Disruption Reinvents the Supply Chain
As COVID-19 has changed our world, there has been a dramatic shift in how supply chains are viewed within an organization. Today, the supply chain is increasingly recognized as an area where companies have the most to gain or lose.
Prior to COVID-19, supply chains were too focused on lean and over-optimized for cost. And in many cases, supply chains have not had the investments to quickly adapt and thrive in a world where historical demand is no longer a good predictor for future demand, and where supply constraints and risk will impede customer satisfaction and revenue growth.
Companies that purposefully adopted process change and implemented advanced technologies are faring better in the short term and will be better positioned in the pandemic's aftermath.
Leading practices in technology and process have made a significant difference in demand and supply planning. Companies that have integrated advanced analytics, machine learning, and artificial intelligence into well-defined and aligned business planning processes have pivoted from historical data, and used these models to make near-real-time production and logistics scheduling updates.
These companies often leverage external data, such as weather forecasts, consumer sentiment, and even traffic and port data, to predict demand forecast and supply constraints. The results have been significant. Demand forecasts are 25% more accurate, tying up less working capital in inventory and safety stock, and increasing revenue capture where there is heightened demand.
This is one example where technology is catching up with our aspirations, and the vision of moving to an autonomous supply chain is within reach. The acceleration of change and the opportunities it will provide are exciting. But there is a catch: Creating a sustainable and differentiated impact can be cost-prohibitive if not done correctly.
So, what should companies do now? It would be short-sighted to discuss using innovation to jump the S-curve without looking at similar events that have influenced the way we do business.
The oil crisis of the 1970s offers insight into the supply chain-centric business. Long lines at the gas station were common, and there was a shift from big muscle cars to smaller cars, and even smaller engines from foreign automakers, in an industry that large U.S. automakers had dominated.
The crisis changed the game and fostered a rise in innovation fueled by a significant change in consumer demand. Japanese automakers, enabled by lean, total quality management and kanban, captured significant market share. They took advantage of disruption and jumped the S-curve.
Who would have predicted that because of COVID-19, auto manufacturers would make ventilators, breweries would make hand sanitizer, and ordering groceries online would be so popular? But looking back, these changes were inevitable. Businesses have increasingly shifted to e-commerce over the years, direct-to-consumer business models have started to pop up, and the rapid adoption of digital technologies offered companies the capabilities to innovate rapidly. Because of the pandemic, it appears we have fast-forwarded about five years—and many changes are here to stay.
For organizations to move beyond stagnant growth, executives need to fundamentally reinvent their supply chains while taking a methodical and agile approach to become more resilient.
There are five important steps for reinventing the supply chain to meet current and future customer demands:
1. Supply chain intelligence and visibility. Baseline and understand where your company is on your supply chain journey. Include the analysis of quantitative and qualitative data sets that will set the tone for your strategy as well as a financial business case.
A holistic supply chain analysis will likely show target areas for improvement, including cost-reduction opportunities, more product availability, and greater visibility.
2. Aligning company purpose with your strategic supply chain architecture. Supply chain leaders have an opportunity to step back, pause, and ask: "What's my organization's purpose and business model, and how does our supply chain align?"
For example, if your company is a distributor, your purpose may be to keep costs low. Therefore, cost will have a large influence on your supply chain goals. If your company hopes to provide custom experiences to your end users, quality is likely one of your main drivers.
Once you understand your organization's purpose, you can start answering questions that will drive next steps in your supply chain architecture. You might think about how consumer behaviors have changed and how these trends will affect your operating model and network strategy.
For example, companies are accelerating e-commerce and shedding brick and mortar. Does this affect you? Two-day delivery is the norm and some companies offer intraday delivery. Does this impact you? Some companies are going direct to consumer and cutting out distributors. Can you afford to not own the customer relationship?
Answers to these tough questions will impact your operating model and network design decisions for years to come.
3. Integrated operational excellence. Now more than ever, the supply chain must become an integral part of business planning. To illustrate, the supply chain leader of a large company that sells sanitizer and antibacterial products attributes his company's success during the pandemic to a relentless focus on integrated sales and operations planning. This means shared metrics and structured processes for decision-making across sales, marketing, commercial, manufacturing, and supply chain.
Incentives are also important in making integrated operational excellence work. For example, sales executives should receive bonuses based on how much they reduce waste and inventory, in addition to how they grow sales. When the supply chain is disconnected from sales, marketing, finance, and operations, and each function operates under a different set of performance metrics, poor results are predictable. Operational excellence means company-wide coordination in supply chain planning, with everyone aligned to the enterprise's key performance indicators.
Driving operational excellence across the end-to-end supply chain will take leveraging enablers, such as automation, augmented with a tax-effective operating model and incorporation of global trade strategies that keep costs down.
4. The future of work. Operational excellence strategies must align to the workforce of the future. As consumer needs and behaviors have shifted, so have the needs of employees. With COVID-19 still raging, long-term shifts in where work is performed will drive the makeup of our cities and states, and national policies.
The pandemic offers an opportunity to rethink how, where, when, and why employees, associates, and suppliers come together to drive business value. Digital will have a profound impact on how work is performed, and companies that put humans at the center of their digital transformation will enjoy a significant competitive advantage.
5. Digital transformation. Amid an increasing number of unplanned disruptions, traditional global supply chain structures are geared toward cost and speed. An enterprise can often handle the occasional supply chain breakdown, but it may not have the right technology, data quality, or updated processes to effectively thrive in situations such as COVID-19.
Supply chain leaders should ask whether they can monitor supplier risk in real time, and then activate the appropriate contingencies in case of major disruption. Can your systems communicate with supplier systems, especially when catastrophe hits? What happens when your equipment is down, or your products are loaded to the wrong trucks? When a crisis hits, can you keep going with 60% of your people but at 100% of your capacity?
A fully digital supply chain can help offer decision-makers the right information to manage various forms of disruption, and often at the moment they occur.
Some companies will certainly fail in the next 12 months because of the pandemic. As a result of this significant disruption, there will be a change in behaviors from consumers to suppliers to manufacturers and beyond. There will also be more significant interruptions. Can you spot these trends and make changes on the fly before they detrimentally affect your company?
The supply chain must keep moving and keep up. The survival of your company likely depends on it.
The views reflected in this article are those of the author and do not necessarily reflect the views of Ernst & Young LLP or other members of the global EY organization.