Three Strategies to Mitigate Supply Chain Risk

For two decades, the optimization of supply chain operations has rightly been viewed as essential for the retail and manufacturing industries. Supply chain professionals and software companies responded to this with an astonishing array of capabilities to meet the challenge. Profit optimization, enhanced forecasting algorithms, pricing optimization, and reverse auction platforms are a few applications that grew in popularity. Even the economic shocks of 9/11 and the contraction of 2008 did not slow this pace of innovation. Indeed, these disruptions provided further appetite to satisfy the need for efficiencies that come from sophisticated practices.  

Now, as the world struggles to minimize the impacts of the Covid-19 pandemic, we begin to hear talk of unwinding some of these practices once hailed as essential. The practices utilized to wring costs out of the supply chain are now being called into question. The tactics of off-shoring and Just-in-Time inventory are easy targets for failures during a major disruption. 

The simple truth is the global supply chain network is far too vast and complex to be walked back. Large scale onshoring back to North America, returning production from overseas, is simply not practical.

It is imperative we take a clinical look at where our supply chain process failed to incorporate the appropriate risk assessment and mitigation. The operational models developed were myopic and failed to consider all the existing variables, no less the new issues not yet considered. This compromised the impact of evaluating all the necessary factors to assure operational continuity.  Substituted for this discipline was the expediency of tactical operational plans justified by the collective confidence in the antithesis of Murphy’s Law. It was assumed that if all parties were making a profit, then anything that “could go right, would go right”.

We must acknowledge strategic supply chain plans need to be about more than just cost shaving and cycle time reductions. The plans need to consider the cumulative impact of all activities across the supply chain. It has been a painful lesson for companies to realize that they need to shift from a singular focus on profit to overall value creation.

Fortunately, the knowledge and technology to do this are both well established. The solution is not a return to full domestic production and Just-in-Case inventory. We must recognize that this is not our only option. What is required is a balanced and informed approach.

Here are three strategies that companies are pursuing with fresh energy to mitigate supply chain risks:

1. Supply Chain Digitization – Up to now, ERP transactional activity has received the lion’s share of attention. However, fully leveraging the breadth of PLM stands as a missed opportunity of singular importance. For too many companies, the existing design process is disjointed and exists in multiple applications like Excel, Adobe Illustrator, CAD or even a physical sketch pad. This legacy design process relies on habit and ease of task which suits the individual participants but misses the opportunity for a complete and systemic foundation for all ensuing activities as product creation moves into the rest of the supply chain. The result of this is the tendency of working with the existing supplier base driven by comfort with the familiar. This complacency creates an artificial barrier to innovation, exploration and diversification. To learn how to scale up your PLM maturity, read our 5-step guide.
2. Manufacturing Diversification – While large-scale manufacturing will likely remain off-shore, we can utilize production closer to North America to supplement capacity. There are countries of the Caribbean basin for example, that have proven to manufacture quality products but were abandoned in search of continued cost cutting. Rekindling those relationships can provide a portion of key production and can offer continuity and flexibility of supply. This type of diversification will provide some level of insulation from global supply chain disruption.
3. Sales & Operations Planning (S&OP) Process Optimization – We have an opportunity to take this well-established, often sclerotic, exercise and imbue it with new vigor. Too frequently the planning and budgeting process is prepared for and run as a part of a numbingly familiar routine. The result is that financial reporting and the S&OP processes fail to test and challenge assumptions. The outcome is further institutionalization of reactive operations.  

Most organizations have some manner of product management & planning processes, that are supported by technology. But dependence on software to magically transform processes is wishful thinking. On top of that, the expenditure on software tools can be a wasted investment.    

When numbers are simply “rolled up” each month and not properly analyzed and tested potential errors and opportunities are not brought forth for examination.

Consider “Comp Sales.” This archaic metric reigns supreme. It is the benchmark against which all present activity is measured against the past. From this false assumption, the future extrapolated. Here, the past is always prologue: It dominates in driving supply chain choices. The impact of this is more than an oversimplification of consumer preferences. It informs the early part of the supply chain planning process and fails to consider independent variables. Companies fail to require S&OP participants to use the use available tools to run “what if” scenarios for a more informed analysis. This stands as one of the most significant lapses. “What if” simulations ground examinations of myriad scenarios, and combinations of potential events with real operating constraints. This offers not only improved forecasting and the consideration of mitigation strategies but eliminates having to improvise when a disruptive event occurs. We need only to look at the impact that COVID-19 has wrought on the supply chain.

Moving Forward Post-Disruption

Winston Churchill once inspired a global empire with the exhortation to “Never let a good crisis go to waste.” While now, much of discussion is around our immediate response to a pandemic our response must go further. The three initiatives we’ve discussed here are hardly exhaustive but rather suggest a place to begin. All will continue to pay dividends in our ability to reduce cycle times and capture trends well after science has quelled the pandemic regardless of when we start. We should not let the crisis go to waste.