complexity, and stakeholders of supply chains, data from multiple sources and in different formats is needed. No other part of a company has as many stakeholders, both internal and external as the supply chain.

    Analytics should investigate supply chains and risks by -

  • product/commodity 
  • supplier
  • country
  • logistics infrastructure
  • logistics service provider

  B) Logistics/supply chain domain expertise. Real-world supply chain, logistics, and international trade experience are required to complement analytics.

  The examinations should aggregate and segregate across trade lanes and products. Doing these provides important insights into exposure scope.

  Step 2) Validation
  Analytics presents macro views that can have gaps. It does not provide needed granular information. Validating actual supply chains-- sources, logistics infrastructure, and logistics providers-- is needed. This provides acumen that analytics alone does not.

  The best way to attest to key supply chains and possible disruption issues is to verify them. This involves walking through select purchase orders as to the actual locations and steps of each order. Inspect origin facilities. Verify how well orders transit the product and information supply chains. Evaluate how the logistics infrastructure meets requirements. Confirm how logistics service providers perform. Determine if there are hidden issues. These are beyond business intelligence questions and require on-site reviews.

  Step 3) Assessment
  With analysis and validation, potential risks are recognized. More must be done as to the various risks. It should be determined what each one means. This is what assessment does.

  Assessments alone can be too subjective. Thanks to the two prior two steps, both quantitative and qualitative information is available to appraise vulnerabilities.

  Each risk is evaluated as to the probability of occurrence and impact. A Risk Index is developed with axes of impact and likelihood. The impact of a disruption is the financial effect and the time to recover. Likelihood reflects the probability of an event happening.

  Plot each risk on the index. This prioritizes and focuses on high-impact and high-probability risks for mitigation.

  What Next. Hazards have been analyzed, including inherent ones, along with interdependencies of components, critical paths along supply chains, and more. Practicable items are found, and there is now a solid foundation for mitigation. Root causes should be determined. This may necessitate going deeper into certain supply chains for threat reduction.

  The risk project is not a one-time effort and should be done every two or three years. Risks are a continuing danger.  

  
  
  
  
  
  

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CONTAINER RATE RFPs AND NEGOTIATIONS FROM A SUPPLY CHAIN PERSPECTIVE

Here are thoughts on container rates for all the people who are involved with international supply chains

 in various roles and trade lanes. There are rates, and there is what rates are about in both rising rates and falling rate times.

Is This You? Many manufacturers, retailers, and wholesalers--as importers and/or exporters--are involved with international logistics. There are likely multiple people inside a firm who interact with it.  As CFOs. CEOs. Supply chain management. Purchasing.

Sometimes this mix of people with different responsibilities are directly or indirectly at cross purposes. This showed with retailers that overstocked inventory. This capital spend hit P&Ls with transportation costs and balance sheets with inventory.

At some point, if volumes are large enough, comes the matter of negotiating rates—contract and/or spot market rates. So what you need is an approach to how and what you buy from container lines. Contracts and/or spot rates—and the split.

Purpose. The intent is to align your supply chain with your rate approach. Give specificity to your Request for Proposal (RFP) and negotiations. This means identify, focus, and prioritize what you are doing. And, as a result, you will decommoditize rates which are often defined as commodity pricing with no differentiation in what you are buying. Also, you want to define what you are buying.

Buyer vs seller. There is a view that it is about buyer vs seller. But there is also a view that is buyer vs buyer and seller vs seller. What am I bid for my container volume? What will you pay for my transport service?

Remember, not all buyers are the same. And not all sellers are the same. You have a supply of volume. What are the best deals you can get for it? Carriers have a supply of service. What are the best deals they can get for it?

All parties with similar ends. What am I bid, what is the demand, for my freight? What am I bid for my container carrying supply? Bidders vs bidders for that transport supply. Sellers vs sellers for that transport demand.

Keep this in mind as you frame your RFP and negotiations approach.

A rate is a rate. Or is it?  There have been numerous stories and posts about various rate indices and how they are moving and changing. What is missed is the question of what they mean.

Is this about the container or about what is in the container?

Containers are really about the inventory they convey—that is sold by distributors and by retailers in stores and e-commerce,  and used by manufacturers. So rates are really about what is in the containers--finished goods, raw materials, components, assemblies,

and work-in-progress items that the container holds. That is not a subtle distinction. That inventory and its movement are central to your business.

