Why you should decentralise supply chain risk

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Global supply chains have been under enormous pressure over the past eighteen months due to an unprecedented level of disruption, and many have found it difficult to recover. While some sectors have been impacted more than others, nearly three quarters of supply chain executives report their companies were hit hard by the pandemic. Multiple lockdowns, suspensions in production, and cross border barriers are just a few of the challenges businesses have struggled with. As we recover from Covid-19 supply chains have had little time to assess the damage. Brexit red tape, driver shortages, and the shipping container crises continue to overwhelm businesses with even more supply chain shocks. To manage the current levels of disruption and be better prepared for the unexpected, businesses need to consider making the move to a de-centralised model.

 

Impacts of globalisation

Risks to supply chains have got worse partly due to globalisation. Businesses rely on being able to import commodities and materials from international suppliers to meet the needs of consumers. Yet, Covid-19 has exposed the weaknesses in this global eco-system. For instance, the chip/semi-conduct shortage. With the world in lockdown, many consumers shopped online to purchase electronic items such as handheld devices and gaming consoles to help alleviate some of the boredom of staying at home. Remote-working also saw huge investments in technology to ensure a workforces could remain productive. This demand combined with the rising prices of raw materials caused a huge shortfall as the world’s largest provider of chips, China, couldn’t produce them fast enough. This triggered a domino effect, leading manufacturers from other industries to halt or delay production. Car manufacturers have especially felt this shortage and as a result are expected to lose $61 billion this year.

Another industry that has been severely impacted has undoubtedly been food and agriculture. While supermarkets worldwide experienced empty shelves in the first half of 2020, the UK has suffered again with the complications of Brexit and a shortage of lorry drivers. With many EU citizens returning to their home country, Britain doesn’t have enough workers to transport goods from A to B. The knock on effects of this is driving prices higher, gaps on shelves and restaurants and fast-food chains including McDonalds, Nando’s and KFC to close down some of their branches. At a time when fully operational supply chains are pivotal for economic recovery, there’s a long road ahead before this becomes a reality.

 

Supply chain re-evaluation

To prevent further damage and to help mitigate risks, business leaders and supply chain managers should work together to re-evaluate the structure of their supply chains. A centralised model is often attractive as the headquarters and warehouse is either in a single location or operates from large, centralised hubs managed by HQ. With everything managed in one place, not only is it cost-efficient but spending can be monitored closely, it’s easier to standardise and likewise make improvements, stock can be better controlled, and shipping prices can be reduced due to logistical efficiency. Yet, when it comes to disaster planning, this model is essentially a risk in itself. With products all in one place any unexpected interference such as a natural disaster or influx in demand could wipe out the entire chain, as experienced by the car manufacturers due to the chip shortage. Additionally, if a business is looking to create new opportunity as part of a recovery plan after a disaster has happened, or wants to pivot quickly to respond to events, a centralised supply chain provides limited scope for flexibility and agility, especially if their HQ is not in a prime location for new markets and suppliers.

 

The case for decentralisation

In the today’s volatile landscape where disaster could strike at any moment, putting ‘all your eggs in one basket’ is no longer an option. Businesses should consider shifting from the traditional centralised model to a de-centralised one to ensure there is a contingency plan in place.

A decentralised supply chain allows operations to spread out across individual business units, designed to be closer to the end customer. Often, each unit has a degree of autonomy to manage its unique requirements (e.g., purchasing supplies and distributing goods) and HQ will just take on a supportive role. Yet, with less control over operations and the possibility of more strain on the budget due to the need for more staff and buildings, business leaders and supply chain executives might initially be put off from making the switch. However, the advantages are hard to ignore.

Some examples include better customer relations due to faster shipping times and community trust, lower costs at a local level and the ability to trial new products on a smaller scale. With warehouses in multiple locations across different regions there is also opportunity to stock more products, enhancing delivery to customers and providing a backup if another unit runs out.

When it comes to mitigating against risk, this means there is likely to be no chance of a complete supply outage, enabling profit to still be made and customers to be satisfied.

Last year, companies operating a decentralised model were able to respond quickly to multi-countries lockdowns, turning to alternative suppliers to ensure a flow of products. Asger Lauritsen, CPO at engineering specialist FLSmidth echoed this, commenting: “In the mining and cement supply chain, disruptions are the norm, so when China went into lockdown earlier this year, [we were] able to switch from Chinese to Turkish and Egyptian suppliers at a moment’s notice. This was only possible because decentralisation had been embedded into our model.”

The good news is that moving to a decentralised model has become more achievable due to the acceleration of automation, machine learning and AI. Supply management software, for example, can heighten visibility over the overall operational process enabling organisations to identify and resolve challenges quickly. It can help businesses source and vet alternative suppliers by enabling them to understand if the supplier poses any risk e.g., are they capable of supplying the product, are they located in a stable location, and do they have a good track history? Additionally, with oversight on all supplier interactions, it can facilitate strong supplier relationships to make sure payments are made on time. If payments are missed or delayed, this can breakdown supplier relationships meaning in that in times of crisis they are less likely to provide preferential treatment.

The disruption that supply chains have felt over the past year and a half has certainly exposed the weaknesses associated with a centralised model. And, with many organisations already in a fragile position due events such as the pandemic and Brexit, business leaders need to ask themselves if they can remain viable based on their current operations if another unforeseen circumstance were to occur. If the answer is no, then now’s the time to start future-proofing the business by adopting a decentralised approach.