Now. Now is the time: now we have the sense of urgency, now we have the spotlight. The global pandemic has ripped the rug out from under supply chains but has also shed light on how supply chain management IS strategy, giving supply chains more prominence than ever. We are thrust forward into an unknown future and cannot afford to invest in returning to the old normal. Crises create opportunities while also begetting casualties. As the innovator’s aphorism popularized by Alan Deutschman goes, change or die. That message may seem harsh in our current environment, as we witness the deaths of both people and companies, so figuring out how to not only survive but thrive is key. Agility, resiliency, and sustainability are keys to supply chain survival, so you can’t afford to wait to invest in building these capabilities, which are entwined with each other. Start now.
Train for agility now
Increasing agility can seem like a nice goal to work towards in normal times, not unlike running a marathon, because as one supply chain leader told me, simple supply chains can work well as long as there are no disruptions. But while our forecast accuracy for the likelihood of a given disruption isn’t good, we can predict with 100% accuracy the likelihood that future disruptions will occur. We can’t know what path the current disruption will take, only that there is no return to normal and a future full of unpredictable disruptions. We can’t count on normal, but we can count on agility.
Companies with agile supply chains outperform their peers. The 10% of firms Accenture categorized as supply chain Masters achieved 13% higher revenue growth, triple the contribution to total revenue, and a 2.5% higher EBITDA margin. One of the four commonalities across these firms was an investment in agility, which is mission-critical during a disruption. As Unilever CSCO Marc Engel said about the pandemic, “At the end of the day, every dollar we spent on agility has probably got a 10x return on every dollar spent on forecasting or scenario planning.” When times call for it, the ability to shorten planning cycles, rationalize SKUs, shift production lines to entirely new products, scale up omnichannel, etc. are enabled by agility. People train for marathons so they are ready when race day arrives; supply chains prepare for agility by ensuring this capability exists throughout the organization.
Be ready with resilience
Resilience helps a supply chain continue business in spite of disruptions, and while it may not be clear what steps your particular supply chain will need in a crisis, agility will make those steps easier. If you are prepared to continue production even if one of your factories shuts down, you have built in resiliency. But if you don’t have agility to make that switch, your built-in resilience is useless. Responsiveness alone is not enough, however, if you haven’t made the plans in the first place. Resilience is sometimes defined as the ability to bounce back, but since there is no going back, I favor the other definition of recovering quickly and adjusting easily. Achieving continuity of business means designing a supply chain that can adjust and recover. In some cases this may mean reshoring to reduce supplier risk; in other cases it may mean a more sophisticated and segmented buffer approach; and in still other cases it may mean rethinking partnering and distribution, to name but a few examples. This pandemic has affected almost all companies but in very different ways, depending on the industry, so generalizations are not helpful.
Cost-cutting and lean moved many supply chains away from incorporating this kind of resilience. But as we’ve seen, cost-cutting itself has a cost, and now companies are showing a renewed willingness to invest in resiliency, even if it costs more. As Megan DeFauw of BCG said, “We feel pretty strongly that the value from this increased resilience far outweighs the small cost benefits companies might get when they try squeeze out a few additional cents out of their global supply chains.” To cite but one example, the vulnerabilities revealed in the sourcing constraints on PPE showed that cost savings indeed came at a cost. That very vulnerability has also heightened willingness to take broader considerations into account. As Candace Browning of BofA Securities writes in Barron’s, the pandemic accelerated forces that were already underway in what she terms a “tectonic shift to stakeholder capitalism,” which means considering not only shareholders but also consumers, employees, and the state.
Sustainability is more important than ever
Stakeholder capitalism increases resilience while also addressing sustainability. For example, mitigating even low-probability risks like pandemics is important for resilience, given their catastrophic impacts, so increasingly leaders are looking beyond mere financial measures to assess environmental, social, and governance factors (ESG). In fact, as sustainable finance professor and consultant Rodrigo Tavares points out, ESG investing has increased during the pandemic and companies highly-rated on ESG have outperformed their peers. He suggests that the very efforts to make companies more sustainable in their operations require increasing efficiency and reducing waste in ways that result in greater agility and resiliency, as well as better returns. A more mature supply chain is both more efficient as well as more sustainable.