Container shipping and its prices are a derivative of supply chains. Supply chains drive the shipping activity. Not the other way around.

Methodology. Since it is about what is in the container, identify, focus, and prioritize what will be shipping and what you are negotiating with container lines or with freight forwarders.

One excellent approach is to define/classify your inventory as A, B, and C.

These designations cross product categories. Think of it as:

P  “A” items are those with high volume and high sales margin. Some may say it should high revenue. But sales margin reflects profit potential. For manufacturers, this would be the manufactured item, which in turn, blows out as the bill of materials and the parts, assemblies, and components.

ü  “B” items have less volume and margin. They may also be compatible with “A” items.

ü  “C” are slow movers. They may be considered sales and supply chain “dogs” for the handling and cost they involve versus their volume and profit contribution.

If you have seasonality or other peak movements, then break down those inventories too. Keep what is important in front of the container lines and you. Stay focused

 

INVENTORY / PRODUCT	SALES MARGIN	VOLUME BY SUPPLIER	VOLUME BY ORIGIN	VOLUME BY DESTINATION
A
B
C

 

The table above is illustrative of products in a container and their varying importance. This includes

knowing the origin-destination port combinations and suppliers. Think of  

this as micro-mapping your immediate/direct upstream supply chain. Make sure you are current and recognize recent and planned changes—product, supplier, and origin port.

 

In a company, it would be bigger with thousands, even thousands of thousands for some, of products, parts, or whatever you are about. Data analytics would be great here.

 

This drill-down gives focus to not only products but also to suppliers and origin ports. Remember, no part of the organization has more data than the end-to-end supply chain. The methodology provides priorities for your bids and negotiations. Also, include any planned changes—with existing or new inventory or suppliers and port combinations. Carriers should understand what you plan to do to bid properly.

 

Not recognizing what is being shipped is to commoditize the products. There is no difference. Think about that. You treat yourself as having commodity products while buying a commodity service. Break that mindset. The results will show in your pricing and your operations performance.

 

Service. This is what you are buying to move those products. Transportation. Freight rates are the price you pay for the service.

 

Unfortunately, it is not a given. It is no longer looking at transit times and how they align with your needs. Now, it may be your biggest sticking point, even contentious, in negotiations. The product differentiation for rates also ties to what carrier and service you buy.

 

Fast, reliable transport is important for the ‘A’ products. It plays a role in the speed from purchase order placement to being paid by customers for what you sell. Compressing that cycle has financial benefits with its payment and inventory turns.

The problem is that container lines are not selling and are not providing a dependable service. Blank sailings. Slow steaming. Canceled services/loops. Each of these impacts the flow of inventory across the A, B, C designations. Especially the A items.

 

Because of the unreliable service, retailers, manufacturers, and distributors must carry more inventory as a buffer. This means spending more capital to mitigate carrier actions. Think of doing a financial analysis of buying extra inventory and what the freight rate offset should be to balance against the purchasing outlay.

 

Or, think of what carriers may want for your service. The cautionary note is that you are not the only one on a ship. Will you be protected against canceled sailings and other tactics? Do not hedge here. Get it in the open. Put it in your RFP.

 

Define what you think the service should be. Start with the booking your supplier or you do and go through the steps to the delivery destination based on your activity. Now define it. That enables having agreed metrics.

 

Analyze the service performance of carriers you will send RFPs to and what you require. Then translate that into metrics and penalties for service failures. Remember these are called “service” contracts, not time volume agreements.

 

The ands—surcharges and disruption. You are prepared with the two key issues—rates and service. But be aware of and be prepared for other charges—bunker adjustment factor (BAF) and other surcharges. Fuel, aka BAF, should be based on a formula that a carrier and you agree on. Recognize that other surcharges may occur—from those that may arise the with Panama Canal and its drought to those for geopolitics that are occurring in various places in the world. The amount of the surcharge may not be known. But recognize that unknowns may occur and how they will be handled. Again, they should be based on a calculation that parties agree to.

A side note. The BAF topic will get interesting in the next few years as alternative fuels for ships come into use as part of IMO 2030 and decarbonization.

The recent past has shown the unexpected can happen. What happens when they do? Play the risk and do nothing or plan now with container lines?  Is it something you want to and can deal with in contracts? Then put it into your bid.

