Developing the resilient supply chain

by Lisa Harrington, LHarrington Group

Global business is at a crossroads. Volatility has emerged as a systemic condition, disruption occurs at any time, often with unprecedented magnitude, and there are no longer discrete sets of risk events with periods of stability in between. When disruptions occur, the global supply chain – now an intricately intertwined web – acts as a massive neural network, spreading impact instantly among all the connected parties. Effects cascade across the extended supply chain, and frequently gain intensity as they ripple outward from the epicenter. In this environment, traditional supply chain management models begin to break down, bending under the strain of the unknown and the unexpected.

Just-in-time, lean and other acknowledged best practices create highly efficient supply chains. As it turns out, however, these supply chains are also brittle and high risk. In the face of this realization, a new paradigm is emerging: The fast, lean and resilient supply chain. This hybrid tempers efficiency and cost management with rational and appropriate contingent capacity, scale and capability.

The new resilient supply chain embodies what futurist Andrew Zolli refers to as the two defining aspects of resilience: the ability to maintain a core purpose, or the ability to restore core purpose in the face of a disruption. It goes one step further than that, however.

The resilient supply chain not only reduces and recovers from risks but also anticipates, rapidly adjusts, and even capitalizes on unanticipated supply chain events or disruptions. To the latter point, by being able to respond, redirect resources, and shift to alternate strategies and tactics when a disruption occurs, resilient supply chains can capture sales and market share from companies that do not have this ability. Thus, true supply chain resiliency is about growth and competitive advantage – not just disruption avoidance and mitigation.

Effective supply chain risk management entails more than a simple, one-time gap assessment or prioritization exercise. It requires continuous monitoring and improvement that go beyond the company’s borders. The traditional approach to responding to supply chain risk follows this predictable pattern:
• be prepared when events happen
• react – according to plan
• recover
• wait for the next event to happen
• start the cycle again.

This kind of reactive response is no longer sufficient. Incremental risk management and cautious adaptation are no longer enough. Reducing risk is not the same as improving resiliency. With the multifaceted nature of today’s supply chain risks, companies must take a more holistic approach. They must build resilient supply chains.

Why resiliency matters 

Supply chain disruption comes in all forms, and usually produces cascading consequences, ranging from minor to severe. These can include financial loss, cost increases, market share declines, customer defection and damage to the brand. In 2011, the Japan earthquake, tsunami and nuclear event, and flooding in Thailand, showed how an event in one part of the world can impact, and even shut down, supply chains halfway across the world. The Japan catastrophe stopped assembly lines in the automotive and high tech sectors; the Thailand floods hit the high tech sector particularly hard.

To develop a truly resilient supply chain, companies must understand the driving forces at work in global business, and how they impact supply chains. While a myriad of factors affect supply chains, four major trends have been identified: consumerism and boundary bleed ; fast, lean and risky; emerging markets; and the rise of regionalism.

Consumerism and boundary bleed 

Traditionally, industry sectors were largely self-contained. Meaning that they were affected by, and had to respond to, dynamics within the boundaries of their industry. Consumer goods was impacted by the consumer goods environment; life sciences affected by the life sciences environment, and so on. Due to global interconnectedness made possible by technology, a singular phenomenon is emerging in business – boundary bleed. Meaning what happens in one sector shows up in an entirely different, seemingly unrelated sector. Perhaps not right away; not necessarily identically. But unquestionably, and with enough force to have an impact, cause disruption and change the status quo.

Boundary bleed is a product of consumerism and refers to the buying behaviors and expectations of the anywhere, anytime, globally connected, always-in-the-channel consumer. A consumer whose expectations for service, price and performance continually escalate, as a recent study by Accenture found. This expectation set is now permeating behaviors in all business relationships. The rise of consumerism has fragmented sales channels, escalated service demands, shortened product lifecycles, splintered demand, ratcheted up cost and margin pressures, created delivery challenges and complicated production management and inventory deployment.

With boundary bleed, no industry or organization is immune from consumerism and the competition it spawns – competition that comes from anywhere, at any time. This means it is only a matter of time before the expectations for near-instant service, product innovation, competitive price and personalization, so characteristic of the high tech and consumer/retail sectors, spread into lumbering, old line industries like heavy equipment manufacturing. With some modifications, of course, but bleed-over just the same.

