Building supply chain resilience through smarter sourcing

22 August 2022 7 min. read
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Resilience in supply chains has emerged from Covid-19 as one of the key success factors for business operations. Amit Singh and Ramakrishnan Kasinathan, leaders at management consultancy Nexdigm, outline four ways how internationally operating companies can enhance the adaptability of their supply chains through smarter sourcing.

For decades, the globalization of manufacturing has been one of the main trends within supply chain. By outsourcing or offshoring activities, companies can lower costs and increase competitiveness. These benefits for long outflanked the risks that come with offshoring, such as more complex supply chains and vulnerability to potential instabilities.

However, the Covid-19 pandemic challenged the decade-long notion, with resilience becoming the key driver for adapting supply chains in order to effectively face new realities.

Building supply chain resilience through smarter sourcing

The pandemic resulted in global economies implementing trade restrictions, closing ports and airports alike, which exposed vulnerabilities in production and supply chain strategies. Essential products such as pharmaceuticals, medical supplies, and other essential goods were stuck when needed the most.

A pandemic combined with numerous geo-political trade tussles constrained the flow of goods. As a result, manufacturers scrambled to reassign production capacities, find new resources, and reduce dependency on suppliers projected as risky.

Further reading: Covid-19 supply chain disruptions pose multi-trillion economic threat.

Building resilience

The need of the hour is to learn from these challenges. The overarching challenge for most businesses is to build a resilient supply chain without compromising their competitiveness in the market. Companies must strengthen their supply chains by finding new methods for sourcing, stocking, distributing, and selling via online platforms or other business models to provide their customers with a seamless experience.

Customers will remain demanding and will expect improved responsiveness. They will continue to expect value for money, and a justification regarding inflation is not something they will accept easily as numerous options are available. However, the premium will be justified for brands that effectively manage their supply chains and instil customer value by keeping their promises. To achieve that, companies should manage their risks well.

Four learnings in the area of supply risks that can be incorporated to build resilience:

1. Moving away from a single source

A business can't possess the lengths and breadth of technological capability to build everything under a single roof. Modern-day commodities are assembled with sophisticated materials and typically require specialized equipment. For example, the pharmaceutical and automobile sectors still need several suppliers. In the case of medicines, Active Pharmaceutical Ingredients, or in the case of automobiles, Original Equipment Manufacturers.

If a firm is stuck with a single supplier or contractor who supplies a critical component for a product, it will lead to higher risks if the supplier fails to deliver. It is essential to map all essential and non-essential components of a complete supply chain. The process might be time-consuming, or it might invite unnecessary expenses, but this learning will go a long way in saving the business in times of crisis.

Businesses should segregate all suppliers into different categories (low, medium and high) basis the risks they showcase. The best way to conduct this study is to calculate the impact on revenues if a certain component from the supply chain is compromised.

One should also consider the recovery timelines from disruption and the availability of possible alternatives that will act as a stop-gap until normalcy is restored to the process. It is of utmost importance to ascertain the time a company could stay afloat from the supply shock without discontinuing operations, the time of recovery for an immobilized asset to come back online, and the time to find an alternate method to cope with the shortage.

It all depends upon the type of manufacturing facility. Manual or semi-automated operations can be reconfigured and reemployed according to the need. However, a highly specialized unit built for a single function could be hard to reconfigure or even difficult to replicate in a short period.

Most companies have added new suppliers and allotted capacities to them, even though it added some risk premium as increased costs. Lost sales are generally more expensive than the increased costs due to adopting a multi-sourcing strategy.

2. Diversification, Diversification

Unforeseen circumstances such as the Covid-19 shutdowns can create potential risks for manufacturing plants in the region and disrupt supply chains, which may take months to recover. The strategy to decrease risk is to look for additional sources in places not vulnerable to similar threats.

The US-China trade war is one of the best examples of this whole scenario. It has motivated the sudden shift to a ‘China plus one’ policy where India is coming forward as a strong alternative to China because of its fast-tracked policies and ease of doing business.

The stakeholders of any business unit should also consider producing a substantial amount of goods regionally, where they are supposed to be consumed. Reducing dependency on a few products, which are not specialized in nature, is much easier than building sophisticated machinery or electronics in those geographical locations.

The diversification of supply sources helps hedge risks and operate at maximum efficiency in times of crisis.

3. Contingency Stock

If alternative suppliers are not readily available, a company must maintain adequate stocks of essential commodities to keep the production line running. Like any safety stock, inventory is subjected to a range of risks, and obsolescence is one of them. Also, it is technically tied-up cash sitting idly in the warehouse. However, it is a risk that some might want to take to have a contingency plan in times of need.

Companies with an abundance of lean inventory and expected suppliers to operate on ‘just in time’ should reconsider these practices as the visibility of tier-2 suppliers is too weak in most companies. Ideally, building contingency stock requires a policy change with a company willing to hold more inventory and incentivize suppliers to hold more inventory.

Most companies decided to hold 30 days more inventory during the crisis. Clearly, not having buffers is an exposure to risk as there have been cases where companies were unable to deliver finished products for want of one or two critical inputs due to not changing just in time policies. Collaboration is key here as the risk needs to be acknowledged and costs shared.

4. Process Re-engineering

In many cases, firms encourage their suppliers to move to the same facility in order to have easier access. In these cases, erecting a new production line becomes an opportunity to improve upon the processes.

One can move away from organizational routines and redesign the whole process from the ground up. Companies with already existing production lines are tempted to retain the fully-depreciated asset as their depreciation expenses are not factored into production costs. However, a new production facility built from the ground up can incrementally increase returns over time.

The Covid-19 pandemic was an instance that heightened complexity because of the uncertainty of demand in the economy. The failure of the supply side highlighted system weaknesses that made businesses reassess their risk management and mitigation. During the pandemic's peak, it was imperative to accept the economic realities of the market and give more importance to agility to ensure business continuity.

The next step is to invest in assets and avenues which lower supply chain vulnerabilities for the company. Resilient companies will shape the future due to their ability to withstand turbulent demand/supply fluctuations by creating robust processes.