Member Article

Hedging your supply chain bets: Why businesses must adapt in order to succeed in a complex, uncertain, and volatile world

Calum Lewis is Founder and Principal Consultant of OP2MA

We have seen one of the world’s largest ships stuck in the narrow artery of the Suez Canal. Pictures of the initial scrambling efforts to re-float the Ever Given causing amusement and panic in equal measure. We hear of the global shortage of semiconductors almost daily, along with production slowdowns at car plants extending into the Autumn and beyond. As another wave of Covid 19 takes a terrible toll on India, reports of crew shortages in shipping emerge with Indian personnel representing around a quarter of staffing. Our awareness of supply chains and how they are extended across the globe has probably never been greater. Against this backdrop, it is no surprise businesses are looking to find ways to safeguard against disruption and the risk to continuity.

If your supply is at risk or is no longer as reliable, it is instinctive to look at inventory as a buffer. If that is what you are thinking, so too is everyone else. There are likely to be two effects seen in short order; significant distortions of demand feeding through the supply chain as buffers are implemented (the so called ‘bull-whip effect’) and pressure on supply leading to constraints that drive price increases. More erratic demand, more erratic supply, increased price/cost in a potentially vicious cycle. Multiply this up and we soon arrive at boom-and-bust cycles in markets as shortages and gluts play out.

Hedging your bets with increased inventory across the board carries cost and risk. Whilst tying up more working capital may be a trade-off worth making during a period of uncertainty, having more stock is only helpful if it is the right stock at the right time. With long product lifecycles and stable customer demand, being able to maintain reliable service no doubt justifies increased working capital and some marginal costs. In markets with changing customer preferences and the need for product innovations and newness, however, this is a very risky bet.

What are the alternatives? Let us consider some options:

• Targeting contingencies • Adding supply options closer to hand • Building collaborative supply chain relationships

Targeting contingencies

Assessing risk across a supply network is difficult and time consuming. Consequently, assessments are often at too high a level to make for practical actions and, with a few conceptual responses documented, are found wanting when real issues strike. In any network, there will be higher risk ‘nodes’ - businesses whose failure can cause exceptional disruption; be that temporary or permanent. Understanding where these nodes are in your supply network is the key to planning contingency measures. Criteria for identification include:

• Materials or components that cannot be substituted within a manageable timescale (either elements that are part of the bill of materials or those consumed in processing) • Suppliers at the end of lengthy lead times or in areas susceptible to disruptive events • Businesses in the network that lack transparency and share limited data on transactions and processes.

In a world potentially awash with data, the use of artificial intelligence (AI) and associated analytics can take much of the labour out of supply network risk analysis. It is worth investigating solutions that move beyond credit risk and look more than one tier up or down the network.

It is likely there will be a few nodes that have far greater impact than others; it is also not necessarily a factor of size. Once pinpointed, contingency measures can be defined.

Adding supply options closer to hand

Extended, often global, supply lines have operated effectively for decades under stable conditions. Reducing the supply base and pursuing lower costs have boosted profits for many. That said, the benefit of lower material costs is not always reconciled with the impact on inventories and associated costs. It can be argued that these apparent cost efficiencies are at the expense of resilience and flexibility. Exploring alternative supply in country or region is one way to balance risk. A nuanced approach can be taken using a pareto analysis; estimating the proportion of demand that is reasonably stable and predictable and that which is more variable. The role of more local supply is then to respond to fluctuations in demand as well as provide a stop gap in case of disruption to the main supply line. Whilst unlikely to fall into nice and easy 80/20 splits, this approach does allow a balance between cost efficiency and responsiveness to be sought.

Build collaborative supply chain relationships

‘Forewarned is forearmed’. The sharing of data and information across supply networks is well-documented in supply chain management. The technical means have been around for a long time. Perhaps what is striking is the extent that more traditional, transactional relationships still prevail. What is sometimes labelled as collaboration is more akin to coercion in some settings.

Relationships matter in all walks of business. It is all the more true in managing supply chains, or better, supply networks. Based on an understanding of processes and operations, both downstream and upstream, teams can be formed that take a more holistic view of the network and both solve immediate issues and develop ways of working for mutual benefit. The dangers of assumptions, second guessing, and pure misinformation can be mitigated.

Collaboration takes time, resource, and commitment. A focus on key suppliers, informed by the assessment mentioned above, and key customers will help to prioritise efforts.

At the onset of a crisis, immediate actions to try and gain some semblance of control and stability are necessary and understandable. As we start to plot a path forward, however, and resilience plays an increased role in decision making, we have the opportunity to take a more sophisticated, data-driven approach, to reshape supply networks. Prior assumptions and processes that held under relatively benign conditions have been challenged; those businesses that adapt are more unlikely to succeed in a complex, uncertain, and volatile world.

This was posted in Bdaily's Members' News section by Anna Boyce .