Using a short-term crisis for long-term planning
Written by: Nick Wildgoose
Written by: Nick Wildgoose
About Nick Wildgoose
Nick Wildgoose works as an independent supply chain and risk consultant. Here, he looks at how desperate situations can promote lasting change.
In my previous article, top three ways companies can manage a procurement and supply crisis, I looked at the three things procurement and supply professionals can do in the short term to respond to events in Iran and in the Strait of Hormuz. They are all related to understanding your suppliers. From carrying out multi-tier mapping, to taking that knowledge to the board, and then using it to help you understand the financial position of your SMEs, these are all things you can do immediately.
But there are changes that can also be implemented now, which will bring benefits in the medium and long term. These can be more difficult to invest in because the financial benefits can be difficult to quantify, but they represent a way to make your organisation more resilient and to anticipate risks before they become problems. This will, in turn, improve your financial results in the medium term.
A major McKinsey Report, from August 2020, based on 10 years of analysis indicated that: “Companies can expect to lose more than 40 per cent of a year’s profits every decade on average. But a single severe event that disrupts production for 100 days - something that happens every five to seven years on average - could erase almost a year’s earnings in some industries.”
Planning for the medium term
As with the short-term fixes I mentioned in the above article, in the medium term, one of the most fundamental requirements is to understand your total supply chain as best you can. The present crisis represents your best chance to go to your board and invest in multi-tier and multi-risk supply chain solutions now.
While Iran is the most pressing crisis, there have been others, year after year, for at least the past 16 years, but many organisations have not appropriately reacted to them. It’s been a question of achieving quarterly numbers against investing for the future, but the companies that are going to be successful have taken a more strategic view.
Going back to 2010 and the Japanese tsunami, Cisco had already invested in multi-tier mapping, so they were able to go to the CEO and say which suppliers they thought would be affected, all the way down to tiers two and three. This meant they knew exactly what they were likely to need to buy elsewhere in the market to avoid being in short supply. This is exactly what they did, and this protected their financial results.
And yet an automotive company realised a few weeks later that they could not get the ignition switches that they needed. Did those switches come out of Japan? It turned out they did. Had the production line just stopped? It turned out that it had. They were blind to it.
There are also the ongoing and increasing regulatory requirements coming out of Europe and other territories, with respect to making companies responsible for understanding a range of ESG risks in their multi-tier supply chain. For example, the regulations regarding modern slavery. This can only be achieved at scale using appropriate technological solutions.
Looking further ahead to the long term
The long-term picture is that climate change is not going away. It is going to lead to certain production facilities no longer being tenable in the supply chain. Rising sea levels will mean that some of them will be underwater in 10 years, and others will face an increased flood risk. There will also be situations where drought conditions mean that industrial production must stop in certain regions of the world, as many industrial processes rely on the existence of adequate water supplies.
Defence spending is also on the increase. I mention that because one of the implications of the demands from the defence industry, and on companies in other industries that they rely on, may have direct implications for you. Have you thought about that?
The final part of the long-term picture is the talent and skills gap. In this context, I’m talking about having access to people who have the right level of risk understanding and the procurement skills for the job they are doing. Part of that is about AI training and being able to use it effectively and appropriately, but it’s also about being able to use supply chain multi-risk mapping tools.
We also need knowledge of the insurance market from a supply chain risk angle, and where financial protection is available through risk transfer options.
As organisations look to reshore manufacturing, these are some of the skills we need to build back up. This is a good opportunity to approach senior management about how they plan to resource certain areas of the supply chain, as well as their risk and procurement operations. The danger is that if you don't understand the multi-tier nature of the supply chain, or the skills you need, then you could be reshoring something, without improving your resilience and financial performance.
Final thoughts...
We increasingly compete in terms of our multi-tier supply chains. This is a trend that started a long time ago. Just look at Apple. How many people would have thought that Tim Cook, who was a mastermind of the company’s supply chain, would succeed Steve Jobs? Despite that, he has done well with the adjusted share price going up since 2011 by around 1,700%!
Working with supply chains has always been a strategic game, and many companies and boards would benefit from improving their multi-tier, multi-risk supply chain understanding. This should be a time to change this.