Inoculating supply chains against disruptive events with a resiliency strategy

Recent events have clearly highlighted the importance of supply chains for individual businesses — and for the global economy. As enterprises seek to prepare themselves for other future unknowns, it’s vital that they have resiliency to inoculate their supply chains against similar disruptive events.

In this Q&A, Bristlecone — a global provider of supply chain strategy, planning and operations consulting, and product engineering services — looks at how savvy CPOs can go about implementing this “inoculation.” Dhaval Buch, Group Technology President at the Mahindra Group and former Chief Procurement Officer of one of the largest global Fortune 500 CPG organizations, shares his thoughts and insights on this topic.

What does it mean to inoculate a supply chain?

Dhaval Buch: Look at an inoculation as a set of strategies and activities designed to drastically increase the resiliency of an organization’s response to unplanned disruption. Because Black Swan events cannot be predicted, we tend to prepare for the future based on our experience with the past — previous events that caused disruption, such as floods and earthquakes, which typically impact a specific geographic area.

For example, when Thailand was subject to massive flooding in 2011-12, a large number of manufacturing locations based there were adversely affected. The Japan earthquake in 2011 caused significant disruption to the many global supply chains as well. Companies learned from these events and, since then, have taken steps to be better prepared for these events next time.

However, we are rarely able to accurately predict what is going to happen in the future or predict the next disruption. Chances are, it will be something completely unexpected. Nobody would have believed it 10 months ago, if they had been told there would be a global pandemic soon. An effective inoculation is one that helps an organization take surprises and unpredictable events in stride, in the best possible manner.

Today, supply chains are not used to handling low-probability, high-impact events. We must start thinking differently if this capability is to be built. Everyday efficiency and great execution must be done without question, which of course continues to give us better ways of handling high-probability, low-impact events — this is business as usual. However, at the same time, we must keep thinking about extremely low-probability, high-impact events and how to manage them. This is the supply chain inoculation that is critical.

If you had to identify one major supply chain ailment fueling the need for inoculation, what would that be?

Buch: Today, many organizations’ supply chain and procurement functions have a prevalent trait — that of concentrating and reducing their supply bases. Whenever we want to do consolidation or any kind of concentration, we must always look through the lens of what would happen if there is another event like the COVID-19 pandemic. A massive disruption of this nature, whether by geography or by industry type, can create significant disruption for organizations that have a high level of concentration in their supply chains.

Spreading the risk across multiple geographies, suppliers or industries is a better way of inoculating against this kind of problem. From a procurement perspective, it’s critical for companies to design their products in such a way that they are fungible across equivalent suppliers. This helps build resilience and protect organizations against disruption.

One of the major drivers for consolidation is cost optimization. Further, consolidation also helps in building high-quality relationships. How would companies manage these vital components of performance in a paradigm of de-consolidation?

Buch: There will be some degree of cost compromise in the short term, but you must understand that business is not an “or” situation. It is always an “and” situation. We need resilience and we need cost optimization. A new equilibrium will need to be found if we are to have resilient supply chains that are also cost effective.

In strategies that focus on de-consolidation, what might happen in the beginning is an initial increase in cost. However, continuous improvement and innovations will help reduce cost over time. If we consider the loss that companies had in the last six months because of the kind of problems encountered in supply chains, it pales in comparison to the additional cost they may have incurred through the initial stages of de-consolidation.

No one expects the worst, so no one wants to go through the initial hump to insulate themselves against a potentially bleak future — yet clearly, that’s what organizations need to be doing now.

As part of this inoculation, what risk management strategies can the procurement organization specifically adopt to ensure success?

Buch: The overarching risk management strategy should be to prepare for an uncertain future, but without compromising the imminent present. It’s important to create a balance between the two.

For example, organizations have to strike the right balance between concentration and geographic spread, and it’s typically not possible to do this for all purchases. Hence, you need to categorize your purchases — at the material level — into a matrix of high-impact, medium-impact and low-impact. For most organizations, high-impact items would be in the range of 20% to 30% of materials.

The only way to manage risk is to reduce it in the larger value chain rather than the small part of the total supply chain that any specific company plays in. Asking suppliers to charge less or pay them less is not going to sustain true value for an extended period. Examples of strategies are like going into the supplier’s supply chain and finding ways to create alternatives, opportunities and efficiencies; collaboration across the industry to enable cost-effective supply; and visibility into the operations of suppliers’ suppliers. These strategies will all help in the long run.

