Supply Chain Resilience: How to Avoid Shutdowns and Encourage Optimal Performance
3 September 2022 |
The C2FO Team
Build a more resilient supply chain by developing strengths and managing threats.
For years, it was enough to have a supply chain that could deliver inventory exactly when you needed it at the best available price.
Whilst price and efficiency are still important, more companies are putting a higher priority on having resilient supply chains — systems that can continue to function even when natural disasters, wars and other threats occur.
Supply chain concerns are certainly top of mind for many business leaders. According to C2FO’s Working Capital Survey for 2022:
57% of CEOs, CFOs and other decision-makers believe that supply chain shortages will negatively impact their businesses, tied for third on the list of potential risks this year.
56% of respondents identified shipping delays and costs as a threat for the coming year — No. 5 on the list.
Nobody wants a repeat of the recent semiconductor shortage, which forced automakers to throttle production and shutter factories — even in the face of massive consumer demand — because they couldn’t source the computer chips they need to make their products.
To make your supply chain as healthy as possible, it’s important to build on its strengths while also taking actions to mitigate the threats that could take it offline.
What does a strong supply chain look like?
It uses demand forecasting to guide orders
The healthiest supply chains have the ability to project how much inventory they will need in the near future so they avoid buying too much or not enough.
Using technology — such as an enterprise resource planning (ERP) platform or a homegrown solution — buyers can build such a forecast by incorporating a large number of demand signals from stores, warehouses, import centers and other points in the supply chain.
“You would think it's something that is standard and people have it down to a science, but unfortunately, it's not,” said Kristyn Baker, C2FO’s vice president of procurement and sourcing strategy. “And that's something that keeps popping up as a very large need.”
Demand forecasting is critical for buyers because it helps them place orders in time to keep store shelves full and keep customers happy. But it’s also important for suppliers so they can line up the inputs and resources they need to meet order demands.
“If (suppliers) don't know what their clients are going to be forecasting, it's really hard to plan on their side, whether it's production of a good or ordering of their own raw materials,” Baker said.
IKEA is a great example of a brand that is innovating in demand forecasting. The retailer has developed an AI-powered tool, Demand Sensing, that uses more than 200 types of data to guide the company’s ordering. That includes standard factors, such as sales history, weather and seasonality, as well as less obvious choices, like when consumers receive their raises.
Demand Sensing can help forecast demand up to four months in advance, with only 2% of its forecasts requiring human correction.
Suppliers are honest about their capabilities
A buyer needs to know whether a supplier can meet the demands of a specific order, especially if that order has a particularly short deadline. The worst possible scenario is for a supplier to overpromise and underdeliver.
Keep in mind, these usually shouldn’t be yes-or-no situations. The supplier should be able to explain why a request may not be possible without shorting another part of the production process. The supplier should also be able to suggest alternatives to the original request.
“The more transparent you are on both sides of the conversation, the better off both sides are going to be,” Baker said.
Buyers also need to be clear about their own limits. This year, for example, there were times when it was extremely difficult for buyers to forecast demand for suppliers — which led to many US retailers overbuying, which forced them to discount those goods later. That’s because there were so many uncontrollable variables, from changing consumer demand to shipping delays slowing down supply chains.
Baker, who was working in merchandising for a large retailer during the pandemic, remembers conversations with suppliers. Her team would walk through the forecasts, what assumptions they were built on and what the team didn’t really know.
Being open with suppliers led her former employer to develop joint forecasts with those suppliers, so they were starting from the same page.
Consistency is standard operating procedure
Consistency in delivery
Buyers need suppliers that show up during the agreed-upon delivery window with 100% of the order that was placed. It’s how they can identify the suppliers that have the capability to be strategic suppliers — the partners you can rely on again and again, and even include in your long-range planning.
Consistency in payment
Buyers need to display consistency when it comes to issuing payment. If the buyer has negotiated a discount for early payment, the buyer needs to make sure the payment arrives within the agreed-upon window. Suppliers live and die by their working capital. The smartest enterprise buyers make sure their suppliers have the funds they need to continue serving them well into the future.
Buyers encourage new ideas from their partners
Some of a company’s biggest innovations come not from the company itself, but its suppliers. Buyers should be open to hearing about new ideas from their partners, whether they’re proposing a change in packaging or an entirely new product. Those changes could end up making the supply chain more resilient – that new packaging, for example, might be easier to source.
“Give room to suppliers to come up with different innovative ideas, whether it's just a different take on the same product or something completely new that you didn't know you needed,” Baker said.