Now What and Negotiations. Your bids should go to container lines that can meet your prerequisites. Your products, your suppliers, your origins. Focus on carriers based on your A, B, and C? Use different carriers for A vs C items?

No matter how you issue your RFP, there are negotiations with your carriers. Remember, it is not about the container. It is about what is in the container. Those A, B, and C products/parts.  Besides freight price and surcharges, this is also about the service needed for each inventory segment. Stay the course in discussions on your package of needs.

This will not go into negotiation techniques. Presumably, you have a way that works for you in various cordial and not cordial environments.

There is internal analysis and thinking. How well do responses meet your defined expectations and requirements as to rates, surcharges, and service? Do you differentiate by product category?

“A” product discussions, with their demand and sales/profit importance, are also about transit time and carrier reliability. Then “B’s have less. And “C’s have a low priority here. This can be a tricky matter with carriers canceling sailings to manage ship capacity and, in turn, rates. Then there is slow sailing which does that too.

 

Both create issues with managing inventory and fast turns from purchase orders to customer payments. The latter is important for profitability and to mitigate either stockouts or being inventory rich. This leads to the idea of splitting your contract and market activity by category.

  

Benchmark the spot market vs what is offered to you. How do you see your market economy and the global economy? Against that, how important is service? That question comes into play in the spot market. There is a lack of service specificity playing 

the market. That lack of contractual commitment can influence how much volume to put under contract. Will you do it based on your products, container lines, or a traditional price way?

Service and related contract commitments should have metrics that are measured for compliance. That keeps contract obligations ongoing and in front of both parties.

There is a wild card here in assessing what you put under contract. It is the potential for trade and logistics disruption. Potential major disruptors involve geopolitics and climate change.

Do you want to hedge your contract volume for terms in the contract that protect you in the event of chaos? You want something firm that you can depend on. Recognize that carriers may want something from you in exchange. There is much to think about, negotiate, and act on.

Result. This approach is meant as a guide to what you are buying with container lines and why—to align your supply chain—its inventory and requirements—with what you buy, why, and with whom. No matter whether bids and negotiations or market pricing, this is about delivering your supply chain parts and products consistent with your needs. It provides context for prioritizing and evaluating negotiation rates both contract and spot in terms of moving inventory.

 

Remember, a rate is not a rate. It differs by product importance and offers increased value to the company.

THE EXTENDED PANAMA CANAL DROUGHT AND SUPPLY CHAIN DISRUPTION

The Panama Canal and its extended drought that the soft economy has masked—fewer containers/less cargo on ships. The economic hit on container lines.

If the economy rebounds in the 4th quarter and/or 1H 2024, then what? Add to it that the timing of the drought ending is an unknown. 

What if it goes longer than the 10 months that the canal authority thinks?

Could there be supply chain disruption across all trade and ship segments? Will shippers plan for it or wait and scramble?

THE TIME OF SUPPLY CHAIN DISRUPTION AND FRACTURE, INCREASING RISK, AND ROLLING ADAPTABILITY

Executive Summary.

Ø Companies around the world are in a state of supply chain continuous disruption and have been for four years. Think supply chain entropy. The threats with geopolitics and climate change raise disruption to supply chain fracture and upheaval. And the threats are spreading.

      Disturbances will become risks as threats escalate. Risk will be the operative word in supply chains and logistics. 

The issue is the pandemic confirmed that supply chain management is strategic and critical to many businesses. The degree of disturbance varies. And will continue. There are and will be lesser and short-term ones. 

What drives the need to build the new supply chain are two potentially significant disruptors--geopolitics and climate change. They bring the greatest risk and could dramatically alter trade and the supply chains that drive it. Do not suffer from risk blindness.

A big challenge in designing a new end-to-end supply chain for continuous disruption and escalating risk are the true manufacturing locations--as compared to assembly operations. The deeper they are in your upstream supply chain, the greater the challenge. 

This is not about a quick fix. There is no quick fix to change your supply chain to deal with what is coming. What took decades to build cannot be undone overnight.

T   The volatility of disruptions brings the need for a new supply chain. Implicit within it and

     a difference with the old is the need to compress time. Delay in beginning the changes pushes things further away. Procrastinating may bring a heavy penalty.

Ø You must understand your supply chain as to its size and complexity. Look at it as upstream and downstream. Supply chains differ for each company and situation. Know how it is designed and operates—how do you have this particular supply chain and why. You need hard inspection and introspection of it. How can you change what you cannot see and understand? 

