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11 February, 2021updated 31 Oct 2021 11:38

Why the new approach to supply chains should outlast Covid

Necessity has changed supply chain operations in the past 12 months. Now is the time to formalise the changes to improve resilience in the future, write McKinsey’s Mikael Hanicke and Anna Strigel.

By Mikael Hanicke and Anna Strigel

Just 18 months ago, conversations about supply chain resilience were limited to manufacturers’ operations teams. Even then, issues were considered mainly on a regional basis – mitigating against localised disruptions, such as natural disasters, or the local effects of geopolitical and environmental uncertainties.

The Covid-19 pandemic has shown the importance of strong and stable supply chains, both to our daily lives and to effective operations. During the early days of the pandemic, car production stalled, electronics manufacturing was delayed, and procurement leaders scrambled to source healthcare supplies and personal protective equipment (PPE). Our research at McKinsey found that 75% of supply chain executives experienced disruptions either in their own networks or among their suppliers.

Throughout the pandemic, global supply chain strategies have shifted – often at speed – to manage border restrictions, workforce restrictions and rapid changes in demand. While the impact of the pandemic on lives and livelihoods continues, companies are adapting to these seismic shifts by building better resiliency for the ‘next normal’. Indeed, 90% of supply chain executives told us that supply chain resilience is now a top priority for their business.

A total of 90% of supply chain executives told us that supply chain resilience is now a top priority for their business.

While the Covid-19 pandemic falls squarely into the black swan category of events, research from the McKinsey Global Institute predicts that supply chain shocks will happen with increasing regularity. Organisations can expect one month or more of disruptions to occur every 3.7 years, resulting in losses worth almost 45% of one year’s earnings before interest, taxes, depreciation and amortisation over the course of a decade. To help companies prepare, we see three trends reshaping global supply chain strategies.

Put supply chain resilience into the spotlight

Rather than applying temporary fixes to supply chains, companies could consider transforming their supply chain functions to deliver long-term resiliency. We found that for many companies, the issues revealed by the Covid-19 pandemic have encouraged the professionalisation of both business continuity plans and supply chain governance. More companies have established dedicated supply chain risk management functions, working closely with procurement, manufacturing and logistics teams to remove silos and apply robust risk mitigation frameworks.

Seven areas of vulnerability merit particular attention: regulation, data security, structure (such as geographic concentration in part of the value chain), organisational maturity, reputation, operation and finance. All seven shape both strategic planning and day-to-day process execution.

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Moreover, decision-making cadences are changing. Shorter planning cycles allow for increased agility, and digital solutions are allowing exploration of different scenarios to better inform the planning process.

Consider the where and the who

Moving components along value chains was an immediate challenge early in the pandemic, causing companies to reassess their global footprints and relieve chokepoints where a single supplier’s failure could completely halt production. While one countermeasure is the regionalisation of value chains, we find that many companies are instead taking more care in pricing the potential risk of disruption. Others are rethinking make-versus-buy decisions and adding dual-sourcing options.

Increasingly, companies are assessing supply chain risk in terms of the stability of tier-one suppliers. They have realised that when big shocks occur, visibility into the financial and operational stability of tier-one and tier-two suppliers is essential but, too often, insufficient.

Let’s get digital, and fast

One of the quickest routes to better supply chain visibility is the faster digitisation of systems while upskilling the teams who use them. Although companies have explored fourth industrial revolution technologies in recent years, too many have remained at the pilot phase, unable to realise the value available. By pursuing end-to-end digitisation at speed and scale, companies can enjoy better visibility in their systems – from raw materials through to customer and post-sales service. Leveraging advanced planning systems to analyse the increased data availability could improve customer service and manage demand swings more proactively.

Digitisation can improve productivity, agility and responsiveness without big cost increases.

As an added incentive, digitisation can improve productivity, agility and responsiveness without big cost increases. The Global Lighthouse Network – a collaborative research project between McKinsey and the World Economic Forum – has found that organisations leading the way in their approach to digitisation report outsized gains in productivity, lead-time reduction, opportunities for customisation and improved sustainability.

Now is the time for companies to move beyond supply chain crisis management and build a robust risk management function, one that can support the organisation’s strategy with deeper insights on crucial digitisation, transparency and footprint decisions. Those that act quickly will be well placed to face future disruptions – whenever and wherever they arrive.

Home page photo by Eric Lalmand/Belga Mag/AFP via Getty Images.

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