The resilience of any supply chain is based on its ability to withstand shocks and recover quickly. The impact of unexpected disruptions should not result in wholesome halting and devastating losses to the affected businesses.
For a long while, businesses have sought to minimize their fixed costs in sourcing. The search for efficiency led to businesses relying on a narrow set of suppliers and countries for inputs to eliminate redundancies. However, recent events have reopened the eyes of supply chain managers to the need for resilience. Trade wars between the US and China in 2019 led to disruptions in numerous supply chains as new tariffs were introduced. The COVID-19 pandemic halted operations in many factories across the world, beginning in China, where production dropped by 13.5%.
The lack of contingency planning among many businesses was exposed. A new need to build resilience in supply chains was realized. Here are some best practices suggested by globally recognized logistics and business management experts.
Rethinking the Global Supply Chain Network
Companies need to redesign their supply chain network so that disruptions do not deal them fatal blows. One suggestion would be dual sourcing of critical items to hedge against supply chocks on one chain. Where possible, companies would be better-placed near-shoring to avoid long and complex chains. Vertical integration has been embraced by large IT companies with the ability to acquire companies that supply them with critical components. This allows greater control of the supply chain, and the ability to plan better for shocks.
New Parameters for Inventory and Production Capacity Buffers
Buffer capacity can either be in the form of unused production capacity or safety stock. It’s a necessary cost for the business to bear as insurance against shocks. However, businesses need to have signals for when to increase this capacity in anticipation of major events that lead to long-term disruptions. Keeping track of utilization trends is quite important. This way, requests for increased capacity will be more justifiable to C-suite level decision-makers.
The lack of visibility upstream into supply chains leaves businesses exposed to risks they do not even realize. To build resilience, businesses must cultivate relationships with suppliers that allow them to assess risks upstream. They may ask suppliers to reveal key information to assess their risk-readiness. Where possible, businesses might find it worthwhile to help suppliers build better capacity. One example would be giving suppliers long-term contracts on the strength of which they can get financing to build modern production facilities. Other ways include conducting training events for suppliers to enable them to make better supply chain decisions.
End-to-End Risk Analysis and Management
Companies must take advantage of the comprehensive nature and amounts of data available that can aid their supply chain management efforts. This will help to identify emerging risks and opportunities the business needs to react to. Chain geo-political landscapes, climate change-related transitions, or new emerging manufacturing markets are a few good examples. Others include regional social unrests, weather forecasts, financial markets, and trade policies in other countries. Cybersecurity is another emerging threat to global supply chains. The business must have a way to assess risks to its IT infrastructure and impose upon suppliers to do the same.
Supply chain experts and statisticians can build models to predict how these scenarios will affect traditional supply chain metrics including lead times and demand.
Using Available Simulation Tools
Companies today can make digital twins of their vast network of suppliers. They can assess supply chain volatility weeks in advance. As indicated, the availability of data today makes these modeling tools quite accurate. Businesses get to know which suppliers will be most affected by events happening in their region.
Simulation makes scenario planning easier and clearer. For instance, if tensions are rising between two countries, businesses can plan what to do if escalations reach different levels. Resilience sometimes means giving up some efficiency. A digital twin of the supply chains helps to make more objective decisions on these trade-offs.
Building Partnerships in the Supply Chain Ecosystem
Building a resilient supply chain might be tough for smaller companies that lack the resources or even clout to influence global supply chains. However, with partnerships among regional companies, they can find ways to partner and hedge against common risks. For instance, if three American companies are using the same contract manufacturer in China, they could partner up and contract another one in India. This will reduce their reliance on Chinese manufacturers. Sourcing from the same company in India might also offer them a chance to split the fixed costs involved.
Such partnerships among buying companies might also be used to create value elsewhere. For instance, some companies might decide to build a company to exclusively handle their global logistics instead of relying on third parties. The service company would not be meant for profit, thus will charge the company lower-than-market fees.
Product and Plant Harmonization
Industry-wide efforts have been made in the past to deal with supply chain problems. In the automotive sector, there are models of cars built on similar platforms. This enables companies to share production plants. Some parts have been standardized for different car models which makes it possible to place large orders of that part from different suppliers. The same can be translated to other sectors in a bid to increase supply chain resilience.
For more information on building resilience in your supply chain, check out ProcurePort’s service offerings. We provide cloud-based e-procurement solutions and strategic consulting services on supply chain management.