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Building resilient Supply Chains

Wednesday 17/06/2020
Building resilient Supply Chains

How do you ensure that you build sufficient resilience into your Supply Chain and make your logistics stronger, better prepared for pandemics, lockdowns and other unforeseen events?

COVID-19 is a wake-up call for companies and Supply Chain managers in particular. The pandemic and subsequent lockdowns shed light on the vulnerability of our modern Supply Chains in a global economy. But there is more: there are some “recent” threats against which Supply Chain managers today better arm themselves. How do you make your logistics stronger, better prepared for a new shock? How do you ensure that you build sufficient resilience into your system so that you can restart quickly?

Complex, global Supply Chain networks more exposed to risk.

In past decades in many industries focus was on the optimization of the Supply & Distribution network. In many sectors, production has moved to low-cost countries, the purchase and sale of raw materials is happening on the world market and the unprecedented growth of water-bound and transshipment activity resulted in gigantic maritime ports worldwide. But air freight and multimodal transport also experienced a steep rise: raw materials, semi-finished and finished products are transported from one link in the value chain to the next, in search of the most economical, most cost-efficient way of purchasing, producing and distributing. By the time the end product reaches the consumer, it has often been shipped across multiple continents, a feature of our current economic model. Today's Supply Chains have become complex global networks that are also exposed to other risks. We have often not taken these risks into account in our business planning and have insufficiently considered them when determining our logistics strategies. However, in addition to the consequences of the Covid-19 pandemic, there are still a number of “new” risks against which we must protect our companies and our Supply Chains. Corona was the wake-up call, but there is more.

Shift to a global economy and disruptive business trends

The world population has grown by more than 30% since 1990, evolving towards a staggering 8 billion people. Although - undeniably - there are still enormous differences in wealth and living conditions between north and south, the absolute purchasing power and urge for new products, on a global scale, has continuously increased and the end consumer has increasingly become a world citizen. Rising prosperity in a number of parts of the world also meant that the geographic outlet for many consumer products expanded to regions that were not previously part of it.
Driven by digital media, consumer behavior is also shifting very rapidly, and with more and more new products finding their way to new markets, with shorter product life cycles and more choice, we can see rapid shifts in consumer behavior. Also, new providers and competitors offer new products and services in a different, “disruptive” way. Online sales versus “traditional” sales, shorter product life cycles, shifts in consumer behavior and new fast-emerging global suppliers and competitors also require a different approach from a Supply Chain perspective. The classic linear Supply Chain of the past has become a globally networked eco-system with greater and different uncertainties and risks.

Climate change and extreme weather phenomena bring unpredictability

Hurricane Sandy was the 18th major storm of the 2012 Atlantic hurricane season. It was also the first-ever hurricane to strike so northerly, so forcefully, and mercilessly. The flood caused by Sandy covered the streets of Manhattan. Reports of the flooded subway network made Wall Street, and by extension, the whole world hold their breath. In some parts of the US, power was cut for several weeks. Citizens and businesses were affected by breaks in the power grid across most of the Northeastern part of the US. This situation had a direct impact on supplies in the affected area, but also far beyond. Many large Distribution Centers, with a hinterland that often covered the entire North American continent, were forced to close once the emergency power generators also ran out of fuel. The economic loss was incalculable. How could this happen?
Climate change is causing instability in weather patterns and more and larger natural disasters. This instability puts extra pressure on the logistics chain, as natural disasters may isolate certain areas of the world for weeks or even months. They may also threaten entire harvests, destabilizing our food supplies, and asking more resilience from our entire economic system. As supplies become more uncertain, so are the dynamics on the world market, which are subject to greater fluctuations. As a result, risk management is becoming an increasingly important consideration when negotiating purchase contracts, which drive the actual configuration of the Supply Chain network of producers and suppliers, requiring more intrinsic flexibility and agility in its design. Rising temperatures, unusually strong storms, persistent droughts and wildfires that isolate entire regions from the outside world for weeks: these are just some of the elements that are increasingly determining the agenda of today's Supply Chain managers.

Changing regulations and taxation require more flexible Supply Chain Configuration

We live in a time of super-fast, often highly technological, developments. In all industrial sectors we see how, partly through research, new insights emerge, which give rise to other and new products and services. Every evolution comes with new regulations that Supply Chain managers are confronted with: safety regulations, changing environmental legislation and reporting obligations that are increasingly impacting our daily operational processes (e.g.: custom and on-demand printed labels in a local distribution center, traceability requirements, stricter standards for packaging materials and returnable items policies, …).
But fiscal reforms also have an impact on today's Supply Chain. The Supply Chain configuration and location choice were already strongly determined in the past by applicable subsidies or tax measures, but this will be even more the case in the future. The economic recovery, after the recent Covid Crisis, will be propped up in part by fiscal measures, which, it should be noted, also aspire to the transformation to a greener value chain. Sustainability, fast-changing taxation and regulations will have a lasting impact on the design of the logistics networks.

Building resilient Supply Chains, a strategic advantage in today’s VUCA world.

All these trends gave rise to the concept of VUCA: Volatile, Uncertain, Complex, Ambiguous. In other words, Supply Chain managers must anticipate the unpredictability and complexities we see today. We must focus on building more flexibility and resilience into our logistics networks. APICS defines Supply Chain resilience as the degree and speed with which a logistics organization is able to recover to the 'normal' initial situation, or to a new 'improved' situation, after a disruptive event or crisis.

Supply Chain Resilience has been placed high on the agenda of Supply Chain managers by COVID-19. The first logistical priority put on the table by the global pandemic was survival: ensuring employee safety, controlling the Corona bullwhip (the shock waves in demand and supply) and cash management are the primary focus. A limited number of companies had prepared logistics fallback scenarios, but in most cases, for most Supply Chains, they had not structurally, proactively identified the risks of their logistics network. In fact, many companies were completely taken by surprise, having hardly tested any logistics emergency scenarios that prepared them for a disruptive shock like this.

In today's world, amidst the new risks and uncertainties that surround us, we must be strategically equipped for the unforeseen. We need to structurally embed a data-driven risk management approach into the Supply Chain function. We need to understand each of the risks engrained in our logistical eco-systems, pro-actively determine mitigation plans, preventative actions and calamity management playbooks. All in all, we must be willing to change some of the 'old' working methods and business choices. What worked fine for yesterday’s Supply Chains, will not necessarily work in tomorrow’s world. These are challenging times for Supply Chain managers, but with a good risk management approach, we will be able to make more resilient Supply Chain eco-systems. 

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Joël Wijns
Joël Wijns
Partner Business Consulting