As the current circumstances continue to unfold, no-one is entirely certain of what the future looks like. There is, however, an immediate impact on your supply chain that you can take positive action on today, explains Oliver Bridge.
Summary of actions to take to strengthen your supply chain
Map out your supply chain. Initially, discover and map your suppliers to Tier 3, then work on understanding to Tier N. Issuing a list of provenance questions to your Tier-1 suppliers is the first step
Turn the map into a model of your supply chain (you can use software such Llamasoft for this) to understand the impact of scenarios. Identify your critical vulnerabilities and redesign your supply chain and procurement policies to build resilience, flexibility and spread the risk, eg second or local sources, build relationships with alternative suppliers, hold higher inventories of critical components/raw materials
Where necessary, have discussions with your key customers about the preventative measures you’d like to take now for the future and any price uplifts that may be necessary
Create business continuity that will help you mitigate, react and recover from future events
Consider how you create a business culture around adaptability and agility
"Black swan" supply chain events
Looking back over the last decade, it’s easy to list off numerous events that have disrupted supply chains:
2010 - Icelandic volcano eruption
2011 - Japan earthquake and tsunami
2011 - Thailand flooding
2012 - Evonik plant fire in Germany
2016 - UK referendum on leaving the EU
2017 - Hurricane Harvey in the USA
2018 - US trade
2020 - COVID-19
All the way back in 2007, risk analyst Nassim Nicholas Taleb identified these "black swan" events - low predictability, high impact. But supply chain managers still aren't planning for the improbable, because historical data either doesn’t exist or it shows that these are extremely rare and unlikely.
It’s difficult to plan for specific, low-probability events. You can, however, expect the unexpected and prepare for scenarios where parts of your supply chain are disrupted and taken offline without attributing a cause. There are, however, operational changes you can make going forwards. It’s important to highlight that, in times of crisis, your people are a critical resource. Taking the time to build a culture around adaptability and agility can make an enormous difference in a company’s ability to respond to a crisis.
Review your supply chain and undertake scenario planning
Now is the time to look at your supply chains and try to build resilience and flexibility into them. Consider the knock-on effects when one or more chains are broken and try to identify critical vulnerabilities.
It’s important not to focus entirely on those suppliers on whom you spend the most and ignore or overlook your smaller suppliers. Eighty percent of your procurement spend may be with 20% of your suppliers, and there may be more incentive to ensure that those strategic suppliers are themselves employing appropriate risk-mitigation strategies. However, those non-strategic suppliers may still be critical to delivering your product.
For example, it took the 2011 Japan tsunami to highlight to many in the automotive industry that a particular metallic paint additive, representing only a fraction of the cost of a car, but used by all automakers, was produced at only one plant in the world, near Fukushima. Likewise, having an assembled car but no key fob to open the doors and start the engine means you cannot sell the vehicle; something Jaguar Land Rover was acutely aware of near the start of the COVID-19 crisis in China as it flew parts out of the country in suitcases.
The process of mapping out supply chains can be difficult. Those with particularly complex global supply chains sometimes aren’t aware of their risk exposure past Tiers 1 and 2. In 2012, chemical producer and Tier-3 automotive supplier, Evonik, suffered an explosion at one of its plants in Germany, which produced a key ingredient for a specialty plastic compound, Nylon 12. The automotive industry relied on Nylon 12 for fuel lines, brake components and seat fabrics. The explosion removed approximately 40% of the world’s annual capacity for nylon 12.
Is lean too lean?
Another part of the problem has been that businesses facing global competition have seen significant pressure to reduce their supply chain costs through lean manufacturing, off-shoring and outsourcing. In some industries, we’ve seen significant pressure on suppliers to drive down their costs and tighten their margins, limiting their ability to be resilient and flexible. When the cheapest supplier of a component or raw material is based in China, margins may dictate that you cannot dual-source from Europe as well.
It may be time for businesses to make the case to their customers that price rises are required to pay for supply-chain security. Procurement teams need to reconsider the weightings that they use for their award criteria.
Consider multi-sourcing from different regions or single-sourcing locally. An alternative to multi-sourcing can be to build relationships with second suppliers, potentially putting in place contracts to ensure you’re at the front of the queue with your alternative supplier, should your primary supply fail. You may want to consider how your competitors will react in a crisis and how demand may shift to alternative suppliers. Another option is to hold increased inventories of certain components, particularly where supply-chain vulnerabilities or potential for bottle-necks are identified.
Given current global events, it's easy to focus on crisis-management and lose sight of the long term. However, by looking at your supply chains, you can not only avoid current issues, but make your business more resilient going forward.
If you’d like to discuss any of the matters above, get in touch with Oliver Bridge.