Building strategic and sustainable competitive advantage with supply chain resilience

Part 1: What is supply chain resilience – and why is it more important than ever?

I recently had the pleasure of hosting a webinar with Dr. Matthias Mette, Principal at our partners h&z Management Consulting, and a leading authority on supply chain and procurement transformation. The topic was supply chain resilience.

Here is the first of two articles that summarize a thoroughly absorbing conversation.

The motto “prevention is better than cure” certainly holds good in the sphere of supply chain management but, of course, it is rather difficult to put into practice even at the best of times, let alone in times of uncertainty such as we have seen in recent years. Where prevention is not possible or simply does not succeed, a fast response can mitigate the situation, but this too is difficult when a supply chain disruption was totally unforeseen, as in black swan events. Consequently many firms have been challenged to make a rapid recovery following disruptions over the past two or three years and there is a clear incentive to build up this capability.

According to our 2022 State of the Supply Side Report: 73% of companies experienced disruption of some sort or other.

Current sources of supply chain risk

But what are the greatest current sources of supply chain risk? These have changed in the course of the past two years with the Ukraine war and tensions in various parts of the world, such as the Taiwan Strait. It is not surprising that geopolitical risks have moved up the agenda alongside the availability/shortage of raw materials: the former is in many cases a cause of the latter. But the issue of climate change and environmental risks remains a concern for many. Price inflation is seen as less of an issue as there are hopes that it will not last, although before the pandemic it never even registered. Cybersecurity is another growing concern, and with the ever-increasing volumes of data shared between customers and suppliers in the era of Industry 4.0 this is an area that will need close attention in the years to come, as the risk of a data security breach, and the impact of such a breach, escalates.

Much depends, of course, on the sector and the geography as well as the precise timing of any survey or pulse check, so any figures must be treated with a certain amount of caution, if not skepticism. Risk factors are constantly changing and the difficulty in quantifying them means that the question of which firms are best prepared to address the challenges remains largely subjective. There is a tendency for companies that think they are well prepared to have an over-optimistic assessment of their position, perhaps because they have not yet had to cope with a major disruption whereas, conversely, companies that think they are badly prepared are over-pessimistic because they have already suffered losses resulting from a bad supply chain shock.

Resilience – what is it?

Against this background, how do we build resilience into the supply chain? And before we answer that question, what to we even mean by “resilience”? We can define it in brief as:

“the ability of a central procurement and supply management function to prepare for unexpected events, respond to disruptions, recover and emerge stronger from them.”

This is rather broader in scope than “supply chain risk management” which is more narrowly focused on identifying risk factors and developing preventive measures. Resilience management, by contrast, accepts that you cannot foresee every risk, every danger, but you can make your organization better equipped to deal with them.

To illustrate this point Matthias used a rather colorful metaphor. Let’s say you have to cross a piece of treacherous terrain. You know that there will be various obstacles (for example, boulders, craters, bogs, quicksand etc.) You can do your best to find the optimum path across the terrain. That’s risk management. But with resilience management you also accept that it may be impossible to avoid every single obstacle, no matter how good your route planning may be. Therefore, you need to build and use a vehicle that can survive the impact of at least some, and ideally all, of the obstacles (for example, an amphibious vehicle, or one with caterpillar tracks, or tire chains etc.)

This calls for a shift in corporate culture and mindset. You must approach supply chain resilience strategically and we can identify four strategic approaches.

Source: h&z Management Consulting

1. A procurement and supply management organization should develop preventive strategies to cover occurrences that it believes have a high likelihood of occurring and will have a severe or very severe impact when they do.
2. It should put strategies in place to respond to disruptive actions which are less foreseeable, (or not foreseeable at all), such as once-in-a-century natural disasters. This means that they are less likely to occur but will have a high impact, perhaps even a catastrophic impact, if they do. The focus here must be on building resilience that enables you to mitigate the impact, regardless of timing etc.
3. It should develop resistance capabilities to deal with events which, though they may have less overall impact, may happen quite frequently. These could be tactical responses to frequent supply problems, such as increasing inventory.
4. Recovery strategies are different; perhaps it is better to talk about capability than strategies: it refers to your ability to recover, and even improve operations, when prevention, resistance and response strategies fail. It could, for example, involve adopting a make, don’t buy policy, acquiring a supplier or negotiating a new contract to ensure security of supply in future.

Crises versus structural change

We should also distinguish between crises, which have a certain time span, and structural changes to supply markets. The great financial crisis or the coronavirus crisis certainly both had a serious impact, but they did not fundamentally change the structure of supply markets. Climate change and environmental considerations are different because they are driving permanent shifts such as the transition from fossil fuels to renewable energy. Deglobalization and deliberalization, driven in large measure by geopolitical developments, notably the standoffs between the Great Powers can also lead to structural shifts in supply markets. What happens, for example, if sanctions are suddenly imposed against China that cut off a vital source of supply? Hence, we no longer simply hear the term “nearshoring” but also the neologism “friendshoring”, i.e. sourcing more goods from countries that are regarded as politically reliable partners.

These trends converge to inform government policy such as with the massive package of loans and subsidies that the United States government is providing to the domestic electric vehicle (EV) industry as part of the Inflation Reduction Act. This is already having a significant impact on the supply of critical metals and their processing. This poses a risk for vehicle manufacturers in Europe as investments pour into battery factories, new mines and electric vehicles in North America. The battery supply chain of an electric car will receive up to US$ 50 of subsidy per each kWh of battery, or over a third of the total battery costs today.

As the European Union seeks to respond to this challenge with its own measures, the automotive industry faces prolonged uncertainty (which countries and regions will benefit most and least from support packages?) and must make tough choices to ensure supply chain resilience in future.

More generally we are seeing a reversal of a twenty-year trend in western countries of subordinating supply chain resilience to market potential, profitability and cost considerations, which has seen an explosive growth in trade with politically high-risk countries. Many now regard the speed of this growth, and the associated neglect of risk management in our sourcing decisions, as naïve, creating dependencies that may not be sustainable in an increasingly unstable world.

In short, geopolitical considerations now weigh heavily with decision makers who must plan supply chain resilience strategies for a wide range of scenarios.

In the next article we will consider in more detail some of the levers for enhancing supply chain resilience.