In the last three weeks, I’ve spoken with senior executives of dozens of companies about how they’re managing business continuity during the COVID-19 crisis. Their insights have been consistent.
It’s clear that reaction is not a strategy. Today, we have the COVID-19 crisis. Last year, we had trade wars and tariffs. Prior to that, there were component shortages. Supply-chain disruptions abound; the only certainty is that there will be more to come in the future. The key lesson: Companies that had proactive resilience planning, and had acted in advance to mitigate structural risk from their supply chains, are the ones that are coping far better than others.
Here are three strategies for building resilience into your supply chain:
Diversify sources. Despite being an obvious first step in mitigating risk, many companies carry significant portions of their supply portfolios with single points of failure. Businesses need to eliminate their dependence on sourcing from a single supplier, region or country. Recall that the Tohoku earthquake and tsunami of 2011 crippled the global automotive industry, because there was a large concentration of automotive parts and accessories manufacturers in Japan.
A simple but effective strategy is to have a combination of near-shore and offshore suppliers for each component. A broader strategy is to develop regional supply chains that source and distribute products within a region, but can also build redundancy so that if one region is disrupted, suppliers from other regions can step up.
Diversification lessens risk. If you have a concentration of suppliers at high risk of financial default, then it’s prudent to qualify alternative sources that are on a stronger financial footing.
Build reserves to absorb shocks. The usual inventory-optimization and safety-stock calculations can neglect the element of structural risk. Building on the concept of eliminating single points of failure, it’s prudent to carry contingency safety stocks, especially for low-volume parts that might impact the availability of high-value features. In general, you need to develop inventory plans to assure supply over a long horizon, taking into account possible shortages as well as obsolescence.
In March, the U.S. Department of Defense released some 5 million masks and 2,000 respirators from its stockpile to help states fight the COVID-19 crisis. Strategic reserves go largely unnoticed until there is a crisis. The U.S. Strategic Petroleum Reserve holds almost 800 million barrels of fuel, as an emergency supply that has been tapped from time to time. The value of having strategic reserves has become abundantly clear in recent years.
Strategic reserves are intended to protect against so called “black swan” events that are rare but can cause an existential threat to the business. When considering strategic reserves, ask yourself: Which materials are essential to protecting the overall business? And how long could it take to react and recover?
Thinking more broadly, the concept of strategic reserves can be applied beyond simply holding strategic inventories. Every procurement veteran will tell you that in times of crises, it’s the strategic relationships that make all the difference. All business is built on relationships — with your customers, your partners and your suppliers. Relationship building takes time, and requires reciprocity. Think of favors you do for your partners as building up strategic reserves of goodwill.
Predict, sense and respond with agility. The best-performing procurement teams operate with an “outside-in” mindset. They stay on top of market trends for their customers, products, suppliers, the latest design practices, and emerging technology trends. They subscribe to content services that help consolidate such sources of insight, to anticipate opportunities and risks and take proactive action long before their competitors.
For instance, you can anticipate end-of-life based on typical part lifespans or supplier notices, and take action to mitigate impacts. Or you can monitor leading indicators of a supplier’s financial health to anticipate the risk of default.
Additionally, we need to be mindful of single sources that could be created from the ripple effect of other risks. For instance, financial default or obsolescence of one source within a dual-sourced component will create a high-risk single-source situation.
Cognitive sourcing platforms track trends and inflection points in demand, lead time, cost, supplier financial health and supplier consolidation across scores of commodities, to help organizations recognize market shifts early, and take pre-emptive action.
There will always be events that were unanticipated. However, the best performers establish processes with virtuous learning cycles. When such events do occur, they ask:
Answers to these questions can be used to establish new sensing mechanisms, additional contingency plans and response playbooks.
As we’ve seen, it’s important to recognize the structural risk across your supply portfolio, and establish clear playbooks on when and how to respond to a wide range of risk events. Leaders categorize the likelihood and impact of risk associated with each part or product to identify four types of risk: routine disruptions, moderate risk events, black swan events and structural flaws.
Mapping out structural risk across your supply portfolio
Routine disruptions are frequent but low-impact events, such as unanticipated demand, port delays and limited factory closures. Such events are part of day-to-day operations and need to be handled automatically, with contingencies such as safety stocks and automated re-planning. Moderate risk events require both proactive measures such as leveraging the diversity of alternative sources, and reactive actions such as expediting shipments followed by shifts in sourcing splits. Responses to black swan events rely on both the robustness of your supply network and the strength of your supplier relationships. Finally, it goes without saying that a proactive assessment of structural risk can expose flaws where there are high impact events that are also highly likely. Examples include single-sourced components nearing end of life, or those that are sourced from suppliers at high risk of financial default. Such situations need to be eliminated immediately.
Digital transformation isn’t about one shiny technology or another. It’s about building a pervasive capability for informed and timely action. Information systems must be grounded in processes that continuously maintain data integrity. Data-driven insights and decisions drive superior performance. Experience shows that digital transformation in direct sourcing can drive sustainable margin improvements of more than 3%, along with a 60% or greater improvement in agility and risk reduction.
Adeel Najmi is chief product officer at LevaData.
Timely, incisive articles delivered directly to your inbox.