Ø Handling and rebounding from serial disruptions go beyond resilience, especially with the two major ones. That reflects more of a one-time, limited-duration occurrence to deal with. You need to create a supply chain that has rolling adaptability to manage all that may happen.

Ø Your approach for identifying risk and achieving supply chain rolling adaptability should include:

o   Map and assess.

o   Recognize trends.

o   Develop a strategy.

o   Make structural change. 

Ø Four cuts for mapping are operations, assets, inventory, and supply chain participants. For many, the focus should be upstream where suppliers and their suppliers reside. Covid showed weaknesses in supply chain operations which had a major impact on inventory end-to-end. Mitigating chaos starts upstream and with mapping.

Ø Some trends should be recognized in building adaptability. These are technology, derisk/decouple, and sustainability. These can assist in creating adaptability and can relate to the two key disruptors.

Overview. Global trade supply chains have gone through four years of disruptions. The economic impact shows the extent of decades of outsourcing by retailers, manufacturers, and distributors/wholesalers.

Events have validated the strategic importance of supply chains. Those who did not recognize it received a difficult awakening.  And it is not over. More is coming. We are in the Era of Supply Chain Disruption. How ready are you?

So what are companies to do with the ongoing supply chain issues? Forget “reset” and “normalize”; forget talking about “pre-pandemic” and “before”.

What we are doing here is to take the ongoing disruptions—and they will be ongoing-- to supply chains and present a way to deal with the ongoing chaos. Think beyond business continuity. Think of survival and adapting.

A comment. Depending on your business type, you may need two takes on all this. Your company and your supply chain. And, if you are a supplier, manufacturer, or wholesaler, your customers, their supply chains, and what they are doing.  

Continuous Disruptions. Disruptions have different aspects—how quickly each occurs, its duration, and the impact on trade, industries, and geography.

These have included and are including:

·       Pandemic. Covid was the start of the turbulence. Shutdowns moving around the world. Supply chain and logistics upheaval. The threat of another epidemic on a worldwide scale cannot be ignored.

·       Shortages. This is what got the attention during Covid. Shortages of finished goods, raw materials, components, and assemblies. There were also logistics/transportation shortages across modes that compounded getting products to move. The result was forget the product “flow”.

·       Demand—Surge and Drop. This ties in with the shortages. Consumers working from home and what they wanted versus what retailers expected. Then as Covid smoothed out, there was a demand drop as consumers made more adjustments and dealt with port congestion. This led to companies overstocking products and buying the wrong items. The time of excess inventory and its hit on the Profit & Loss with the transportation and warehouse spend and on the Balance Sheet with carrying all the inventory. From the start to now, there was a dramatic shift in what was bought. This was more than a bullwhip.

·       Inflation and recession. Inflation has impacted the cost of goods and materials for businesses and consumers. The price increase of inflation affects demand by businesses and consumers which lessens revenues to buy inventory and support operations.

Shortages in the supply chain have been recognized as a factor in inflation. There is also talk of global deflation. That would discourage spending and lead to an economic downturn. 

This also shows interest rate increases that have been used to temper inflation. In turn, interest rates impact the cost of and what companies can do to buy inventory and what they can apply to supply chain investments, such as technology.

Recession has an additional influence on demand for goods, and, in turn, how to forecast and manage inventory. There can be slow turns in the purchasing spend for products which means less sales and lower liquidity. It also means reduced demand for logistics services.

·       Financial. Call it a bank crisis. Banks in the US and Europe have failed. How far this goes and how long it takes to play out are yet to be determined. It could create a credit crunch. Depending on how deep of pockets a company has or does not have, this could create problems for customer-buying and with purchasing inventory and investing in supply chain technology and infrastructure.

·       Technology. We are in the Fourth Industrial Revolution—Technology. This creates opportunities to improve end-to-end operations. Moreover, they are an adaptability factor. We will have more on this later.

·       Geopolitics. Geopolitical instability is serious and the uncertainty it brings to trade supply chains, how it may spread, and how long it may last. It brings very high risk, even war risk, to supply chains and has the potential for long-term effects. 

For example:

o   Russia, the invasion of Ukraine, the sanctions, and those who work around these restrictions.

o   China-US. There have been tariff issues and others that impact trade.

o   China. This includes its views on Taiwan and the important logistics Taiwan Strait, aiding Russia, and actions with Philippines and in the South China Sea.