Opportunities lie in both directions of the value chain — from suppliers on one side to customers on the other. While organizations may choose to start with suppliers first, increased customer collaboration will also help ensure overall efficiency of the organization and improve relationships with suppliers, meaning that having a more accurate demand forecast can help create more effective supply plans. Customers are also struggling with issues like a lack of supply chain visibility and resilience, and they are also looking for ways to achieve the same resiliency in their organizations.

Procurement professionals should know their market and the markets of their suppliers. This will enable them to intervene in a much more insightful and meaningful way, rather than talking to suppliers only about cost and price. Also, they should know how to use technology to collaborate effectively with suppliers.

Then they can look at medium-impact materials, while the low-impact ones can be managed at an aggregate level.

Is there an emerging trend around nearshoring supply based on the pandemic as opposed to the offshoring that has been the mantra in recent years?

Buch: We have to give it a bit of time for the flux in the system to settle, as to how much the trend will continue beyond the current situation. What is more important is how much of a vendor spread exists, rather than simply being nearshore. Companies also need to evaluate — and this needs to be done company-by­company and industry-by-industry — what needs to be concentrated. When the dust settles, organizations will start their strategic thinking and make a call on this, but certainly, there will be distributed supplier bases, more than what we see today.

Let’s look at the “vaccine” behind the inoculation. What are the ideal components of such a vaccine?

Buch: Overall, an effective procurement strategy is the foundation of an efficient and resilient supply chain. This can be elaborated in terms of the usual dimensions of Process, Technology and People — we can club Process and Technology together, since they go hand-in-hand in today’s world.

Processes must necessarily be agile and responsive and help the organization react quickly and effectively to changes in the market and environment. This calls for thoughtful process design and incorporating best practices, like loosely coupled processes. These processes have to be enabled by state-of-the-art technology. Businesses must embrace opportunities provided by today’s digital transformation landscape to design effective, integrated and collaborative processes leveraging a seamless technology foundation.

For example, real-time visibility is critical to ensure appropriate reactions to extreme situations in the world. Collaborative planning must be done with visibility into suppliers. Changes should be captured quickly and communicated to all concerned stakeholders.

In the People dimension, the changes are far more profound and difficult to implement, but equally exciting to those concerned. Procurement specialists/buyers will have to drastically change what they are doing to survive. Buyers will have to become industry specialists. They will have to understand supply chains, technologies and processes, rather than focusing solely on cost and price negotiations.

Further, collaboration will be the mantra to resolve most companies’ pain points — something that buyers will have to internalize completely. Buyers will have to be expert users in digital technologies that aid collaboration.

What governance can CPOs establish and operate during “normal” times to ensure the continued efficacy of the vaccine? Are there new trends around centralizing/de-centralizing the procurement function, especially in global organizations?

Buch: As a result of the pandemic, procurement functions and supply chains have come to the forefront and are no longer seen as mere support functions of the organization. CPOs should grab this opportunity to lead. The focus should be on customer service, cash and cost — in that order.

To manage the current situation, some organizations have what they call an Integrated Operations Group comprised of people from procurement, finance, manufacturing, marketing, etc., to take care of the day-to-day operations and collaborate internally. In the future, it’s likely that organizations will create interesting organizational designs to collaborate and integrate internally much better than today.

It’s important to have an Executive Procurement Organization — people all over the world near suppliers and customers working together as one. CPOs should consider customer service, cash and cost to structure the governance to ensure change will be well-managed.

Bristlecone, the trusted partner in supply chain transformation, is a global provider of supply chain strategy, planning and operations consulting, and product engineering services. Since 1998, clients across diverse industries have been turning to Bristlecone for end-to-end digital transformation capabilities.

Major analyst firms rate Bristlecone among the top 10 leaders in supply chain. Bristlecone’s process consulting and solution deployment are aided by unique value-added assets and business services, including Spend Management, Sourcing-as-a-Service and Supplier Onboarding, among others.

With headquarters in San Jose, California, and a presence in 10 countries, Bristlecone employs over 1,800 consultants with strategic expertise in supply chain and solution development.

Bristlecone is part of the $19.4 billion Mahindra Group.