Article

The Imperative for Increased Supply Chain Resilience

Supply chain management: a support activity or a strategic function?

In the last few years, we have seen seismic shocks to the traditional supply chain from COVID-19, the domino effect of disruptions due to the temporary blockage of the Suez Canal, Brexit and the lengthy customs checks causing gridlock at the UK border, and the war in the Ukraine. These are all in addition to other ongoing issues such as extreme weather and global staff shortages. This is leading to a new mind-set shift in how organisations view supply chains.

More organisations are finding themselves with fewer options - forced to get the best goods whenever, from wherever they can, whatever the cost. However, this is also the time to plan for a future world where businesses need to thrive amid disruption and uncertainty. Such a transformation requires strategic ownership of the supply chain at the board and C-suite level (including the costs and operations within it) to transform it from a support activity to a function that enables resilience as a strategic objective.

Yet, for years, industry leaders have been holding back from making initial investments in supply chain resilience for a number of reasons including optimism bias, aversion to change, excessive focus on cost-efficiency, and a siloed approach to resilience and crisis management.

In this article we explore:

  • how these geopolitical and other challenges are repositioning resilient supply chains from a “nice to have” to a “must have” amid increasing complexity and volatility;
  • the costs of not being resilient and the rewards for being so; and
  • what mature organisations are doing differently.

Combining proactive and reactive practices

The need for supply chain resilience is becoming increasingly critical, not just as a tool of defence to ensure continuity of supply, but as a transformative element in strategic and commercial discussions. Over the last few years, organisational engagement with, and dependency on, suppliers and other third parties has increased to unprecedented levels. Research conducted with our clients and used to inform our recent publication on Integrated Third-Party Management, has shown that as much as 60-80 percent of direct and indirect operating costs, and 50-100 percent of revenues can be attributed to third parties in organisations that rely significantly on third parties for mission critical activities. A strategic approach to supply chain management focused on resilience can enable these organisations to maximise the benefits and opportunities from supplier dependency while managing the risks (e.g. concentration, single point of failure).

The rising costs of not being resilient

The growing need for proactive resilience procedures in organisations is captured by the Business Continuity Institute’s Supply Chain Resilience Report 2021 that stated 16.7 percent of organisations saw a severe impact on revenues due to supply chain disruption between 2020 and 2021. This sharp uptick in high-impact supply chain and other third-party related incidents was also captured in our 2022 Global Third-Party Risk Management Survey.

Survey respondents acknowledged that these incidents had a severe impact on customer service, financial position, regulatory compliance and/or reputation. In absolute numbers, 19 percent of organisations estimated their financial exposure to a major third-party incident at US$500 million or more; 11 percent at more than US$1 billion. Recent disruption has therefore demonstrated how impacts from supply chain issues can fundamentally undermine organisations’ overall business resilience and objectives if they are not armed with adequate capabilities to absorb shock and deliver through disruption.

Acknowledging the non-financial “costs”

It is important to recognise that supply chain disruptions often have an impact that extends beyond the directly quantifiable financial costs. Let’s take the example of a pharmaceutical company that is unable to fulfil their pledges to supply governments an agreed volume of life-saving medicine due to supply chain disruptions. The impact here will be multifaceted and include:

  • Operational: operations stall due to missing key inputs to manufacture the medicine
  • Financial: the organisation loses the contract causing financial losses
  • Reputational: reputation is tarnished due to an image of unreliability
  • Human: patients cannot access essential medicines.

Along with “Environmental”, these form the five “resilience capitals” that are typically impacted in a disruption. It is important to recognise that impacts are not isolated to one capital, but can spread across several, presenting severe shock and unintended consequences. An approach to building and maintaining resilience in the supply chain should recognise the need to build resilience across all five capitals and not just one.

Understanding and addressing the reluctance to invest in resilience

Supply chains have traditionally been designed with an efficiency (“just in time”) focus, rather than resilience (“just in case”) focus. Many organisations have been slow to shift gears at a time when the business and macro-economic environment has changed. Our experience working with clients on emerging issues across the supply chain, shows that efficiency and resilience will continue to be seen as conflicting considerations in organisations. An excessive focus on cost-cutting over the last few years has aggravated this problem, redirecting investment away from resilience. This is also often coupled with optimism bias, where industry leaders lacked sufficient foresight regarding the severity of disruption their organisation could experience. Therefore, as stated in a blog by our Chief UK Economist Ian Stewart, the systems that have grown out of this thinking were not designed with agility and transformation at the forefront of strategy. This has left them unprepared for protracted periods of volatility as we are now experiencing. The shift in mind-set towards a “just in case” approach is seen in the recent publication of the new British Standard on Organisational Resilience. The publication emphasises the need for organisations to build “resilience by design” by implementing greater redundancy into the supply chain which can provide much needed slack in a disruption.

