Supply Chains: An Enabler of Value

Despite being vital to global commerce, supply chains have rarely been a topic of newsrooms or boardrooms discussions. However, these past 2 years have pushed the subject to the top of their agenda and supply chain leaders now find themselves in an unfamiliar position; they have the attention of top management and a mandate to make real change.

It’s important to keep in mind that disruptions have been around before pandemic and will probably continue to happen in the times to come. In an Indian context, we see a whole host of disruptions around strikes, floods, elections, festivals, dharna andolans and what not.

A great strategist said, “All times are uncertain; the only certain thing is uncertainty”. According to pre-pandemic research, companies encountered 1-2 months of disruptions on average every 3.7 years. But of late, this frequency has gone up. The earlier traditional supply chains worked in silos and sought to minimize costs, improve efficiency, and achieve stability for a company. The vulnerabilities in this approach were revealed when supply chains couldn’t cope with uncertainty and lack of visibility due to the bottlenecks in global trade as a result of the pandemic and subsequent geo-political developments.

It is now imperative to change our approach while designing new supply chains and consider challenges that will reshape the global economy. For example, some of the recent factors that businesses need to consider are –

Deglobalization – Bottlenecks in supply chains, increasing transportation and raw material prices and fluctuating currency value and inflation are some of the forces leading to a shift from the trend of global trade and openness to a more regionalized trade for economic growth.

Decline in demographic productivity – the decline in the proportion of skilled workforce and resulting diminishing productivity amongst the population is impacting the economic growth and monetary policies as well as reducing opportunities for migration and the outlook for the future of work

Environmental Impact – Although the urgency to take action to mitigate climate changes and it’s resulting impact is becoming increasingly obvious, the transition to green energy is taking longer than expected

Accelerated Technology Integration – there is a widespread increase in technological innovation and the adoption of technological tools for seamless business operations

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So, how do we redesign our supply chains?

We should recognize 3 new priorities alongside the traditional objectives of cost/capital, quality, and service:

Resilience – The first step in mitigating the risks in an organization’s supply chain is to obtain a clear understanding of the vulnerabilities within it. Which suppliers, processes, or facilities present as potential points of failure in the supply chain? Which critical inputs are at risk from shortages or price volatility? A survey conducted in 2021 with senior supply chain executives revealed that less than 50% understood the location of their Tier-1 suppliers and key risks those suppliers face and surprisingly only 2% understood the problems faced by suppliers in the third tier and beyond. Supply chains that have fewer 3rd party logistics services providers, shipping modes and lanes as well as greater distance between suppliers, factories, and distribution centres have experienced fewer disruptions.

2.??Agility – 77% of US customers changed stores, brands, or the way they shop, and this was driven by necessity. People went online when they couldn’t access their regular store and about 2/3rd of them stated that lack of availability was the primary reason to switch brands. In today’s world, most brands face a challenge of losing control over peaks or troughs in their product demand. And contrary to previous times, the peaks and troughs may get decided by factors outside their control. The Netflix show Squid Game caused a 78X spike in Vans white slip-on shoes. A simple twitter post caused 15X spike in sales of Roman Originals dresses for women. The lesson is clear - The fast-moving, fragmented, consumer-centric world requires a different sort of supply chain. Future supply chains will need to be much more dynamic - and be able to predict, prepare, and respond to rapidly evolving demand and a continually changing product and channel mix. In short, supply chains will need to become agile. Alike the banks did during the financial crisis of 2007-08, we need to stress test our supply chains to investigate two key aspects: (1) The potential impact to the business if one specific node in the supply chains gets disrupted and (2) The time it will take ?to recover the node fully once it is disrupted.

3.??Sustainability – It is our collective duty to safeguard our mother earth from all kinds of man-made hazards and preserve it for our future generations. Furthermore, Gen Z consumers are more likely to prefer brands that offer robust sustainability credentials and a strong purpose. Companies that are looking to avoid the increasing reputational, regulatory, and financial risks of poor ESG performance are being pressed to act as a result. A report finds that 38% of Fortune Global 500 companies have set up significant milestones for 2030 and that there is a 50% increase in the number of companies that have either achieved carbon neutrality or are targeting it by 2030. Some companies have undertaken strong environmental actions and hard data has proven that these are delivering real operational results. For example, Henkel has adopted real-time sustainability actions and within 10 years, they have reduced their energy consumption by ~40% and waste by 20%.

In summary, forward-thinking chief supply chain officers (CSCOs) now have a once-in-a-generation opportunity to future-proof their supply chains. A survey revealed that around 72% of CEOs are worried about losing their jobs to disruption and 69% are worried about supply chain disruptions. 94% of executives agreed that their business models must change within next 3 years.

Businesses need to change their view of the supply chain function as a cost centre, but rather consider it as a value enabler. Our supply chain can single-handedly make or break our fortunes and we can carefully design it to cater to our offered value proposition and make it responsible for our outcomes. This way, we can create value not only for our customers but also for our people.