Is the pandemic still disrupting your business? Perhaps it is your value chain that needs fixing!
Our last article explored what an organization could do on its own to future-proof itself. This month, we look at how the entire value chain within which it operates can be shock-proofed by functioning as a cohesive eco-system. Since the inception of globalization, supply chains have evolved to function as global value chains (GVC), with inter-connectedness between multiple countries being the commonality across any product value chain. Comparative advantage has been a key driver in relocating these activities to countries that have specialized in them.
However, such GVCs are now increasingly exposed to a significant level of exogenous shocks and the recent COVID-19 pandemic has commanded a reset – calling for a shift in how companies and their value chains operate. Sri Lanka’s apparel sector has seen the effect of this first hand during the last 12-18 months. They have had to address logistics disruptions, shortages of raw materials, plant closures and sudden swings in demand. The increase in the frequency as well as the impact of such externalities on organizations is creating zero incentive to return to the supply chain status quo ante.
Averaging across industries, supply chain disruptions lasting a month or longer now happen every 3.7 years, and the most severe events take a major financial toll.
While the COVID-19 pandemic has delivered the biggest and broadest value chain shock in recent memory, it is only the latest in a series of disruptions. The urgency for a reset has only been heightened. Research reveals that over the course of a decade, companies can expect disruptions to erase half a year’s worth of profits or more.
Companies can now expect to lose more than 40% of a year’s profits every decade, on average. But a single extreme event can deliver an even bigger hit, wiping out a full year’s profits or more.
Hence, the objective of businesses should be to build the value chain with the ability to both resist disruptions and recover operational capability even after disruptions occur. This means, value chains will need to improve stability and resilience to shocks while still capturing efficiency gains stemming from specialization and comparative advantage.
Working As An Eco-system Can Help Build A Resilient Value Chain A potential solution is to explore the possibility of disintegrated and independent value chain partners functioning cohesively to form an eco-system, where partners work collaboratively towards a common outcome. The move of product from one step in the chain to the other is not viewed as a stand-alone operation, rather as a holistic network, where all partners work together to have a product created and delivered to the customer. In order to do so, companies will need to:
Improve transparency, trust and visibility
Leverage data to create faster value chain simulations
1. Improve Transparency, Trust and Visibility
Do not restrict complexity, rather encourage visibility – As value chains grow, with more and more partners linking up on the chain, it can lead to complex networks. Complexity itself does not translate as a weakness, unless it obscures vulnerabilities and interdependencies within the value chain, and hinder visibility of potential emergent risks. Hence, improving transparency and visibility among players is crucial to create an interconnected ecosystem.
Setting up smart factories and smart logistics including smart warehouses and distribution centers with smart sensors on stock will enable real time data collection and exchange across other partners along the value chain. Collecting and communicating stock data to supply chain partners in real time can assist them in more effectively coordinating their own procurement and inventory activities.
Integrating consumer sales e-commerce portals to the manufacturer’s warehouse and distribution portals, would reveal stock outages or demand drops early on. Businesses can then immediately shift focus to stay on top of demand, clear bottlenecks, reduce waste and improve profit margins.
Greater visibility is integral to helping retailers right size inventory. For example, global apparel brand Ralph Lauren reduced lead times from 15 to nine months by strengthening collaboration with its Asia-based supplier network. They relied on a technology solution to establish visibility across the entire organization, so that managers were allowed insight into all parts of the design, production and distribution processes.
While there are several high-end supply chain integration technologies, SMEs could explore Internet technologies. These can provide many of the capabilities today at far lower cost, and SMEs should take advantage of these easy-to-use technologies.
Breaking down end-to-end information barriers – This would speed up the flow of information between value chain partners and customers. When data becomes available seamlessly throughout the ecosystem, it enables partners to simultaneously access relevant information. This allows for optimized decision-making and execution. Frontline workers and executives can better understand how to shift operations when needed, by honing in on the ability to detect changes in demand and issues before they arise.
Invest on cyber -security – As companies digitize their supply chains by increasing transparency, analyzing data and upskilling the workforce, they must also protect their assets by prioritizing cybersecurity and digital privacy. 2.Leverage data to create faster value chain simulations
Use analytics to drive action – Technology can help interpret massive amounts of raw data to help create a self-orchestrated, self-learning value chain. The latest advances in technology offer new solutions for running scenarios, monitoring many layers of supplier networks, accelerating response times, and even autonomous course correction changing the economics of operation to the next viable route, if a disaster hits. Businesses should leverage such data and analytics throughout the value eco-system for real-time connectivity, improved predictability and decision making, with limited human intervention, especially if they are complex.
Addressing Vulnerabilities Can Also Help Strengthen The Value Chain
A value chain is only as strong as its weakest link. In order to ensure that a value chain isn’t fragile, the strength of each activity within the chain should be planned to accommodate multiple permutations and scenarios. It should not be designed to stay rigid – relying on one supplier, one customer, or one geography. In order to do this:
Reduce overreliance on few key partners
Reduce over-dependence on few geographies
Address controllable vulnerabilities within the value chain
1. Reduce overreliance on few key partners
Diversify suppliers and customer base – Relying on a single customer can cause issues when demand shocks cascade through a value chain. Likewise, while a few suppliers are easier to manage, the absence of substitute suppliers heightens vulnerability should anything happen to them.
