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The Hackett Group outlines how to build resilient supply chains in the wake of coronavirus

10/07/2020 By

As the COVID-19 pandemic continues to generate uncertainty around supply and demand in economies across the globe, supply chain resilience has never been more important. When planning for the medium and long term, businesses in every industry must be proactive in their response to market imbalances that accompany the pandemic recovery to remain competitive.

The Hackett Group breaks down the process in its “Safeguard and Build Resilience in Your Supply Chain” research report, outlining steps to build a more stable, resilient and optimized supply chain. As a result, businesses can unlock greater variability in their cost of goods sold, preserving gross margin at a time when balance sheets are already under considerable strain.

In the report, Hackett indicates businesses will see revenues decline 21% on average because of the coronavirus pandemic. As a result, gross margins can be reduced up to 6.6% based on different organization’s ability to scale costs of goods sold with changes in revenue.

On the other hand, companies with high variability in their COGS structure (costs of good sold) are able to scale up to 80% of costs with changes in revenue, leading to gross margin impacts of 3.3%, just half that of less prepared businesses. The key difference between the two is a culture of being proactive in relation to shifting supply and demand environments, facilitated by comprehensive forecasting and contingencies based on those forecasts to prepare for shocks in either direction.
Graph depicting the Hackett Group's COVID-19 resilient supply chain study

(Click image to enlarge)

How to develop resilient supply chains

To begin the process of developing resilience during the ongoing pandemic, Hackett recommends a thorough evaluation of baseline performance to better understand where improvements can have the biggest impact.

A review of demand forecasting is a good place to start while keeping an eye towards developing more granular and geographically-distributed metrics to predict and react to emerging virus outbreaks before they affect business. Ideally, these evaluations have weekly or even daily updates and incorporate external data to supplement insights that can be gathered from previous business experience.

Understanding inventory coverage on a regional basis combined with up-to-date information on distribution network choke points and redundancies can also help businesses get ahead of component shortages by shifting suppliers as necessary.

Going a step further, companies can work together with supply chain partners to increase their visibility into second-tier suppliers, adding an early warning layer to supply shortage considerations.

Improved forecasting into supply and demand changes help identify key variable cost drivers and allow businesses to define upper and lower-bound scenarios for matching production to demand and generate action plans for those levels most likely to play out.

After increasing the coverage and granularity of supply and demand coverage, businesses can seek out supply chain adjustments with the highest impact and fastest rollout. Hackett suggests strategies like increasing the presence of real-time decision making in the supply chain to shift business to suppliers that are less likely to experience complications for a resurgence of coronavirus infections or to reduce the procurement of materials and components that would otherwise idle as unused inputs in the event of a downside demand shock.

To every extent possible, these decision-making capabilities should also be applied to existing

production lines. In some scenarios, manufacturing outsourcing may be the right choice for meeting the early stages of a demand revival in vulnerable parts of the world where renewed outbreaks are more likely and fixed production costs can only be recouped over months or years of robust demand. In regions where raw material and input supply may be at risk, improved visibility into the supply chain can help businesses identify supplemental first- and second-tier suppliers to be called up if primary partners are compromised.

How to measure success

In addition to the work of improving supply chain visibility and identifying action plans to respond to changing business conditions, the Hackett research notes that procurement and supply chain professionals need to solidify buy-in from executives and other parts of the business. To accomplish this, it’s essential to establish baseline metrics and key performance indicators (KPIs) that can track improvements over time and rapidly identify where results are falling short of expectations.

One example could be tightly-bound requirements for essential inputs required to meet forecasted demand, with lists of contingent suppliers in multiple regions to be contacted in the event regular suppliers are unable to produce the necessary components. Such an approach helps ensure there is enough supply to anticipated demand without overstocking raw materials that could go unused if demand unexpectedly declines.

A deeper understanding of total production costs could justify redundant or ad hoc logistical services to help move supply from the most efficient production facilities to regions where demand is growing but risks from renewed outbreaks persist, satisfying demand while putting off localized fixed costs until the required supply is more expensive to transport in than produce in nearby facilities.

It’s rarely possible for businesses to be able to anticipate every supply chain risk or every demand shock. But Hackett research shows that with a proactive culture of comprehensive forecasting and intelligent planning, impacts to the bottom line can be held to a minimum and companies can position themselves to outperform the competition throughout the coronavirus pandemic and beyond.