• Now there are the Middle East with Israel and Gaza, and the Houthi attacks on commercial shipping in the Red Sea as entrance/exit to the Suez Canal. This brings the risk of becoming a regional, or even bigger, conflict.
• Potential oil supply shortages with its impact on end-to-end supply chains and logistics/transportation may increase geopolitics.
• North Korea is getting attention with talk of whether they are preparing for war. 

Also recognize what the Group of Seven, or G7, is saying and doing. You hear terms like “derisking” and “economic coercion”.

Meanwhile, geopolitics continues to elevate and escalate to become global.  There is talk of a bipolar trade war. Can geopolitics lead to supply chain diversification, even trade fracture? That would create unbelievable supply chain chaos.

·       Climate Change. This is serious and may last long. It has high risk. As with the other major disruptor, geopolitics, it can affect how and where firms do business. A difference is climate change is also domestic, not just global, in its impact.

Reports of record global temperatures. We see it with droughts that hit the Rhine and Mississippi Rivers, the Amazon Basin, and the Panama Canal. It also shows with the Arctic Circle and record temperatures in place around the world, and flooding because warm air can hold more moisture.

Significant CO₂ emissions are in end-to-end supply chains. That puts sustainability efforts front and center with supply chains--from suppliers through to transportation. Greenhouse gas reduction and decarbonization reside here.

Some say we are approaching a tipping point in being able to mitigate climate change. This may increase regulatory and other pressures.

·       Logistics. Disorders have occurred within sectors of logistics. These include:

o   Labor strife/unions/contracts. There have been work stoppages around the world. Ports. Transport carriers. Some of it arises because logistics workers who worked frontline during the pandemic want recognition with “hero” pay.

o   The geopolitics with Russia with the Black Sea and Europe and threats and shipping concerns because of military games by China within the vital maritime route with the Taiwan Strait.

o   Climate change. A frequently occurring disruptor has been drought. The Panama Canal, for example, has had to slow the fill of its locks and so restrict the flow of ships. In addition, the Canal has limited how much weight they can carry. How serious the drought and restrictions may have a significant impact on global trade and shipping. Add IMO2030, the International Maritime Organization’s rules for the decarbonization of ocean shipping. Compliance is shaping up as alternative fuels which may show as additional costs for shippers.

·       And. how disruptions have played and are playing out in companies is important. Questions within firms include:

o   Synergies to lower costs.

o   Manage high costs and volatility.

o   Difficult demand forecasting with all the uncertainty.

o   Changing consumer preference

o   Materials shortages.

Supply Chains. Disruption is about your supply chain. It has differing effects on companies.  To deal with change, you should know your end-to-end supply chain.

A cautionary note. What we are discussing is creating a supply chain that can deal with ongoing disruption.

You should recognize that you are looking at:

P Change and risk.

P Doing something or standing still.

P Reacting vs strategy.

There are different takes on the inspection and introspection to understand your supply chain as it is now.

·       Questions. There are questions—or more correctly, your answers-- for setting the starting point for what you will be doing.

o   What have you done and what are you doing about all this?

o   Do you know how and where you fit in your customers’ supply chains?

o   Have you had active conversations with key customers on what they are doing with the continuous disruptions in their supply chains?

o   How well do you comprehend supply chain management (SCM) and your supply chain?

§  Segments.  Supply chains have two parts—upstream/inbound and downstream/outbound.  Much of what has happened, is happening, and will happen is with the upstream supply chain. A takeaway from the pandemic is that you cannot fix downstream the problems that occur upstream.

And keep in mind that the supply chain is how you see it and how your customers see it.  You are part of their upstream supply chain.

o    How well.  Ask yourself: how well do you know your supply chain?

P End-to-end

P Its design

P How it performs

P Your metrics for it

P Use of technology

P The time in your operations and the sub-sets

P Cost, of course.

o   Recognition.  How well do you understand your supply chain as to its:

ü Size

ü Complexity

ü Participants and players and participants

ü Nonlinearity

ü Data

o   Its position.  Every supply chain is different in what it does, why, and how well. Do you comprehend your supply chain and the drill downs of it as to:

o   Products

o   Markets

o   Channels

o   Lastly.  Your introspection should ask:

o   Did the pandemic expose weaknesses that were always there in your supply chain?

o   How much of the three years of problems reflect a foundation of pushing for low costs?

o   How much supply chain cost can be reduced with improved supply chain performance as compared to pursuing lower logistics and supplier costs?

