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Transformation talk series: How to increase operational resilience in times of transition
November 2022
If you’re in operations and supply chain management, you’re no doubt thinking about current market challenges like labor shortages and digitization. According to a recent PwC Pulse Survey, more than 70% of operations leaders plan to change their processes to address labor shortages and more than 50% plan to invest more in digital transformation over the next 12 months. At the same time, you’re navigating the long-term implications of global trade complexity and ongoing uncertainty — fueled by inflation and potential stagflation, increasing nationalism and geopolitical tensions abroad, climate change, ongoing automation and more.
Depending on your company and ambitions, the industries you serve, who your consumers are and where your products come from, your approach to risks and opportunities will vary. That includes how you think about your manufacturing and distribution footprint, how you increase supply chain efficiency (a top priority for more than 60% of COOs), how you handle workforce challenges and how you address environmental, social and governance (ESG) requirements. No matter your specific ambitions, there are some common considerations that can help drive long-term success — and they come down to how you build your operational capabilities to achieve resilience.
Resilience is one of the most overused terms in supply chains, and it has many interpretations based on a business leader’s functional orientation. We think resilience is an outcome of defined operational strategies. It isn’t just about adding inventory, improving manufacturing agility or network flexibility or diversifying a supply base. Each of those may or may not be relevant to managing potential risks to delivering on service level, quality or cost goals. Achieving resilience requires looking at key constraints end to end and using that as your compass to drive decisions. Then you can better determine which elements of your supply chain need to improve to enable the most resilient outcomes against defined goals.
Adapting to dynamic demand-side conditions
Right now, consumers still have buying power, and we don’t expect that to change significantly over the next few quarters. The volatility we saw earlier in the pandemic has subsided, but few organizations have entirely adapted to the realities of new demand patterns. While pressures are easing in many sectors, our surveillance across a range of supply chains has found that most improvements to date are demand-driven, and current issues won’t be solved simply by waiting for demand to slow further and for supply to catch up.
Demand tends to be elastic and cyclical, and the next time it surges we could see a similar supply-constrained environment again. To help prevent that, companies need to assess their ability to respond to dynamic demand patterns and explore investments that do more than provide temporary relief to issues like long lead times, labor constraints and high freight costs. That means more structural investment on the supply side to protect against short-term fluctuations in demand and to increase long-term stability.
Actions to consider:
- Reassess integrated demand forecasting and planning capabilities to better predict and plan inventory flows. The goal is to ensure a stable supply of raw materials and/or finished products while also guarding against asymmetrical changes in demand.
- Update supply chain strategies to address continued volatility in demand patterns, understanding that there’s been a fundamental shift that requires new tactics to deliver resilient outcomes.
- Determine any necessary adjustments to late-stage/last-mile agility to allow for central inventory holding before commitment to final product placement.
Focusing on supply-side availability and ESG opportunities
As the world continues to move toward sustainability, we’ll likely need more and different raw material resources to create new types of infrastructure and products — from batteries to scaled clean energy sources. This shift will fundamentally change how companies operate today while also opening up a huge source of potential market opportunities. For instance, the US government recently announced $52.7 billion in subsidies to support semiconductor manufacturing domestically. The transition could be positive for manufacturing, industrial products and energy companies but will require new thinking and capabilities around material planning and supplier network resilience.
Increasing supply-side resilience requires addressing constraints in industrial materials even as demand is increasing due to ESG policy, public investment and regulatory changes. Among the companies adapting to that shift is Amazon, which announced it will transition its delivery fleet to electric vehicles and, in some cities, has already begun using electric vans in partnership with Rivian. In addition to mitigating the risk of fuel price fluctuations, such large-scale moves show a recognition that environmental issues such as carbon emissions reduction also can be opportunities to improve long-term stability in operations.
Action to consider:
- Deconstruct your products to the most fundamental elements needed to produce them and establish an understanding of the full N-tier supplier network required to provide those inputs.
- Use increased visibility to model new constraints and critical points of disruption across your supply network and refresh your supply planning parameters to reflect changes.
- Leverage new relationships or partnerships with suppliers beyond Tier 1 to increase agility and flexibility in supply.
- Establish supply planning control tower capabilities to sense and respond to operational events as they arise.
Increasing digital capabilities to improve agility and resilience
The complexities highlighted above create fundamentally new decision patterns and require different approaches, which means applying new digital capabilities to solve challenges and operate at scale.
- Instead of the current approach to forecasting consumer demand based on buying history, look at how consumers are actually behaving to set forecasts and manage your supply chain. Incorporating first-party and third-party data sources to more granularly understand consumer sentiment, spending patterns, mobility and evolving preferences can shape advanced forecasting models. AI and machine learning models can help identify true drivers of demand to help shape long-term strategies around portfolios, channels and positioning.
- Digital twins can help model risks across your supply network — all the way down to the availability of periodic table elements that are needed to build your products but may be sourced by second- or third-tier suppliers versus direct suppliers. In addition to better identifying risks, this can help with designing your supply chain network and flows to produce more resilient outcomes.
- To bring demand and supply together, leverage advanced AI and machine learning to understand what is truly creating volatility across operations by extending the digital twin concept across functions. This can allow you to focus on the areas that matter most and would cause the greatest impact in a disruption, informing decisions about what needs attention for your organization to become more resilient.
Learn more about what’s on the minds of COOs and other operations leaders in PwC’s Pulse Survey.
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