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.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.
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.
