In alignment with President Joe Biden’s latest effort to address supply chain bottlenecks across the U.S., a growing number of organizations are on a quest to establish more resilient networks. However, chief operating officers, supply chain leaders and other C-suite executives must first recognize the drivers of supply chain fragility — including but not limited to those detailed in Biden’s Freight Logistics Optimization Works (FLOW) initiative.
Leaders should also consider pursuing a fundamental redesign of longstanding supply chain strategies, risk management approaches and supply networks.
Ongoing U.S.-China tensions, a global pandemic, extreme weather events and Russia’s war on Ukraine have exposed longstanding and fundamental flaws in widely employed supply chain strategies. Most approaches center on a dominant but incomplete view of cost — to the exclusion of resilience. Global volatility along with increasingly forceful responses from policymakers, regulators, enforcement bodies and boards of directors make it imperative for supply chain leaders to deploy more advanced technologies that foster better and faster information-sharing among trading partners.
For those deployments to succeed, however, more fundamental work is required. Organizations rethinking their resilience should consider these four steps:
Adopt a mindset that goes beyond cost. The traditional view of supply chains as a cost center no longer suffices. Supply chains should be viewed in the context of revenue assurance. Consider questions such as, “What investments in responsiveness and reliability need to be made to ensure that we receive the goods we need to complete sales to end-customers in a timely manner?”
The longstanding focus on supply chain costs has proven incomplete and damaging in the face of larger and more frequent disruptions. Organizations routinely treat and measure “cost” solely as cost of goods sold while neglecting crucial performance measures such as delivery reliability, quality, business continuity and other workaround costs. This narrow focus greatly increases the use of single-source suppliers in one country, just-in-time manufacturing and delivery techniques, and other cost-savings mechanisms. It also creates lower inventory levels, which can be advantageous from a cost perspective but also reduces supply chain resilience. While cost is an important risk consideration, it should be evaluated and monitored in conjunction with supply chain reliability and responsiveness. Managing the supply chain based on revenue assurance requires a comprehensive understanding of the total cost of disruptions as well as the investments needed to ensure access to supplies in the face of unexpected obstacles.
Foster more trust. Deficient supply chain transparency will pose larger obstacles and higher costs as new disruptions and regulations emerge. Corporate boards of directors are increasingly concerned about “we don’t know what we don’t know” risks lurking among suppliers and deeper nodes of the value chain as regulators put forth new disclosure requirements concerning cybersecurity, national security, and environmental, social and governance (ESG) matters. A lack of transparency stems from a lack of information-sharing, which in turn is caused by a lack of trust among trading partners. Many suppliers have developed a stout resistance to requests from their sourcing counterparts for data-sharing because this information was used, or perceived to be used, to exact concessions in subsequent sourcing subsequent negotiations. Fortunately, more supply chain leaders and CEOs recognize that communications and collaboration models are fundamentally broken and need to be redesigned to cultivate higher levels of trust and supply chain management effectiveness.
Design new supply networks. As the cost advantages of offshoring, outsourcing, single-sourcing and the like continue to decline in the face of more frequent large-scale disruptions that reverberate globally, leading companies are diversifying their portfolio of suppliers, production locations and distribution channels. These network redesigns are far more comprehensive than moving from China to Southeast Asia, for example; this shift does little to address logistics-related disruptions when they strike. Instead, more organizations are reimagining network design based on comprehensive supply chain risk analyses that put more options on the table, including near-shoring and reshoring as well as building factories and distribution centers closer to where products are sold.
Strengthen internal collaboration. When Russia converted from U.S. dollars to the Yuan in its trade with China, leading CFOs immediately called their supply chain colleagues to discuss the implications of this potentially game-changing global trade development. While most COOs and supply chain leaders have always worked with finance groups, this collaboration thrives when it is unified by a shared purpose and alignment on risk identification and measurement. Other internal collaborations are also crucial from a supply chain risk management perspective. Frequent, productive communications with the logistics and transportation, legal, compliance, sourcing, customer management, credit management and other areas of the business equip supply chain leaders with a more complete and real-time view of risks that can affect supply chain operations.
While the White House correctly notes that a “lack of digital infrastructure and transparency makes our supply chains brittle and unable to adapt when faced with a shock,” the most advanced technologies and data analytics will have minimal positive impacts unless underlying mindsets, relationships and network designs are fundamentally redesigned to reflect current and future realities in building and managing strong and resilient supply chains.
David Petrucci is managing director and global leader of supply chain practice at Protiviti.
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