The new supply chain equilibrium

The COVID-19 pandemic exposed serious vulnerabilities in today’s highly efficient global supply chains. As COVID-19 transitions to an endemic state, the world braces for still more shocks and inflationary pressures driven by sanctions on Russia and uncertainty throughout Eastern Europe. Clogged ports and empty store shelves around the world speak to the additional work companies must do to make their supply chains more resilient, even as they face pressure to hold down costs. These measures are important and necessary, but we believe they miss another crucial element in supply chain management: agility.

The case for an agile supply chain

Disruption and massive, rapid change are the new normal, but the response from supply chains has been largely defensive to date, as managers enact measures to guard against supply shortages. Agility, which most supply chain officers would nod to as a nice-to-have attribute, is harder to quantify and can feel less urgent in the face of a crisis. As a result, most supply chain leaders have focused on improving the more tangible elements of supply chain performance where metrics and performance expectations—elements such as cost, service, quality, inventory, and asset performance—are much better defined.

However, the fact that agility is less tangible does not make it less important. The ability to save money or weather a crisis, while necessary, is insufficient. In the long run, it is agility that can make the difference between operations that thrive and those that merely survive. When disruption hits, it upends established practices, but it also reveals new opportunities. Three of the most important benefits of agility—better and more timely data and improved visibility; the ability to execute faster than the competition; and integrated and collaborative relationships with key supply chain partners—enable faster and better responses to new opportunities.

The agile supply chain is important for two reasons. First, we live in an age of disruption. Capabilities that improve supply chain agility can also help improve its resilience. As new forces continue to roil the world’s sources of supply, from increasingly severe and frequent natural disasters to geopolitical upheavals, supply chains will need to build in the capacity to reconfigure much more rapidly to keep goods flowing. This is a level of agility that, before the pandemic, was considered less important than maintaining a simpler, more cost-efficient chain, from source to customer. Historical approaches to improve resilience typically relied on incremental inventory, incremental capacity, or incremental suppliers. However, these “physical” approaches to resilience all have a financial overhead that is difficult to justify when supply chain performance is primarily evaluated on efficiency. In the future, digital approaches and new agile capabilities will enable improved resilience, with less financial burden.

Second, supply chain managers often operate much closer to markets, and with a higher degree of granularity, than managers in other parts of the organization. They have access to market signals that others do not, such as a potential competitor supply issue. As such, they can identify new opportunities and help mobilize the organization to take advantage of these. This advantage gets compounded when organizations can respond more quickly and precisely than their competitors.

To build in agility, supply chain leaders need to play offense as well as they play defense. This is a fundamental shift in mindset for a world in which the supply chain is more complex, organic, and changeable. It’s also more deeply embedded in corporate strategy and requires a clear understanding of how you configure your supply chain, and the capabilities that you need to win.

What makes a supply chain agile?

The capabilities, key performance metrics, and performance expectations related to agility are not as standardized or well defined as they are for supply chain efficiency. And the focus on agility will vary based on a company’s overall strategy and the design of the supply chain to support that strategy. However, in our experience, agility can be built in four areas:

• Demand sensing
• Collaborative relationships
• Process integration
• Information integration

Each of these areas involves new capabilities, but, more importantly, they require a new understanding of the role of agility in creating competitive advantage. As they build agility into their operations, supply chain managers must strike the right balance among agility, resilience, and efficiency.

Demand sensing

The capability to sense and respond to changes in demand is a good start. However, the agile supply chain goes a step further and anticipates changes, smoothly reconfiguring the production and distribution network and pivoting to robust sources of supply as new demands and opportunities for profitable growth come into view. In an agile supply chain, managers track metrics that include the average number of days between sensing demand for a new product and getting it to the market, as well as the overall number of products introduced based on proactive sensing of new customer preferences.

Collaborative relationships

Supply chain managers that excel in this area, in effect, become information hubs, taking in data and observations from multiple sources to understand opportunities and risks. They excel in collaborating with their key supply chain partners to respond in an orchestrated manner to these opportunities. They collaborate with key customers, exchanging marketplace information and aligning demand forecasts and product flows. They also have two-way information exchanges with a greater percentage of tier 1 suppliers, sharing inventory, production schedule, and capacity information to better optimize the end-to-end supply chain response, versus just a single company’s piece of it.

Process integration

Agile supply chain organizations break down traditional functional barriers and focus on optimizing end-to-end processes. This fundamentally changes the speed at which an organization can respond to change. Process cycle times that were traditionally measured in months will be executed in weeks. Weekly processes will become daily processes. And the boundaries between planning and execution will blur. For some organizations, the ability to respond quickly may lead to a greater degree of vertical integration and direct control over a higher percentage of nodes across the end-to-end supply chain, including manufacturing plants, supply locations, and customer access points. Tesla, for example, is more vertically integrated than many other automotive original equipment manufacturers. As such, it neatly sidestepped the supply crisis in computer chips by using its own in-house software engineers to write code for alternative chips. While other carmakers were forced to shut down assembly lines as they waited for chips, Tesla increased production of its all-electric vehicles in 2021 by an estimated 80%.¹

Information integration

Rapidly advancing technologies such as cloud computing, 5G, the industrial Internet of Things, and artificial intelligence are driving the digitization of supply chains, increasingly leveraging information over assets. Organizations seeking to up their agility quotient often run aground because of an inability to easily and quickly share information across the organization. This same constraint is even more challenging when sharing information across entities in the extended supply chain. That’s why agile supply chains monitor the timeliness of information and the percentage of data where they have real-time—or even better, right-time—visibility and access. They also focus on the richness and integrity of this information as agile supply chain excellence is driven by accurate data and enriched signals.