Some companies even build innovation into their supply chain software. Haier Group, a China-based maker of home appliances, built its COSMOPlat platform so that it’s easy to identify resource providers for new projects.
Haier teamed up with a customer to quickly build mobile isolation wards early in the COVID-19 pandemic. It was something that Haier had no experience building. But the company was able to quickly identify the expertise and partners it needed, all thanks to the network of companies on COSMOPlat.
Haier will post on COSMOPlat about a problem that it is having and let suppliers work together to propose solutions. Companies don’t even have to be a Haier supplier to register for the platform.
How to reduce risk in your supply chain
All of the qualities mentioned above — accurate forecasts, honest communication, openness to innovation, consistency in delivery and payment — are essential for making your supply chain as healthy as possible. Focus on those qualities, and you’re playing “offense,” i.e., making your supply chain as competitive as possible so it can deliver value at the highest levels.
Buyers should think about defense, too. Namely, how can they protect their supply chains from threats that could reduce performance or even shut them down entirely? To reduce those risks, consider the following strategies.
Have more than one way to get what you need
Many companies use a centralised approach to supply chain management. Inventory flows through a single distribution center because it can lower costs and make it easier to oversee and track inventory.
But in the event of a natural disaster, that kind of operation can be, well, disastrous. Pandemic, armed conflict, natural disasters — they might seem like relatively low-risk events, but when they strike, they can completely shut down a business that uses a centralised approach.
And that applies not just to distribution but to sourcing (using companies in only one country to supply a critical product or part) and sales (having only a single way to get your product to customers).
The good news is that you can usually find alternatives for key functions for distribution, manufacturing and even sales.
For example, you might work with a diversified manufacturer that has facilities in multiple countries, so if there is a crisis, it can shift production to another location. The key is to find these alternative partners before you need them.
Make your supply chain a hard target
When it comes to supply chain disruptions, most businesses fall into one of two categories, Gartner found. They’re either disruption responders or disruption shapers.
Disruption responders are companies that have larger supply chains involving multiple countries as a way to diversify risk. They also put processes in place for responding to disruptions, but if multiple crises happen at once — like what happened over the past two years with COVID-19, supply chain issues, global conflicts and other problems — it can be easy to overwhelm their ability to recover. And because their supply chains are so sprawling, there are more opportunities for them to be affected by unexpected problems.
Disruption shapers, meanwhile, have fewer suppliers and fewer sales channels. Their products pass through fewer countries as they’re being made. They use multiple suppliers, but no more than necessary to meet demand and protect against disruption. Their processes are usually simpler. By making themselves a smaller target, they reduce the opportunity for disruptions to hit them.
It’s a strategy that more UK companies are adopting. To avoid supply chain issues, 40% of UK companies left at least one of their international suppliers for an in-country partner, according to a 2022 survey from the Chartered Institute of Procurement and Supply.
According to Gartner, this approach leads to one-third the number of disruptions that a disruption responder has to deal with.
Identify potential breaking points, and monitor your supply chain regularly
It’s hard to protect your supply chain from threats if you don’t know what those threats look like. That’s why McKinsey & Co. advises companies to spend time cataloging potential threats and creating a framework for regularly monitoring and addressing them.
What that looks like in practice will vary from company to company. A tourism-based business might devote more attention to weather forecasts while a manufacturer might track the price of key commodities or political conditions in the countries where its parts are made.
What about threats that seem to come out of nowhere because they’ve never happened before? To prepare for unknown, unexpected events, McKinsey & Co. encourages businesses to invest in general defenses that make their organisations more resilient — like, for example, training employees to spot potential risks and creating emergency plans.
Segment your supply chain
Different types of products might require different types of supply chains, according to Northwestern University’s Sunil Chopra and ManMohan S. Sodhi of City University of London.
A clothing retailer might use multiple suppliers to make a high-volume but low-margin product like plain T-shirts, minimising the risk of shutdown, they write. However, that same company might use a centralised supply chain for products with low volume but high margins, so it can scale production up or down quickly if demand drops off completely.
The bottom line on supply chain resilience
Fast, efficient supply chains are important for business success, but they also need to be resilient.
Companies can make their supply chains more resistant to disruption by encouraging high-performance habits (such as forecasting demand, communicating openly with suppliers and paying on time or early) while also mitigating risks by diversifying their sourcing, identifying and monitoring threats, and even eliminating the opportunity for a threat to affect them.