How you respond to the above is important for what you have to do to create a supply chain that can deal with continuous disruption. One with Rolling Adaptability.

Rolling Adaptability and Approach. There is no simple solution for continuous disruption. No magic bullet. No “the” answer is...

That said, what are you going to do with the economic shocks and the effect in this Time of Supply Chain Disruption? Will you just ride out each disruption? Will there be a crash and burn? Or will you have the ability to adapt to each disturbance, especially ones that have extended duration? Even more challenging, multiple disruptions at the same time. Rolling adaptability to roll with the punches.

The Covid pandemic had barely begun when the buzzword “resilience” arose. It gained traction even if there was little specificity about what it meant or how to do it. It has been used as some sort of magic word to explain positive happenings.

Firms are facing more than an ability to bounce back from an event. They are facing one happening after another. Sometimes multiple incidents at the same time.

Some view resilience as technology or cheap labor. My view is that it is a one-time occurrence word.  Resiliency cannot handle an ongoing series of shockwaves. Even the occurrence of multiple disruptions at a time. And some of them can be significant. Significant and continuing chaos from different causes goes beyond resilience.

Past, present, and future disruptions show that more is needed. And remember, supply chains drive global trade. They are the largest and most important part of many companies, and their external reach is upstream and downstream.

Supply Chain Disruption requires you to build a new supply chain, especially with the threats of geopolitics and climate change. One that responds to ongoing disturbances and risks. You need a hybrid with its blend of design, strategy, operations, and technology. Include structure and sustainability.

Many supply chains are built on cost, and it has been shown during disturbances. They are slow and difficult to adjust. Supply chains designed on performance bring flexibility and adaptability.

To develop and implement a supply chain that can adjust as disturbances hit, you need an approach. Implicit and explicit is how you recognize and deal with uncertainty and risk. Implicit too is the need to compress time in your supply chain. Extra and unnecessary time adds to your inability to respond to disruption.  

With supply chains varying by company, industry, market, channel, and geography, there is no one approach. What is presented here are features that you should consider when creating the supply chain to handle the disturbances, some of which will be significant.

The methodology to build a supply chain with rolling adaptability is presented here. Key elements are:

1)    Map and assess.

2)    Recognize trends.

3)    Develop a strategy.

4)    Make structural change.

1)    Map and assess. As discussed earlier, it is important to know your supply chain.  One step to doing it is to map and then assess your operations,  assets, inventory, and players/participants. These different takes will prove insightful in building needed flexibility and prioritizing what must be done first. Get granularity. This will keep you from being distracted by less important areas.

Mapping enables you to see your supply chain and its process, size, complexity, and nonlinearity.  This is your network. You also realize gaps and redundancies that occur because of all the activities and participants, both internal and external to your company.

From this, you can evaluate how to mitigate risk and where, what, and how to change or not, aka, the reluctance to change. You are gaining visibility to your real supply chain.

o   Operations. What you are mapping is your supply chain process. The more you know your supply chain, the better you can identify risk and create the needed supply chain to mitigate it.

      Four years have been primarily about the operations of the upstream / inbound supply chain. Manufacturers and suppliers lock downs. High maritime shipping rates. Port congestion. Rail congestion and equipment shortages. High demand for warehouse space. And more. These were hard lessons learned. Serious issues and annoying one.

     All the supply and logistics players, including intermediaries, add time to your total supply chain cycle time, which is defined here as the time from when you need to buy till the time you are paid by customers. Compressing that time improves your ability to adapt and brings significant financial benefit.

• Upstream supply chain. This is the starting point, the most critical part of your supply chain. Inbound/upstream is the largest and most complex segment of the end-to-end supply chain. It has the most participants, both seen and unseen. And therein lies a challenge.  

Upstream is where supply chains begin and where risk begins. It is where your   suppliers are. Manufacturers understand part of it with their Bills of Material. Each part in a completed product. 

The unseen part is that your suppliers have suppliers. And those suppliers may have suppliers. The networks. Add the logistics activity here. This is how your true supply chain gets large and complex—what you do not directly see and deal with.

