Supply chain agility: the new superpower

November 26, 2024

Evolution from back office activity to board room

Supply chain management has evolved dramatically in the last four decades.? Figure 1 shows the evolution of procurement and what is now called supply chain optimization from the 90s to today (mid-2020s), based on the author's personal experiences consulting to a wide range of industries across several continents during this period.

Leading up to the 90s, the concept of supply chain management was nascent.? Supply management—rather than supply chain management—was a back-office activity that identified suppliers and procured what the business requisitioned. ?Competitive bidding was the means of revealing market pricing—among those who competed on the RFP.? Should-cost pricing was elusive as production cost data was hard to find. ??Customers had little transparency into, nor control over, their suppliers’ suppliers.? Without insight into costs and drivers of suppliers’ behavior, managing up the supply chain was a challenge.

In the 90s, many industries recognized that strategic sourcing could deliver huge bottom line benefits:? Global markets were opening access to lower cost and/or higher quality products; large enterprises saw opportunities to consolidate spending, standardize procurement, and to leverage buying power.?

By the 2000s, companies realized that EBITDA was not just about cost reduction.? Aligning a supplier with the right capabilities and cost structure to the needs of the business could improve the quality of the end product.? Better quality and time to market could boost sales, outsourcing would lower capital costs, restructuring contracts would provide more flexibility, sharing production schedules with suppliers could lead to more efficient operations.? The supply chain strategy, if there had been one, shifted from “sourcing” to managing upstream supply chains and optimizing supply-demand planning. ???

In the period of 2020-2022, several incidents shook global supply chains.? Covid itself had a dramatic effect on labor availability, which subsequently translated into shortage of key components used IN manufacturing (chips in automobiles) and on components used BY manufacturing (pallets).? A large number of unrelated incidents combined with Covid to disrupt commerce worldwide: storms damaged facilities, blockages in a canal and a port blocked movement of cargo by sea, and plant outages caused shortages in tight commodity markets.

Agility—not just for survival, it’s for leapfrogging

Companies who thrived during this period learned to react quickly and decisively.? They restructured their organizations and pivoted in the marketplace to address new needs and abandon old models. ?Several years ago, the author undertook an analysis of the behavior and subsequent market?performance of about 80 US companies during 2020 (see Figure 2).? This was the year in which the United States economy was paralyzed by the onset of the Covid pandemic.? While the sample size was small, the analysis strongly suggested that the more rapidly and aggressively a company responded to the crisis, the more Wall Street rewarded the company months later.? In this particular study, the author analyzed corporate job postings as a proxy for company behavior:? Increasing postings meant a company was starting to hire.? Cutting postings meant that the company was slowing growth, and possibly shrinking the workforce. ?The greater the change in the number of job postings—up or down—, the greater the subsequent gain in stock price.?

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Some high performing companies were surely reacting defensively to disruptions by cutting the size of their organizations.? But others were repositioning themselves in the market, as suggested by the surge in hiring.? Companies who restructured quickly in either direction exploited the disruption to become stronger companies.? The overall message is that agility matters, not to weather a storm, but to catch the wind and sail ahead of competitors.?

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How did we get here?

Figure 3 below shows four forces that brought us to this point.? The first is outsourcing:? As companies became less vertically integrated by outsourcing organizations, office space, and production capabilities to their suppliers, two factors came into play:? (1) companies became more flexible and free to focus on their core competencies; and (2) because they had less control over their factors of production, they needed to become more effective at exercising influence up and down the supply chain.? ?

The second force was globalization.? Globalization provided companies with access to a wider range of markets and labor pools, which enhanced access to capabilities and improved cost control.? On the other hand, global competitors also forced domestic companies to be more efficient.

The third force was the availability of technology that enabled more efficient and effective supplier and supply chain management.? While this may appear to be an enabler, it is a driver because companies who took advantage of new solutions became more competitive, which forced other companies to follow suit.

The last force is the steady drumbeat of shocks to the economy and disruptions to the supply chain.? As global markets become more intertwined, disruptions have ripple effect on companies throughout the supply chain.? By 2020, companies began to understand that it was not just enough to weather the storm by compensating for disruptions (e.g., by shrinking the organization or retreating from risky markets).? They realized there were opportunities in seizing the moment and reorganizing themselves quickly to continue doing business in changing conditions.? Restaurant chains that defined their brand through their indoor dining experience had to shut their doors and reinvented themselves as take-out and delivery businesses.? Brick and mortar businesses scaled up their online sales channel.? Organizations defined by their office-based work forces suddenly discovered that virtual work via teleconference was not just adequate, it could actually improve worker efficiency, reduce travel costs, and raise job satisfaction.

The past informs the future

Why does this history matter?? Framing the transformation in supply chain management in terms of corporate agility opens up new lines of inquiry:? ?What’s next in the evolution?? Are there industries or markets where these forces do not apply?? Is the technology keeping up with the other forces?? What other kinds of shocks could destabilize our tightly-bound supply chain?

It also shines a light on the importance of the role of procurement and supply chain professionals. ?A long time ago, procurement was a corporate backwater.? Even in recent decades, procurement and supply chain professionals have struggled to get a seat at the (board room) table.? The complexities of today’s supply chain demand a significant amount of competence and capability.? How will we keep our professionals ahead of the change??

With access to tools for automation and generative AI, the future of the supply chain will rely increasingly on technology that can systematize, scale, and consolidate processes up and down the supply chain.? There will be a dual challenge of (1) determining what aspects of the supply chain are suitable for certain solutions, and (2) determining which technologies to prioritize to address the most critical opportunities.? ?

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About the author

Peter Benda is a 30 year veteran management consultant.? His client work includes strategic sourcing and supply chain management, workforce effectiveness, front line productivity improvement, governance design, and data analysis.? He has worked with clients in mining, utilities, manufacturing, financial services, transportation, defense, and federal and state agencies.? Please reach out if you'd like to know more about procurement automation.

Ironically, this article was written without the use of GenAI.

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Keywords

procurement; supply chain; agility; automation; generative AI; genAI; Axtom

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