In the last three weeks I have spoken with senior executives of dozens of companies about how they are managing business continuity during the Covid-19 crisis. The insights have been very consistent.
It is clear that reaction is not a strategy. Today, we have the Covid-19 crisis. Last year, we had trade wars and tariffs. Prior to that, there were component shortages for passives. Supply chain disruptions abound; the only thing for certain is that there will be more to come in the future. What I have learned is that the companies that had proactive resilience planning and that had acted ahead to mitigate structural risk from their supply chain are the ones that are coping far better than others.
Here are three strategies that I recommend for building resilience in your supply chain:
Despite being an obvious first step in mitigating risk, I am surprised to find companies that carry significant portions of supply portfolios with single points of failure. We not only need to diversify to eliminate single sources, but we also need to eliminate sourcing from a single region or country. Recall that the Great Tohoku Earthquake and Tsunami of 2011 crippled the global automotive industry because there was a large concentration of automotive parts and accessories manufacturers in Japan.
A simple but effective strategy is to have a combination of near-shore and offshore suppliers for each component. A broader strategy is to develop regional supply chains that source and distribute products within a region but can also build redundancy such that if one region is disrupted, suppliers from other regions can step up.
In general, the strategy is to diversify to eliminate concentration of risk. For example, if you have a concentration of suppliers at high risk of financial default regardless of the number of sources, then it is prudent to qualify alternative sources that are on a stronger financial footing.
Build reserves to absorb shocks
Usual inventory optimization and safety stock calculations can neglect the element of structural risk. Building on the concept of eliminating single points of failure, it is prudent to carry contingency safety stocks particularly for low-volume parts that might impact the availability of high-value features. In general, we need to develop inventory plans to assure supply over a long horizon taking into account possible shortages as well as obsolescence.
In March, the Department of Defense released some 5 million masks and 2000 respirators from its stockpile to help states fighting the Covid-19 crisis. Strategic reserves go largely unnoticed until there is a crisis. The United States Strategic Petroleum Reserve holds almost 800 million barrels of fuel as an emergency supply that has been tapped from time to time. The value of having strategic reserves has become abundantly clear in recent times.
Strategic reserves are intended to protect against so called “black swan” events that are rare but can cause an existential threat to the business. When considering strategic reserves, ask the several questions.
- What materials are essential to protect the overall business?
- How long could it take to react and recover?
Thinking more broadly, the concept of strategic reserves can be applied far beyond simply holding strategic inventories. Every procurement veteran will tell you that in times of crises, it is the strategic relationships that make all the difference. All business is built on relationships. These include relationships with your customers, your partners and with your suppliers. Relationship building takes time and requires reciprocity rather than one-way postures. Think of favors you do for your partners as building up strategic reserves of goodwill. Today, it is value chains that compete with each other and strong relationships with your value chain partners are key to resilience of the entire value chain.
Predict, sense and respond with agility
The best performing procurement teams operate with an “outside-in” mindset. They stay on top of market trends for their customers, their products, their suppliers, the latest design practices and emerging technology trends in their industry. They subscribe to content services that help consolidate such sources of insight to anticipate opportunities and risks and take proactive action long before their competitors.
For instance, you can anticipate end-of-life based on typical part lifespans or directly from supplier notices and take proactive action to mitigate impacts pre-emptively. Another example is that of financial default. You can monitor leading indicators of a supplier’s financial health to anticipate risk of default.
Additionally, we also need to be mindful of single sources that could be created from ripple effect of other risks. For instance, financial default or obsolescence of one source within a dual sourced component will create a high-risk single source situation.
As one example, LevaData’s Cognitive Sourcing Platform is tracking trends and inflection points in demand, lead time, cost, supplier financial health and supplier consolidation across scores of commodities in the electronics industry to help our customers recognize market shifts early and take pre-emptive actions.
There will always be events that were unanticipated. However, the best performers establish processes with virtuous learning cycles. When such events do occur, they ask:
- When did we first know?
- When could we have known sooner?
- What could we do in the future to anticipate such events?
- What actions can we take at the earliest to mitigate the impacts in the future?
Answers to these questions can be used to establish new sensing mechanisms, additional contingency plans and response playbooks.
Pulling it all together
As we have seen, it is important to recognize the structural risk across your supply portfolio and establish clear playbooks on when and how to respond to a wide range of risk events. At LevaData, we categorize the likelihood and impact of risk associated with each part or each product to identify four types of risk: routine disruptions, moderate risk events, black swan events and structural flaws.
Mapping out structural risk across your supply portfolio
Routine Disruptions are frequent but low impact events such as unanticipated demand, port delays or limited factory closures. Such events are part of day to day operations and need to be handled automatically with contingencies such as safety stocks and automated re-planning. Moderate risk events require both proactive measures such as leveraging diversity of alternate sources as well as reactive actions such as expedited shipments followed by shifts in sourcing splits. Response to black swan events rely on both the robustness of your supply network as well as the strength of your supplier relationships. Finally, it goes without saying that a proactive assessment of structural risk can expose structural flaws where there are high impact events that are also highly likely. Examples of these include single sourced components nearing end-of-life or those that are sourced from suppliers at high risk of financial default. Such situations need to be eliminated immediately.
As you have seen, digital transformation is not about one shiny artificial intelligence technology or another. Instead, it is about building a pervasive capability for informed and timely actions. Information systems must be grounded in processes that continuously maintain data integrity. Data driven insights and decisions drive superior performance. Our experience with several customers over the last several years has shown that digital transformation in direct sourcing can drive 3% + sustainable margin improvement through incremental cost savings, while driving 60%+ improvement in agility and reduction of risk at the same time.