 Geopolitics and climate change are serious threats to operations that may have to dramatically shift. You must understand it, especially upstream. Map. Go deep. This is important to identify risks and, in turn, to mitigate them, with new supply chain. 

o   Assets. These should also be defined and mapped. These are factories, warehouses, and other logistics assets, owned or leased, and whether yours or someone else in the supply chain.

Fixed structures should be understood as to their operation and purpose. Think what stopping the operation can mean in a serious disruption. Do you have options and workarounds? A step with building flexibility into your supply chain. Rather than being blindsided.

Study what they mean as to the ability to move—how fluid their locations are.  These nodes have links, or transportation, from and to them. All are your network.

o   Inventory. The supply chain is about the products, the inventory, that are in them, end to end. Raw materials/commodities, work in process, and finished goods. They are your inbound and outbound product portfolios.

Inventory was a talking point, directly and indirectly, for three years. Lockdowns. Port congestion. Container freight rates. Consumer demand shifts. Shortages. Excess inventory. All of these are a macro view of what rolling adaptability must be designed to mitigate. As compared to moving from crisis to crisis.

Sometimes that can be lost in the demands to reduce costs. Analyzing them as to turns, added value, profit contribution, volume sold, and other metrics can lead to line divestment.

Identify and segment your products. Segment them. Not all inventory is the same. Know their suppliers and where they ship from, how, and with whom. This gives priority to your efforts.

Your work here could lead to product portfolio simplification which means reduced capital investment for inventory and logistics spend for transportation and warehousing and improve productivity. All of which improve performance.  Remember too, removed items may affect your mapping.

Mapping upstream may help you to see improvements, such as reducing purchase order-delivery times. Such a performance advancement can mean carrying less buffer inventory which means lower capital spend—capital that will be needed to prepare for and to deal with disruption.

Participants/players. Your supply chain is products and more. It is also about who makes and handles the products, parts, assemblies, raw materials, and goods. It is about who is in it. You; your suppliers, transportation/logistics providers; your suppliers’ suppliers; their logistics/transportation providers. And, if appropriate, their suppliers and transport firms.

These companies are central to your ability to adapt. They should be analyzed. Ask yourself why you do business with them. Prioritize. How important are they? Study their financials. What has been their performance? Where are they located? Who and where are their suppliers and logistics providers? Are they strong companies that can work through disruption? What does it mean?

As with inventory, should you change or remove logistics providers? Do 3PLs offer what you need in the event of change or is disintermediation a way to remove players to improve operations flexibility? 

All this puts additional meaning to your suppliers and logistics providers. And the risk. It becomes more than price or freight rate. It is their ability and plans to adapt. This can be seen in how long some firms have taken to resolve supply problems.

1)    Recognize trends. You should recognize what is going on outside your company. What are others doing and why?

These trends can also be considered disruptions within companies because of the time and effort.

Technology. This is a big topic for companies, not just for supply chain management. Early in the pandemic, tech was discussed for supply chains. It began with digitization as a must-do. Right behind it came visibility. Then it moved among robotics, autonomous technology, analytics and predictive analytics, and now artificial intelligence (AI).

The end-to-end supply chain is the largest and most complex part of manufacturers, retailers, and distributors. Add its nonlinearity. Think what AI can do.

 

Each has different uses in building supply chain rolling adaptability. You should recognize and evaluate where and how you use each, especially to have rolling adaptability.

Remember, there is no magic answer to dealing with supply chain disturbances. And that includes technology. View each as a tool in creating needed adaptability.

o   Decouple / De-risk.

 With disruption and rolling adaptability, here is a good example of geopolitics. There is global talk about supply chains positioned in China—economic coercion, derisk, decouple, reshore, nearshore, friendshoring, and what it is all about-- supply chain diversification. It also reflects a debate of “putting all your eggs in one basket” which so much of a supply chain concentrated in one country. There is an underlying benefit vs risk analysis.  

If your company is talking about or assessing dispersing its supply chain to other countries because no one country can replace China, then remember mapping. It helps to see and evaluate what to shift, including priority and sequence. And it provides context for how and where you position nodes and links in your supply chain for adaptability.

o   Sustainability. This is about climate change. Specifically, supply chains are central to decarbonization. 

The United States Environmental Protection Agency (EPA) in its Supply Chain Guidance says, “Organizations' supply chains often account for more than 90¹ percent of their greenhouse gas (GHG) emissions, when taking into account their overall climate impacts.”

