24 Jun 2020
By Oliver Wight Partner, Flavio Pietrocola
Just a few months ago end-to-end (E2E) supply chain agility was a hot topic, but then along came Covid-19 and resilience became the new name of the game. According to the Cambridge Dictionary resilience is ‘the quality of being able to return quickly to a previous good condition after problems’, which poses the question for many businesses - was their E2E supply chain in a ‘good condition’ before coronavirus? Instead of returning to a supply chain where they only win because others – either the consumer or supplier – lose, is there now an opportunity for businesses to build a better supply chain rather than readopting old habits? In this blog, I’ll look at some of the issues supply chains need to resolve to build long-term resilience post-pandemic and in the ‘new normal’.
Recent shortages in many supply chains have brought to light the amount of offshoring that has taken place in Europe in the past two decades. There were short-term benefits to offshoring that have made it an appealing prospect for businesses and their stakeholders in the past so they could, for example, source goods more cost-effectively. But when Covid-19 caused a shortage in some urgently required products, including medical equipment and devices, these had to be at least partially re-shored. Companies such as Volkswagen, used 3D printing technology to manufacture respirators, which raised the question for many - if Europe could produce its own supplies, particularly strategic ones, why was it so heavily relying on sources in the Far East?
When setting up their supply chains many businesses apparently neglected to consider the long-term ‘social cost’ of offshoring on jobs and the environment, in favour of short-term financial benefits. Companies have been left with consumers at a local level, but their supply points are now far away, which also makes it difficult to maintain the three tenets of a circular economy – reduce, re-use, and recycle. Taking the production of textiles, footwear, and apparel as an example, many businesses have moved this activity out of Europe to low labour cost countries. However, when the garments are used, it is uneconomical to ship them back to suppliers for re-use/recycling and they are typically disposed of. So lower sourcing costs (which are usually associated with lower quality and less durable goods) shortens consumption cycles and exacerbates the lack of efficient waste management.
As well as the environment there are people to consider in the ‘social cost’ of any supply chain. There’s often a vast difference between the low production cost of a product and its retail price. If companies have set up their supply chains to save on production costs but the savings are not being passed on to the consumer, nor shared with the producing entity, who is getting the largest share of the profit? In most cases the money ends up in shareholders dividends, employee pay-outs, and tax, all the while the suppliers remain in poverty.
Then there’s advanced digital technology. AI, Machine Learning and Big Data have been utilised by many large successful companies to help them stay ahead of the competition, but in the case of global supply chain disruption how much use can they be? Many suppliers have been forced to dramatically reduce their workforce or close their factories altogether, which means that even if the data is telling them to expect a 50% uptake in sales, they may not be able to access the supplies required to meet the demand. The result of this is frustration for those companies with access to immediate information but long supply chains; they see themselves missing out on opportunities but aren’t able to do anything about it.
Many businesses will recognise they need to address some, if not all, of these issues to create a long-term resilient and ethical supply chain beyond Covid-19. While it can seem like a daunting prospect, there are actions they can take that will help them to adapt more quickly and easily to the ‘new normal’ ahead of their competitors:
Build strong collaborative relationships with suppliers. For a business, having a supplier you have confidence in, who you are sharing information with, reduces your need to shop around. One of our clients that produces rare metal catalysts for the chemical industry has established this loyalty with its suppliers; it has left them in a much better position to deal with any supply and demand changes through the pandemic so far.
Effective scenario and demand planning processes. Businesses that have looked ahead at the different potential outcomes once lockdown is eased and tested how they will operate under these conditions will be better prepared. One question retailers face is whether recent behaviour is a long or short-term change to the consumption pattern, i.e. will flour remain in high demand because people will continue to make bread at home, or will it return to pre-lockdown levels? A good demand planning process, utilising digital technology and analytics, will include market and consumption signals that can indicate these changes in real-time and businesses can use this data to inform scenario plans.
Establish new E2E supply chain performance criteria. While we hear many companies talking about their environmental and social impact and have seen some taking steps to reduce it, we have seen very few measuring its effects. While KPIs like financial performance and customer service levels remain paramount for businesses to be successful in the short-term, now is also the time to consider introducing new sustainability KPIs that will help build the resilience of your supply chain for the future because it truly looks after its partners, all of them.
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