Fast, lean and risky 

The basis for this supply chain volatility ecosystem lies in the prevailing business best practices of the last 20 years. Most organizations competing in the global marketplace over the past 20 years have organized their supply chain around three key criteria: efficiency, low cost and speed to market.

They adopted a number of strategies to achieve these principles, among them outsourcing, consolidation of physical assets and suppliers, lean and just-in-time manufacturing; and low-cost country sourcing and production. These strategies cut operating costs, shorten lead times, reduce inventory, improve margins and provide operating flexibility. They help accelerate new product launches which, in turn, can translate into capture of market share.

At the same time, they add complexity to supply chains – expanding their geographic reach, creating dependencies and interdependencies (often hidden), eliminating redundancies, and forcing organizations to rely on more tiers of suppliers. All of this has meant a lack of resilience and an increased risk profile – and more vulnerability to natural catastrophes and other events. Take current thinking in inventory management, for example. With the advent of just-in-time and lean manufacturing, highly extended supply chains operate without historical inventory buffers and ‘fat’. While this strategy saves money, it carries a risk.

Emerging markets 

According to DHL Supply Chain Latin America and Technology & Service Logistics – Americas, because of lackluster performance and modest growth potential in mature markets, companies are looking at emerging markets as their pathway to the future. In the past, emerging markets were seen as a potential place for sourcing products into mature markets.

But that paradigm has changed. Emerging markets are fast becoming engines of demand, a trend that carries implications for all industry sectors and their supply chains. Two demographic tidal waves are driving this trend: urbanization and the rise of cities, and the rise of the global middle class.

Today there are 21 cities with more than 10 million inhabitants, most of them in developing countries. By 2050, roughly 70% of the world’s population will live in urban centers. The number of cities with populations greater than eight million is expected to double by 2015. By 2020, Mumbai, Delhi, Mexico City, Sao Paulo, New York, Dhaka, Jakarta and Lagos will have achieved meta-city status (more than 20 million people). These mega- and meta-cities present significant supply and logistical challenges. The rise of cities in emerging markets is not limited to the mega-centers.

Regionalization 

Supply chains are contracting. Trade flows, which were long-distance, east-west oriented for nearly two decades, are shifting. They are being replaced, at least in part, by shorter, regionally-based trade flows. A new model is emerging: the regionalized global supply chain in which goods are produced and sold/consumed in the same geographic region.

There are many reasons for this contraction, but one of the primary ones is risk management. There is a new awareness of the length, complexity and fragility of technology supply chains for instance. For demand in the Americas, for example, companies are starting to move production back to the United States or pursue near shoring to Mexico. The same trend is occurring in Europe, with a resurgence in Eastern Europe as a production center. The Boston Consulting Group estimates that as a result of its increasing competitiveness in manufacturing, the United States will capture $70 billion to $115 billion in annual exports from other nations by the end of the decade. The findings of an AlixPartners survey of 116 senior executives in manufacturing companies that sell into the U.S. market showed that more than half are either in the process of near-shoring now or will be in the next two years. The automotive sector is at the forefront of this trend.

Manufacturers have moved from manufacturing in their home countries and shipping finished vehicles to market, to a model of geographically regionalized production – i.e. manufacturing at, or near, the point of demand. This means the industry is setting up regionalized manufacturing plants and supplier clusters in new locations all over the world, according to DHL Supply Chain. Companies are not necessarily pursuing this strategy to take advantage of lower labor rates. Instead, the primary drivers are reduced supply chain costs, speed to market, access to market in response to government requirements or tariffs, and support for locally manufactured content. Once sales volumes reach a certain point, it no longer makes sense to ship finished vehicles across oceans.

Resiliency model

Building a supply chain that is both lean and resilient means creating a new hybrid that balances the need to reduce costs with effective use of redundancy, contingent scale and capacity. This is no easy task, and the solutions are dependent on multiple variables. They differ by customer, by geography and by provider. A resilient supply chain not only reduces risks but also anticipates, rapidly adjusts, recovers and even capitalizes on unanticipated supply chain events or disruptions. True supply chain resiliency is about growth and competitive advantage – not just disruption avoidance and mitigation.

Extract from a DHL Supply Chain white paper by Lisa Harrington, LHarrington Group