Managing volatility – business-critical lessons leaders must learn to thrive amid persistent uncertainty
20 Mar 2024
Blog
February 24, 2024, marks two years since the onset of Russia’s mass invasion of Ukraine. In the shadow of a worldwide pandemic, the resulting economic sanctions and global instability triggered further supply-chain volatility that persists today.
Surely, though, businesses have learnt the hard lessons from the coronavirus crisis? Many are still struggling, in truth, and the list of challenges is growing, creating a multiplier effect.
Despite hopes of stabilization, disruption continues from factors like energy market turmoil, climate-change impacts, evolving consumer behaviors, and geopolitical conflicts. For business leaders, the imperative is clear: building resilience by preparing for variability has become mandatory to survive, let alone thrive.
While some supply chains show signs of recovery, shortages and bottlenecks still abound – a situation aggravated by the Iran-backed Houthi pirates plundering ships in the Red Sea. With the Middle East a tinderbox, we can expect shipping market turmoil to continue. Egypt recently announced that Suez Canal revenue was down 50% as vessels divert around Africa.
From commodities to shipping capacity, instability is the new normal. Even companies investing in their own capabilities face vulnerabilities if suppliers cannot assure consistent access to materials and distribution networks.
External shockwaves – internal reverberations
Recent crises expose the interconnectedness of modern supply webs. A single disruption in one region – a flood in Malaysia, a drought in California – rapidly cascades across global networks. No company is an island; all are vulnerable to external shockwaves.
The savvy response is balancing prudent contingency planning with continuous data-backed adaptations. Leaders must understand their position within wider supply ecosystems, mapping potential variability factors both internally and across their value chains. Construct scenario analysis using leading indicators from across operations, suppliers, partners, and market dynamics.
Building supply-chain resilience also means more collaborative relationships with external stakeholders, not just transactional engagements. Share projected production plans and anticipated volatility constraints to enable proactive responses. Explore creative solutions together; mutual dependence means mutual interest in overcoming challenges.
Inflation risks remain
A tempting but risky response from businesses is covering increased supply uncertainty costs by raising prices for customers. Despite significant inflation already, the urge to safeguard margins by passing costs to consumers remains. However, customers face their own budget constraints and sustained price hikes risk demand erosion.
Leaders should absorb some margin squeezes rather than continually fuel inflationary spirals. This builds customer loyalty despite external pressures, sustaining volume growth to offset thinner per-unit profits. Further, those claiming inflated pricing is necessary should re-analyze finances; many brands sustain strong profitability already.
Of course, production volume itself may dip if suppliers cannot deliver sufficient materials. But embracing some margin decline is preferable to losing customers or sales from unavailable products. Shared resilience across the value chain is vital.
Alongside conflict-driven instability, climate change impacts on critical production inputs like water, crops, and electricity further drive supply uncertainty. In Portugal, for example, drought conditions force a 25% water reduction for farmers. Avocado crops promoted for environmental gains now face shortages, increasing prices.
Natural disasters like floods in Asia regularly halt the production of crucial semiconductor components used across electronics and autos. Even routine seasonal storms now create disproportionate chaos due to buffers being already depleted. Supply chain leaders must incorporate climate change variability into their scenario planning. No business is immune to global warming’s supply shocks.
Diversity breeds robustness
Supply chain resilience ultimately requires breadth and diversity of options, not just reliance on the lowest cost or most convenient partners. Broaden supplier and distributor networks so no single node disruption halts operations. Manage inventory to buffer against variability without accruing excessive storage costs.
Knowledge and data also contribute to resilience – deeper visibility into all aspects of extended value chains enables responding quickly to deviations. Tracking leading indicators allows pre-emptive planning before bottlenecks emerge. Perfect prediction is impossible, but avoiding blind spots makes weathering storms smoother.
And just as partnerships create collective resilience externally, collaboration internally between procurement, production, logistics, and sales also smooths responses to supply or demand fluctuations. Breaking down stubborn business silos enables more agility across volatile landscapes.
Seeking shelter from the storm
Recent years proved to business leaders that supply-chain volatility is unavoidable, no matter how refined operations may seem during periods of stability. But resilience is possible via contingency planning, buffers, market diversity, and shared visibility across value chains.
Rather than reactively responding to each disruption, accept variability as standard. Stress test operational and financial plans against multiple scenarios to prepare responses before crises. Build strategic stock reserves and dual source materials and invest in transparency and data integration. Foster partnerships beyond transactions.
With climate change and geopolitical conflicts compounding pandemic instability, turbulence will continue. But by implementing measures that bolster resilience, leaders can weather adverse conditions more smoothly while better serving customers. Supply chains should bend, not break, in volatile times.
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