Global value chains’ trade in intermediate goods has tripled in the last 20 years. As their scale has extrapolated, so too has their complexity. COVID-19 has highlighted how black swan outlier occurrences, and even less dramatic disruptions can threaten tightly-refined efficiencies, compromise competitiveness, and impinge margins.
There is nothing like a crisis to crystallize issues and focus minds around solutions. Accepting that volatility is unavoidable, supply chain leaders must now redesign for greater resilience.
The longer-term context
McKinsey calculate that, over a 10-year period, disruptions cause the loss of 30%-50% of an average year’s profits. The study also concludes that even a single but long-lasting production disruption will result in the equivalent of up to 7.4% EBITDA margin loss at net present value.1
The architecture of the value network must be reassessed. Coping through the crisis is one thing but, longer term, demand pattern changes and their possible permanency are unknown. For instance, whilst e-commerce has expanded, in many categories this may reverse, so a drastic route-to-market ecosystem change may be unwise – although it is opportune to properly adjust systems for e-commerce scalability.
Besides issues triggered by the pandemic, trade wars and Brexit are examples of economic volatility which will materially affect COGS by means of tariffs and regulatory costs.
Risk assessment and evaluation
94% of companies are no longer confident in their systems and capabilities for end-to-end supply chain visibility.2 All-round improvement and greater resilience starts with understanding: Where are the vulnerable points in the value network, can the consequences of breakdown or disruption be calculated for comparison, what are the cost trade-offs to tighten, and do the prioritizations align with company strategy?
But identifying risk is complex. The World Economic Forum enumerates a staggering 30 identifiable risk areas for businesses to consider, spanning political uncertainty, natural disaster and climate change impacts, cyber risks, terror attacks, financial crises, and – now top of mind, pandemics.3
To properly mitigate all such risks, sophisticated modelling should be performed across multiple variables and alternative probabilities. This is a multifaceted and inter-interdisciplinary investigation. It should be led by an open-minded team leader able to bypass confirmation biases, and weigh evaluations skeptically – even pessimistically.
Prioritize agility, and quick wins
Facing recessionary times and with ongoing uncertainty as to the duration and severity of COVID-19’s shock, now may not be the optimal time to invest heavily in a range of measures. So, start with known problems or areas that can quickly be evaluated. Prioritize improvements which can generate material gains or significant savings.
Then, restrategize – and redesign if necessary
Conventionally, supply chains have been structured around the trade-off between costs and speed. More recent designs incorporate agility as strategized attribute, intended to achieve flex between the two.
Today, organizations must consider agility as the defining dimension. Manufacturing capacity and customer fulfilment must be prioritized around this attribute; because it inherently accommodates variation, it can cushion against massive swings or major disruption.
More broadly, integrated business planning has never been more vital.
Solidify best practices and processes
Proven foundations exist in the practices of lean, standardization and continuous improvement kaizen.
Zoom in on focused improvements, too. These can bring major savings or innovative solutions, illustrated by Unilever’s Sustainable Living Plan which has generated €1 billion in cumulative 10-year cost reductions via materials, energy and water input efficiencies.
Define-Measure-Analyze-Improve-Control (DMAIC) drives optimization. The process and documentation rigor forces comprehensive analysis and forges integrated solutions.
Constantly strive to improve data. Data is the expression of the pulse of the enterprise. Better, faster, clearer data enables rapid response to crises or opportunities.
Incorporate visual tools. The visualization of data, project or work-in-progress status, facilitates understanding and insights towards solutions. Adopt digital and new technologies if feasible.
Benchmark. Accountability requires objectives and delivery. Target, too, against top-quartile external standards, in a constant ‘stretch’ exercise.
Design teams for better teamwork
The Human Capital function should play a transformative role in envisioning new capabilities and upskilled talent – even entirely new functions – in a future-proofed, world-class company.
COVID-19 has hastened the uptake of remote work, and compelled considerations as to how teams can be structured to function virtually. It has spotlighted the advantages: A global recruitment field, improved employee engagement, boundaryless thinking and diversity. These attributes are a necessity to navigate the challenges of a more complex and volatile business environment.
Capitalize upon technology as enabler
Industry 4.0/5.0 applications can override the extent of the trade-off between accuracy and efficiency or agility and resilience. As technological capabilities expand, so the supply chain gains greater potential to leverage technology for value and margin. Studies show that leveraging technologies amplifies by up to 50% the return of lean method improvement initiatives targeting overall equipment effectiveness (OEE).4
There is one critical catch: Cyber breaches now represent a major risk, and the security of systems and data is vital.
Deepen collaboration, particularly with key suppliers and customers
Cloud-based, real-time sharing of information allows for integrated activity towards common goals in a partnership approach. Unity forges strength.
Risk standards must be tightened for the new normal
The realization is that survival is simultaneously about the ability to shockproof the supply chain as well as the ambition to thrive beyond this current crisis. COVID-19 has clarified that agility is paramount.
High performance can be recovered
Post the COVID-19 crisis, C-suite and senior management should revisit the organization’s documented risk mitigation strategies – and reflect, too, on its cultural attitude to risk and reward. World-class companies build a legacy of achievement based on rigor. The words of Apple founder and CEO Steve Jobs also ring true: “That love affair with focus drove Apple’s success, it minimized distraction, and it articulated in clear terms what the metric of success would be.”
Download the insight Recovery and resilience: Safeguarding and strengthening the supply chain to thrive through uncertainty for a deeper dive into the strategies, plans, actions and measures required to insulate and bolster short-term robustness and strengthen longer-term resilience.
1‘Risk, resilience, and rebalancing in global value chains’, McKinsey, 6 August 2020, Exhibit 5
2EY.com webcast poll, “Responding to COVID-19: What’s next for supply chains,” April 2020.
3Regional Risks for Doing Business 2018, World Economic Forum, p36
4‘Digital lean: a guide to manufacturing excellence’, Bain & Company, page 8, figure 4: combining digital and lean initiatives can reduce costs by up to 30% vs. 15% for traditional lean efforts.