Additionally, as mentioned previously, the areas of impact are often interrelated, and this warrants an integrated approach to resilience. However, many organisations operate a siloed management process, where the impacts of decisions and actions on other areas of the business are ignored. Such structures have inhibited transformation and prevented a joined-up approach to resilience. Cross-functional collaboration and an integrated approach to supply chain management must replace siloed and fragmented approaches. Even today, many organisations aspire to save costs or improve performance by focusing narrowly on individual processes or specific suppliers. This tends to deliver benefits on the order of 5-10 percent in each specific area. In contrast, and as demonstrated in our recent publication on Integrated Third-Party Management, organisations that adopt an integrated approach and leverage external assistance, such as managed services solutions, can aim to achieve:

  • 10-25 percent cost savings in each area;
  • 11-18 percent increase in third-party spend managed per Full-Time Equivalent (FTE);
  • 15-30 percent additional contribution to net revenue from supply chain initiatives; and
  • 20-33 percent increase in overall business earnings and share price upon completion of the entire transformation.

Capitalising on the opportunity while mitigating the risks

Despite the need for organisations to protect themselves against losses, supply chain resilience should not just be viewed as responsive in nature. The more astute organisations have recognised supply chain management as a strategic function that enhances their competitive edge in the marketplace and brings significant business as usual benefits. Even during the pandemic, some of these organisations reported that they were not worried, but excited about the transformational opportunities that this shift in mindset was potentially creating for them. Such opportunities ahead included newer offerings enabled by innovative digital channels, that were better aligned to changing societal expectations. It also meant that organisations were becoming stronger than competition when faced with a potential crisis.

The benefits from such a mindset continue to accrue even in the absence of disruption by improving business confidence and greater service reliability.

Seven practices to begin your journey to building a resilient supply chain

There is no universal approach to building supply chain resilience. As a result, organisations need to establish and even innovate processes that work in their specific circumstances. We propose seven steps organisations can take to begin their journey to achieving a resilient supply chain.

  1. Focus on critical supplies and suppliers: Smarter organisations prioritise and focus their resilience investment on their most critical supplies and suppliers, enabling a proportionate approach to the risks involved. Our latest Extended Enterprise Survey 2022 indicates that more than three quarters of organisations (78 percent) consider not more than 20 percent of their third-party population as critical. The vast majority out of this 78 percent i.e., 59 percent are focused on only up to 10 percent of third parties that they consider to be critical and presenting the highest potential risk.
  2. Illumination initiatives to enhance end-to-end supply chain visibility: Mature organisations continue to invest in end-to-end supply chain visibility and across all tiers of supplier and subcontractor relationships, often referred to as illumination of the supply chain. Such visibility is essential to be able manage the volatility and uncertainty in the external environment discussed earlier. 1Nevertheless, the vast majority of global supply chains remain opaque and approximately only 13% of manufacturing organisations, for instance, have full visibility .
  3. Determining an appropriate level of resilience-efficiency trade off: The more advanced organisations recognise that resilience and efficiency will continue to be conflicting considerations and seek to find a level of trade-off that works for them, aligned to their strategic objectives and risk appetite. This could potentially include embracing multi-sourcing and supplier diversification to a certain extent even at a higher cost or complexity of managing these relationships.
  4. Leveraging technology: 2Digital tools are key to enhancing end-to-end visibility and connectivity, in addition to supporting end-to-end integration, improving data integrity, and providing crucial analytics to monitor key performance indicators in real time ; all these functions improve an organisation’s ability to respond to market changes swiftly, e.g. explore how a disruption in one locality will affect lines of supply across the enterprise. Improving the way these tools are used to make the data and insight action-focused and more easily usable is a big step forward that many organisations are seeking to make.
  5. Ongoing monitoring: High-performing organisations set standards and expectations with their suppliers in the procurement phase, define them contractually (e.g. within service level agreements) and monitor them closely in proportion to the risk they present. These specifically include measures related to ensuring resilience and continuity and include an increasing focus on the use of more detailed and targeted third-party audits of critical supply chain partners. Some industries, such as Financial Services, have already placed regulatory expectations around the use of third-party audits with a specific focus on operational and financial resilience.
  6. Enhancing collaboration with suppliers and supply chain partners: Smarter organisations collaborate better with their suppliers based on mutual understanding and aligned objectives. This specifically includes being better coordinated on stress testing and related response plans and determining ‘what if’ scenarios in conjunction with suppliers.
  7. Building a resilience culture: Last but not the least, resilience must permeate throughout the organisation by establishing a resilience-focused culture and mindset. The increasing involvement of boards and C-suite members in the more progressive organisations is going a long way in fulfilling this objective.

Resilience should be a strategic imperative in organisations that goes further than creating the ability to take a blow and remain standing. It should also be more than just preventing or minimising the effects of such a blow. To generate benefits such as significant commercial advantage, it is integral to develop the capability to thrive, bouncing back better and stronger each time, and embracing uncertainty in the operating environment. To understand how you can apply the learnings from this article to create distinctive benefits for your organisation in your journey towards supply chain resilience, please get in touch with one of the contacts listed below.

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1Davidge, V. and Kinder, A. (2022). Operating Without Borders – Building Global Resilient SCs. Available at: https://www.makeuk.org/insights/reports/operating-without-borders-building-global-resilient-supply-chains; accessed 30 July 2022.
2Deloitte (2022). Emerging Stronger – The Rise of Sustainable and Resilient SCs. United Kingdom: Deloitte UK. Available at: https://www2.deloitte.com/uk/en/pages/risk/articles/third-party-risk-management-survey.html; accessed 30 July 2022.

 

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