Between a flight and a train journey, Resilience interviewed PwC’s Joseph Roussel, one of the authors of Strategic Supply Chain Management—Second Edition. Joseph tells us that when all is said and done, it’s the ability to keep the customer happy — even during disruptions — that defines a resilient supply chain.
Well, the headline natural disasters that we are seeing more of in recent times are obviously shaking up supply chains. The recent United Nations Global Assessment of Risk 2013 study has confirmed that these disruptions are happening more frequently, and given that supply chains are global, repercussions are no longer limited to the location of the disaster.
In the last five years since the financial crisis in 2008, it’s really been supplier risk that has troubled supply chain resilience, though. In many industries, ranging from aerospace & defence to automotive, there’s been increasing supplier failure. Some have been unable to secure financing and have gone out of business. So we’re seeing supply chains that can’t deliver to customers, or ramp up production as planned. In the worst case, a company’s reputation is damaged as they make commitments they can’t keep and are seen as unreliable.
There are other reasons, but it’s primarily the combination of increasing natural disasters and continued financial uncertainty that makes today’s supply chains more vulnerable. This is going to be the case for a few years yet.
It depends which point you’re at in the supply chain’s lifecycle.
Supply chain strategy and design. If you’re setting your supply chain strategy, risk managers and supply network planners will bring a professional approach to identifying and understanding the strategic risks and designing the supply chain to mitigate them. They will help business leaders and supply chain leaders through the “what if” questions: What if a natural disaster hit our main warehouse? What if we suddenly can’t get the main ingredient needed in our product? What if political instability cuts off part of the chain? How will any of these scenarios impact our ability to grow the top line?
Marketing and Sales also play a role in resilience strategy. They help determine which market and customer segments to prioritise in case of disruption, based on both account prioritisation and specific market needs in terms of responsiveness.
Ultimately, these questions support the supply chain design: How should our asset network look to keep on delivering to customers — whatever happens? Where shall we have facilities and other assets and where do we need redundancies?
Supply chain process and execution. If we consider day-to-day execution, then other functions have a role in increasing resilience. Imagine you’re assessing how robust a supplier’s capability is to deliver. Functions as diverse as supply chain management, sourcing, finance, and manufacturing will all be part of assessing the supplier’s ability to withstand pressure on their balance sheet, their capacity for continued investment, their capability to manufacture according to specifications and so on. This applies equally to the supplier’s supplier and further on up the supply chain as the risks are often found well up the supply chain.
The generally held view is that complexity is bad as it prevents you having a clear line of sight on risks. In response, supply chain managers are often guided to reduce the number and size of assets. But this is not always the right response — an overly “lean” approach can remove the very factors that differentiate you in the customer’s eyes.
Again, the right response starts with designing to satisfy your primary basis of competition (what makes you win in the market) and then ensuring resilience and the right level of complexity is built into that design. How many different factories, order desks, warehouses and service centres do you need? How many different suppliers of the same commodity?
Yes, I am saying that the asset footprint should not only be driven by cost and efficiency considerations. For the supply chain to be resilient it can’t be overly lean; some redundancies will be needed — maybe several suppliers of a critical component, or the ability to quickly bring on stream an additional manufacturing capacity. Yes, this introduces complexity and extra costs, but the upside is greater customer loyalty and the ability to grow revenue while competitors can’t deliver.
There are risks everywhere, and you can’t address them all. Actually, we asked 209 companies with a global footprint a similar question in a study by PwC and the MIT Forum for Supply Chain Innovation.
What we know is that leading companies focus on those risks that might seriously impact their ability to have access to the critical material or people assets needed to keep on meeting customer demands. They assess threats posed by micro and systemic risks, and design their asset footprint and resilience strategies to mitigate for those.
Production: In managing risks to this first level of manufacturing, companies might consider, for example: Should we manufacture ourselves to have greater control over that part of the chain, or can we outsource? Should we have multiple plants in different locations? Are outsourced facilities in disaster-prone areas?
Working capital: Have we gone too lean in our inventories and stocks? Should we be using inventory more strategically and invest in more redundancies? Do we have buffer capacity of our most critical components or ingredients?
Supply base: Are we sure our critical suppliers are financially stable? Do we have visibility into their processes and health? Are we sure they can increase production quickly if we ask for it? Are our suppliers’ suppliers resilient?
What leading companies don’t do is design their supply chains to achieve perfect, risk-free conditions — they know this is mission impossible. They take steps to be ready for potential disruptions in a way that can create competitive advantage.
The short answer is that resilience is about being prepared. Being prepared means knowing who will do what in a moment that matters.
We can look at three particularly important “moments” of the supply chain lifecycle when resilience can be strengthened. At these times, the roles and responsibilities need to be clear.
I’ve already said that resilience needs to be a key consideration in setting up the supply chain footprint. Compared to average performers, leading companies put a lot of energy into designing their supply chain for resilience. At this point those people who can help provide a full picture of the threats that need to be mitigated should be at the table. Otherwise, leaders may miss major risks in their resilience planning and decision-making. Roles present might include Risk Management, Strategy, R&D, Supply Chain Management, Production, Sourcing, Marketing & Sales, Finance and more.
Then, most importantly, what happens when a disruption occurs? Which customers should be prioritised? How shall scarce materials be sourced or re-routed? The company cannot wait until the disaster happens to make these decisions. The business continuity plan/crisis plan defines what should happen — responsibilities, roles, communications processes, decision-making rights and more — ahead of time. Not defining roles and responsibilities pre-emptively means that people will lose time at the moment of disruption, and the company is less likely to recover speedily
When the disruption happens, when component A is suddenly not available, the sales team knows what to do, the manufacturing teams switch to the back-up plan, additional manufacturing capacity is brought on line smoothly, customer service teams know what to communicate to which customers, and so on. Above all, customer relationships are strengthened rather than weakened.
PwC and the MIT Forum for Supply Chain Innovation, Making the right risk decisions to strengthen operations performance, 2013.