Improving supply chain resilience
Invested in digital supply chain technologies
Implemented dual-sourcing strategies
If a pandemic was enough to create significant supply chain disruptions, what happens if you add a war, an energy crisis, and the ever-more apparent effects of climate change? To survive in these volatile times, companies are being forced to rethink their approach to supply chain resilience.
Nowadays, everyone is talking about supply chain resilience. If you follow Delivered, you know that we are too. Just check out the links at the end of this article.
And we're doing so for a good reason. Severe disruptions to business and the economy are becoming more common and more costly. As we were emerging from the frying pan of pandemic-related lockdowns, port congestion, and container shortages, little did we know that we would land in the fire of the war in Ukraine, surging fuel prices, and the return of inflation.
Whether you’re a Scottish barbershop owner or the US Treasury Secretary, understanding why companies and countries need to be resilient is surprisingly similar. Things can’t continue as they are, whether you need to keep the clippers buzzing or oversee the hair-raising business of keeping inflation in check.
According to McKinsey, supply chain disruptions alone will cost organizations an average of up to 45% of one year’s profits over the course of a decade. With the next black swan event likely just around the corner, we must learn from this this situation and change how we think about supply chain risk and resilience.
Companies have been shifting parts of their supply chains abroad to improve profit margins for years. As a result, supply chains grew in length and complexity based on a lean, global model of manufacturing that called for low inventory levels, on-time and in-full deliveries, and shorter lead times. Now, the new normal of regular disruption has broken that system.
To become more resilient, companies must move from just-in-time to just-in-case. That means diversified supply bases, planning alternative freight routes, making distribution centers flexible, and building inventory. And state-of-the-art technology will be the key to success. In its 2022 report, From Disruption to Reinvention – The future of supply chains in Europe, Accenture says that technology will enable “resilient, relevant, and sustainable supply chains.” These digital supply chains will provide real-time end-to-end visibility, using digital twins and control tower algorithms to oversee the entire value chain, including Tier 2 and Tier 3 suppliers.
Invested in digital supply chain technologies
Implemented dual-sourcing strategies
Source: 2022 McKinsey survey of supply chain leaders
We are seeing this shift first-hand as the challenges in recent years have forced companies to examine the vulnerabilities in their supply chains. Our customers are recognizing that they can't continue business as usual. They want to do things differently and are turning to logistics for help.
In the past, companies could plan procurement months – and sometimes even a year – in advance. Now they have reduced that horizon to monthly and even weekly. It's taking a lot more effort, but the need to be more agile is clear.
According to a 2022 survey by McKinsey, several strategies are being used to bolster supply chain stability. For example, the survey found that increasing inventory was the most common action, with 80% of respondents indicating that they had built up safety stock during 2021. An analysis of almost 300 listed companies found inventories rose on average by 11% between 2018 and 2021, with the largest increases in the high-tech and commodity sectors. Some supply chain leaders said they would have boosted inventories even more if suppliers had been able to fill their requests.
With all the uncertainty, global supply chains are also literally moving as companies readjust their global sourcing. Regionalization is a big trend that we expect to continue as manufacturers and parts suppliers bring operations nearer to the end customer and expand supply bases across multiple countries. During the pandemic, many companies also began to shift part of their manufacturing from China to alternate locations like Vietnam and Thailand. The China-US trade war initially triggered this so-called “China+1” diversification strategy, and many manufacturers expedited it when COVID-19 hit.
As a result, we've been busy crafting multimodal solutions for many customers to ensure business continuity and even lowering carbon emissions during the regional disruptions.
McKinsey’s survey also shows that companies report significant progress in longer-term strategies designed to increase supply chain resilience. For example, 81% of respondents say that they have implemented a dual-sourcing approach, relying on at least two suppliers for components. In 2020, only 55% followed such a strategy. Meanwhile, 44% of respondents say they are developing regionalized supply networks, up from 25% in the previous year. Most respondents expect this momentum to continue.
Why go looking for the latest logistics trends and business insights when you can have them delivered right to you?
We do, too. Our global forwarding business has seen customers diversifying their supply chains to reduce risk – splitting their inventory between at least two continents. For example, one of our European customers now has stock in both China and Hungary. So if operations in China were disrupted, they would still be able to access to supplies in Europe. Our job has been to support this journey and add value to their supply chain wherever possible.
Other studies underscore this trend. Ivalua, a leading global spend management cloud provider, found that many companies are investing in new strategies to minimize the frequency and impact of disruption. Two-thirds of respondents say their companies now calibrate more closely with suppliers to increase supply chain resilience. Yet, despite the availability of new platforms and analytics tools, supply chain risk management strategies remain in their infancy. This needs to change so that organizations can plan for disruptions and avoid them in many cases. Ivalua and others expect black swan events to occur more frequently, so businesses need to assess sources of potential problems and how they might affect global supply chains.
That assessment means including suppliers in risk analysis and business planning. Here again, cutting-edge technology plays a vital role. Companies are turning to automated risk monitoring solutions to proactively notify of risk events, increase inventory levels, and rationalize their supplier base to better monitor and engage fewer suppliers. The future of effective supplier management must be agile enough to identify disruption, assess impact, and recommend action. This will take state-of-art processes and systems that allow collaboration with suppliers and high visibility across the supply chain.
To shift supply chain management from reactive to proactive, you need to see beyond your Tier 1 suppliers and identify risk long before it impacts operations. Our partner, Everstream Analytics, offers AI-powered data technology that predicts supply chain risk and provides actionable recommendations that help customers react quickly and even avoid some issues altogether. The trick is getting predictive risk insights to the right people at the right time. And you identify not only risks but also opportunities within the supply chain that can provide a competitive edge and help drive growth.
Despite the war in Ukraine and global challenges, our most recent DHL Trade Growth Atlas predicts trade will grow faster in 2023 than it did over the previous decade. International trade in goods has surged to as high as 10% above levels before the COVID-19 pandemic.
In the current global business environment, logistics providers can help customers rethink certain supply chains, basing them on a sensible trade-off between cost and risk so that they are both efficient and secure. In today's volatile market environments, stable and reliable logistics represent the most critical link in the supply chain resilience chain.
Published: February 2023