There is a growing consensus and corporate leadership around the fact that the planet faces a “climate emergency,” which also creates risk for firms, illustrating another way resiliency and sustainability are linked. As investment firm J.P. Morgan writes about ESG investing, “We believe that pandemics and environmental risks are viewed as similar in terms of impact, representing an important wake-up call for decision makers. The impacts of the COVID-19 crisis on the real economy and the financial system highlight the limits of most forecasting models, which do not deal well with non-linear, complex systemic risks.” Building resiliency into supply chains to account for this kind of uncertainty is one response, addressing sustainability is another. Firms like Unilever and Schneider Electric reported that the prior investments to gain transparency into suppliers for sustainability reasons also served them well during the pandemic, ranging from closer relationships that gave them better agility to collaborate to systems for tracking materials that afforded better visibility into monitoring real-time production.
Visibility brings it all together
In fact, visibility is a foundation across all these other capabilities, critical to ensuring the full value of agility, resiliency, and sustainability in your supply chain. If you have visibility across your entire supply chain, you are not limited to local optima by silos but instead can see the impact of any decision on the whole network by running scenarios to compare alternatives. With concurrent planning and the agility it affords, you can immediately see the impact of any decision and act quickly to respond. Applying a stakeholder capitalism approach, you can weigh any decision against metrics that consider both resiliency and sustainability.
You can’t afford to wait
If you think this all sounds good but you can’t justify the expense, remember that the time is now. If supply chain is having our time in the spotlight, we need to show what we can do to justify this investment. One way to lean in is to learn to converse in “financial speak,” an area for growth for most supply chain leaders. Strong supply chains can contribute to shareholder value by increasing revenue due to improved ability to satisfy customers as well as by reducing costs with improved operational efficiencies and lowered capital requirements (inventory, working capital, streamlined physical networks). In contrast, disrupted supply chains can bring down value, as Professors Kevin Hendricks and Vinod Singhal showed in a landmark study that analyzed hundreds of supply chain disruptions over an earlier ten-year period and found that the average abnormal returns of disrupted firms were down 40%.
Investing in agility, resiliency, and sustainability on a foundation of visibility is like buying insurance – you pay a known cost now to reduce risk exposure from catastrophic future disruptions. We know those disruptions are coming. Even in 2019, which may now seem like a cakewalk by comparison, consulting firm McKinsey estimates that losses impacting supply chains due to natural disasters reached $150 billion and spiked closer to $350 billion in 2017 due to hurricanes. But we also know these investments pay off. Consulting firm PwC found that Digital Champions, those leading the way in digital transformation, reported a 6.8% reduction in supply chain costs, a 7.7% increase in revenue, and a payback period of less than two years. These kinds of results are why firms are making digital transformation a priority, with many surveys showing the vast majority are making digital transformation a priority now. These firms know they can’t afford to wait to gain agility, resiliency, and sustainability to be ready for the next disruption, can you?
Polly Mitchell-Guthrie is the VP of Industry Outreach and Thought Leadership at Kinaxis, the leader in empowering people to make confident supply chain decisions. Previously she served in roles as director of Analytical Consulting Services at the University of North Carolina Health Care System, senior manager of the Advanced Analytics Customer Liaison Group in SAS’ Research and Development Division, and Director of the SAS Global Academic Program.
Mitchell-Guthrie has an MBA from the Kenan-Flagler Business School of the University of North Carolina at Chapel Hill, where she also received her BA in political science as a Morehead Scholar. She has been active in many roles within INFORMS (the Institute for Operations Research and Management Sciences), including serving as the chair and vice chair of the Analytics Certification Board and secretary of the Analytics Society.