Preparing for a Post-COVID-19 supply chain reality

As the COVID-19 pandemic spreads across the globe, world governments are taking measures to figure out the right response – balancing the priority need of keeping their citizens healthy and safe – encouraging and enforcing social distancing to spread the infection - while ensuring that essential supply chains around health care and food supply continue to function.  Yet initial responses show the challenges and illuminate the chances of getting things wrongs as reactive decisions and measures are undertaken with the best of interests.

A global not regional or local shock

While supply chains have in the past encountered, overcome, and learnt from shocks – both uncontrollable (natural disasters, weather etc.) or controllable (trade restrictions, transport industry strikes etc.) – none have been at the global scale of COVID-19.  Bill Gates described in his 2015 Ted Talk, “as you look at what went on, the problem wasn't that there was a system that didn't work well enough, the problem was that we didn't have a system at all”. Full Ted Talk here.

Changing Nature of Supply Chains

The discrepancy of the actual responsiveness and delivery of the supply chain vs. the desired delivery and responsiveness of the supply chain is making consumers realize the global and complex nature of today’s supply chains.  That certain commodities are “unavailable” in the marketplace even when there are buyers willing to pay a premium for it is a new experience to many who are grown used to the instant gratification of receiving what they desire within hours and days!

As part of the “profitable growth” and “core competency” focus, supply chains have become specialized, global and just-in-time.  Lean supply chains focus on no or low inventory – focusing on eliminating spare capacity as much as possible - because holding inventory is not an efficient use of capital. Lean supply chains focus on core competencies and direct all necessary but low value add activities to be outsourced to supply chain partners at lower costs – again increasing the efficient use of capital – by holding lower amount of assets- machines or people - within the company.

These strategies have been quite successful in achieving efficiency and increased return on capital while carrying an inherent risk of heavy reliance on trade partner co-operation.  Borrowing a biological parallel, many of the supply chains have become so lean that evolved entities have atrophy – they have lost the knowledge and ability of certain functions - in the course of evolution.  They have moved higher up the evolution curve without “vestigiality” - the retention of knowledge of functions that have lost some or all of the ancestral need.

Actions to Consider

Maturing Approach to Supply Chain Risk Management - COVID-19 can be the catalyst for companies to move towards a more holistic and mature supply chain risk management approach. A first step maybe acknowledging that supply chain risk management is not simple exercise and requires ongoing consideration while being integrated in the business.  Considerations include understanding the variety of risks - organized by category (environmental, economic, geo-political, technological) and by type (controllable, uncontrollable, physical, non-physical).  Another important consideration is understanding risks not only to direct suppliers but the supplier’s suppliers (Tier 2, Tier 3, …Tier n) and includes overcoming the challenge of lower tiers reluctance to share their trade partner relationships for competitive considerations.  Scenario planning for quantifying and prioritizing risks can help outline the possibilities and also focus on those areas that deliver the biggest benefits.  An in-depth report by SCM World and Gartner’s John Geraint related to Supply Chain Risk Management can be found here.

Leveraging Data and Technology – 1) End-to-End Visibility.  Advances in emerging technologies such as IoT combined with existing enterprise systems technologies can provide visibility and transparency in multi-tier supply chains. Understanding the upstream and downstream supply chain behavior can provide a factual basis for developing a responsive and resilient supply chain strategy and executing against it.  Involving functional supply chain professionals within the organization to work alongside the technologists and data scientists to cut through the huge amount of structured and unstructured data to create and find the relevant nuggets needs to be pursued.  Such a data-driven, algorithmic approach amongst functional and technical teams helps build the culture to leverage systems and technology to augment decision making and avoiding fall back on “instinctive” decisions with no data backing them. 2) Industrial Automation. Advances in variety of manufacturing robotics available at lower cost points can enable possibilities of manufacturing in geographies previously inaccessible due to cost reasons.  Some of these choices can also lead to lower logistics distances and further supply chain network optimization.

Balancing outsourcing while holding on to knowledge and capabilities – Lesser discussed risks of a complex outsourcing environment are 1) the loss of institutional knowledge and insight 2) loss of innovation opportunities due to a siloed, multi-tiered operating model 3) loss of self-reliance due to disruptive loss of access to trading partners.  To combat these risks, organizations must be deliberate and careful of their staffing strategies and consider two types teams – retained operational teams and outsourcing governance teams.  The retained operational teams own the institutional knowledge and drive the strategy and the level of outsourcing desired. The outsourcing governance team focus on executing the strategy with contract negotiations, supplier performance evaluation and renewal/termination of chosen outsourced partners ensuring that each is executing their chosen role with the supply chain.  Considerations of technology tools, to document on-boarding and knowledge transfer sessions and processes conducted by retained operational teams to chosen outsourced suppliers can create learning resources to mitigate risk of lost knowledge, experience and insights within the organization.  The knowledge base can serve as a learning resource for new members to the operational and governance teams preserving the organizations evolution to managing the supply chain.

Conclusion

There is a natural tussle between supply chain risk mitigation and supply chain efficiency.  Efficiency programs drive reduction of suppliers and lowering of inventory.  Supply chain risk management advises increased, diversified suppliers and addition of strategic inventory. While executive approval for risk mitigation strategies has been a real challenge (or near impossibility), maybe the COVID-19 pandemic awakens the adoption of a more balanced perspective within organizations without a whiplash about it from the capital markets.

Those are my takeaways as I work sheltered-at-home amidst the pandemic, but you may look at it in a completely different way. Please comment with your perspectives.