They also say, “Supply chain emissions are, on average, 11.4 times higher than operational emissions, which equates to approximately 92% of an organization's total GHG emissions.”  In other words, supply chains dominate a company’s emissions footprint.

That is why controlling, reducing and even stopping CO2, resides with supply chain management—and its upstream and downstream groups. Mapping provides visibility to see supply chain detail—suppliers, transportation, outsourcing.

The European Union has The Sustainable Finance Action Plan and the proposed “Net Zero Industry Act”. Also, look at G20 and the Task Force on Climate-Related Financial Disclosures.   

There is also the International Maritime Organization with its net zero emissions by 2050. This may have significant operational and cost impacts on ship owners, carriers, and shippers.

Net zero emissions for maritime opens an important area. Much of the effort for US firms comes under Scope 3 which the EPA defines as “ Scope 3 emissions are the result of activities from assets not owned or controlled by the reporting organization, but that the organization indirectly affects in its value chain. Scope 3 emissions include all sources not within an organization’s scope 1 and 2 boundary. The scope 3 emissions for one organization are the scope 1 and 2 emissions of another organization. Scope 3 emissions, also referred to as value chain emissions, often represent the majority of an organization’s total greenhouse gas (GHG) emissions.”

The considerable focus for Scope 3 is upstream with the network and tiers of suppliers and logistics providers. Up with the size, complexity, and participants.

Sustainability and climate change bring unique challenges to supply chain change. With all this will be climate-related events that roil operations. Remember, we see climate change as a significant disruptor.

3)    Develop a strategy.  Creating the needed supply chain for continuous disruption and risk requires strategy. You cannot react to disruption after disruption. Supply chains would break down with that approach.

The starting point is that supply chain management should be central to your company strategy. And it must be flexible to deal with what is happening. That is a takeaway from the last four years and what may lie ahead. Knowing and mapping your supply chain is important here.

Your supply chain scheme defines what you will do to prepare for the disorders that you will face. It should be end-to-end in scope.

As mentioned earlier, there are key players to assess and incorporate into this endeavor. Your critical suppliers and logistics providers should have their adaptability. And your suppliers’ key suppliers and their logistics firms. 

Keep in mind that, depending on your business, you may be someone else’s supplier in someone else’s strategy.

A lesson learned is that the approach should blend both operations and technology. These provide a platform for what you must do to achieve adaptability.

And recognize and address important gaps and redundancies that can interfere with your effort. Think of what has already happened and its supply chain impact—shortages, excesses, demand surge, and demand drop.

That experience gives perspective to the need for adaptability and flexibility. It also means a focus on operations execution and streamlining the process and removing waste which improve performance and productivity.

All this comes into prioritization and execution. The past sets the context for part of strategy development. But the strategy is about the future and its unknown possibilities and the challenge and risk. The latter is important. Too many strategies have failed with poor execution.

Your company’s risk tolerance should be defined in the strategy. It can be a limitation or opportunity to strategy design and its success.

4)    Make structural change. This is your supply chain organization. The first matter is where it sits in the organization and where it reports. The higher it is positioned and where it reports set a better foundation for building rolling adaptability.

As for the new structure, remember that supply chain management is a process. Yet it is organized by functions—such as transportation, warehousing, inventory, and purchasing. It also reflects defining SCM by cost. That grouping can hinder dealing with ongoing disruption.

A better design is to organize upstream and downstream. It is cohesive and reflects a lesson learned during the past three years and where the

 various chaoses were.  Again, it should be performance-based and not measured on “cheap” costs—a view that was a behind-the-scenes factor that supply changes had to deal with.

The upstream/downstream should be reflected in its operation with centralized and decentralized roles. That aids in dealing with rapid change. This hybrid organization, with strategy buy-in, can provide fluidity to see what is happening and to shift.

Implicit here are the supplier and logistics firms that you do business with. A question is what to do with third parties. You should define or redefine the role of outsourcing and the firms in your supply chain. Ask how such groups fit in, or do not, with dealing with chaos.

Conclusion. There has been and will be continuous disruption. Geopolitics and climate change may be the most intense and have the longest durations.

Ongoing supply chain disruption will cross industries, markets, channels, and types of business. The extent of each disruption may vary. But there will be disruption. It is a given.

Prioritize your efforts. It cannot all be done overnight.

Remember, you are dealing with change. Your choices are doing something or standing still and reacting vs strategy. Choose wisely.