Map the supply chain network – In order to be confident that the fundamentals of the value chain are preserved, it is vital to map the entire supplier chain network. Categorize suppliers and customers as low-, medium-, or high-risk. This could be based on metrics ascertaining over-dependency such as impact on revenues if a certain source is lost, the time it would take a particular supplier’s factory to recover from a disruption, the availability of alternate sources, how long the value chain could withstand a shock without having to shut down, how soon can production be switched to an alternate site or how soon can we plug in the next supplier to enable continuity.
This visual would help the business see a big picture, drawing attention to aspects that could be potential risks should a shock materialize. While this is time-consuming and an expensive process, it can save a business the losses it can be exposed to if the value chain halts.
2.Reduce over-dependence on few geographies
Include suppliers from other countries within the region – Regional concentration of suppliers generally depicts a specialized skill of a region, as in the case of South East Asia for low-cost labour. A typical example of this is how several global firms have diversified production sites to include multiple South East Asian countries such as Vietnam, Indonesia, or Thailand.
15-25% of global goods exports could potentially shift to different countries over the next 3-5 years.
Look for suppliers in different parts of the world should a regional disaster hit –Relying on a single region could expose firms to a sudden disaster or localized conflict in that part of the world. This can cause critical shortages that snarl the entire network. Hence, businesses should look for broader geographic diversification to avoid over-dependence on a single region, adding suppliers from locations that are not vulnerable to the same risks or impacts that can spread from one place to the other rapidly. Regionwide problems like the 1997 Asian financial crisis or the 2004 tsunami are a clear example of this.
In doing so, they could also look at what would work best for customers. Today’s digitally connected customers have increasingly higher service expectations, wanting instant delivery to their doorstep, and at a lower price. Hence, when looking for suppliers in new geographies, closer to the consumer will also help speed up delivery times.
Re-shore to bring back some production home – Several companies have explored the potential to re-shore operations, and create a local supply network, to provide greater security of supply and lower uncertainty for consumers and businesses. However, reshoring also means greater reliance on own production, which limits the scope for cushioning shocks, particularly those that may originate domestically. Re-shored options may also not be economically viable when an open economy functions, and is better off explored only as a contingency plan.
3.Address controllable vulnerabilities within the value chain
Shocks exploit vulnerabilities within companies and value chains. Some of these vulnerabilities are inherent to a given industry and cannot be curtailed, while some of them are addressable. Hence it is crucial to identify those within a firm’s control so that they can be addressed ahead of time, as built-in weaknesses that are ignored tend to magnify shock propagation.
Un-addressable vulnerabilities – For example, the perishability of food and agricultural products, means that the associated value chain activities are highly vulnerable to delivery delays and spoilage. Such weaknesses are driven by the nature of the product and may be difficult to avoid.
Addressable vulnerabilities – A few weaknesses are the result of intentional decisions, such as, how much inventory needs to be carried, the complexity of the product portfolio, the number of unique SKUs in the supply chain, and the amount of debt or insurance. Changing these decisions can reduce or increase vulnerability to shocks. For example, a decision to hold more safety stock in the event an alternate supplier is not available may go against the popular principles of lean manufacturing; yet, may prove viable if cost of sourcing raw material is 2 – 3 times the usual price during sudden short supply or if a stock shortage could mean losing customers to a competitor.
Creating the ability to flex production by spreading investments across multiple plants, as opposed to having all state of the art technologies concentrated in one site may also minimize impacts of external shocks. This is especially true for manufacturing of products with sparsely available options for raw material sourcing (for example, API for Pharmaceuticals, high-density interconnect circuit boards for electronics). This is mainly because, an entire local industry may be impacted through job losses, capacity constraints, shortage of critical goods as well as the cost of re-building supply chains, should supply be disrupted. In such cases, it is wiser moving production closer to the country where such raw materials are sourced from.
Simplifying product portfolios may also make supply chains easier to manage in times of downturns.
Why do they matter more so for SMEs?
Firms’ age and size play an important role in failure during shocks. Resource-rich firms are able to buffer the effects of environmental changes while SMEs, owing to the possession and utilization of sub-optimal resources and capabilities, weak processes, and unsuitable capabilities are more susceptible to failure. SMEs also generally lack the capacity to quickly change their business model to embrace new routines and processes and hence need to be more conscious to build supply chains that are connected, with information flowing freely from end to end. This allows them to quickly pivot operations when operating conditions change and respond quickly to changing customer needs/preferences, helping them avoid sinking funds in the wrong direction during uncertainty.
References: “Future-Proofing Your Supply Chain for the New Normal” – Supply Chain Brain, September 2020; “Risk, resilience, and rebalancing in global value chains” – McKinsey, August 2020; “Global Supply Chains in a Post-Pandemic World” – Harvard Business Review, October 2020; “COVID-19 and business failures” – NCBI, September 2020; “Colgate-Palmolive” – Automation World, July 2021; “What Supply Chain Transparency Really Means” – Harvard Business Review, August 2019; “Smarter Supply Chains Help Apparel Companies Keep Pace” – RISNews, January 2019