The supply chain crisis (Part 2):How leading organizations are adapting

In Part 1 of this series we discussed supply chain processes and technologies that helped firms through the late 20th-century wave of globalization. The supply chain has certainly been disrupted in the past but is more complex today than it has ever been. In fact, it’s more of a web or network than a chain. Business networks stretch halfway across the world, and although they are impressively efficient, they have proven to be fragile when disruptions occur. Those disruptions are plentiful; Russia’s invasion of Ukraine, Covid lockdowns in China (a country that most businesses at least indirectly rely on), broad-based logistics constraints and capacity issues. We’re seeing that no supply chain event is isolated, and disruptions can pose dire, existential risks (e.g., baby formula shortages).

Experts can’t seem to agree on when the supply chain will balance out, but they do agree that businesses can no longer afford to make predictions; all they can plan for is the unpredictable. Planning for the unpredictable entails building new capabilities for resilience (to better anticipate and recover from adverse events) and agility (to move quickly to not just avoid risks but also seize opportunities and transform in the process). These include:

• Redefining performance metrics. Too many organizations have “metrics” that are misaligned if they exist at all, often centered around accounting costs or spend management (rather than supply management). High-maturity organizations are now looking more at economic costs or the “what-ifs” that have rippling effects on their supply continuity and bottom line. After all, spend is what you pay, but supply is what you get, and both must be on a “balanced scorecard.” Metrics are what tell you whether your supply is available, sustainable, ethical, high-quality, and timely enough to really be considered “cost effective” from a true total cost-to-serve standpoint. This might entail keeping a better pulse on customer feedback, regulatory issues, labor conditions, natural disasters, logistics barriers, geopolitical complications and other factors that impact performance. Further, firms should be differentiating the types of risk they measure (e.g., supply risk, capacity risk, supplier risk, IT risk, IP risk, enterprise risk) in order to factor risk scores into sourcing decisions and supply chain strategy choices. Essentially, performance metrics need to be future-oriented and shouldn’t only center around the “costs of doing business”. As Pierre Mitchell said, “supply risk management done well is more than just a glorified insurance policy applied to the supply chain.”
• Making better choices at the time of design. Industry experts are calling this “design for supply, and there are already organizations (like Tesla) pioneering these practices and technologies that provide the intelligence to make it possible. It makes sense that engineers often reuse bills of materials for new designs, especially if they’re using parts that are readily available and used across many products in the supply chain — but parts are not always readily available. During the past couple of years, buyers have been forced to make expensive spot buys (with expedited shipping at record-high shipping costs) and reconfigure their supplier networks in order to meet demand. So, organizations are opening up the aperture and making design decisions that are “outside-in” rather than “inside-out” so that product design, or manufacturing specifications, can actually be achieved with current supply network capabilities. Sophisticated engineers are working cross-functionally, thinking through the availability, lead-time and alternatives of each part that goes into their design. They’re looking at suppliers’ and backup suppliers’ ability to handle geopolitical disruptions and ramp up supply in times of volatility. We’re moving past the days of designing products with custom chips or parts that are only made by a handful of constrained (and powerful) manufacturers. Essentially, companies are breaking down silos and improving their overall visibility across the design-to-source lifecycle so they can pivot quickly when plans fall through.
• Although everyone has a budget and might be under pressure to focus on short-term gains more than long-term gains, companies recognize that they are more competitive and more valuable as a brand when they innovate. Many supply chain innovations are widely discussed even by the general public (i.e. ESG-related initiatives, fraud-combatting initiatives via blockchain), but what often goes unseen is the innovation that occurs in collaboration with suppliers. For example, Apple is an innovator because they work with suppliers to develop (and protect!) innovative intellectual property in terms of product features and internal capabilities alike. This sort of supplier collaboration must be baked into the design-for-supply process for innovation to be realized across the entire NPDI process. When an entire supplier ecosystem innovates together and aligns objectives, those objectives are substantially easier to achieve (i.e. sustainability, circularity, diversity, transparency, localization).
• Optimizing their tradeoffs between effectiveness and efficiency. Efficient systems like JIT might minimize costs but they lack buffers when disruptions occur, ultimately leading to higher costs and lost revenues from disappointed customers. Companies aren’t throwing their individual systems away altogether, but instead are enhancing their systems (e.g., with outside-in intelligence) and integrating them to break down information silos because it’s impossible to manage an integrated supply chain with non-integrated data. They are “designing for supply” by reducing product/specification complexity, near-shoring, driving down lead times, diversifying their supplier base, vertically integrating in strategic categories, re-locating/re-sizing buffers and generally striking a better balance between strategic supply chain effectiveness and tactical operational efficiency.
• Adopting AI technology. AI helps automate high-volume repetitive processes like sourcing execution, but the large impact is in turbocharging analytics to help sift through big data. Truly strategic sourcing is about “opportunity identification” and the bigger the opportunity, the better. Detecting those opportunities requires AI-enabled analytics, which allow organizations to see big data in a way that moves beyond “descriptive” and becomes “predictive” and “prescriptive.” This allows analysts and managers not only to orchestrate internal workflow processes better, but to see the big picture enabling them to take the right course of action, rather than the status-quo course of action, with more efficiency. In effect, with limited budgets, headcount and tools, it’s next-generation supply chain technology and analytics that will generate value within the global supply chain.

Speaking of supply chain technology, it’s evolving faster than it’s being adopted. In Part 3, we will discuss the future of our global supply chains and how technology (and its adoption) will radically transform the way we react to disruptions of all nature.

This Spend Matters brand studio article was written with SupplyFrame