Supply Chain Resilience – 4 Key Steps

Events of recent times have brought supply chain disruption into everyday conversation.  However, we could be fooled into thinking this is a new or temporary phenomenon.

Whilst many of the events that have created disruptions are ‘unprecedented’ (global pandemic, a container ship getting stuck in the Suez canal, a Russian invasion of Ukraine, labour shortages), supply chains have always been vulnerable.

In a recent McKinsey report, it is shown that supply chain shocks should not be a surprise – in fact they are becoming more frequent and severe.   The report points to a number of drivers:

• Acute climate change
• Macroeconomic / financial crises
• Trade disputes
• Pandemics
• Cyber attacks
• Terrorism
• Supplier issues

The headline grabbing figure in the research is that companies can expect to lose 42% of one year’s EBITDA (Earnings Before Interest, Tax, Dividends and Amortisation) every decade due to disruptions.    It highlights what has actually happened:

• Disruptions of 1-2 weeks occur at a frequency of every 2 years
• Interruptions of 2-4 weeks take place less than every 3 years
• Just under once every 5 years there will be a disturbance of >2 months

“For too long now, supply chain management has been too focused on cost reduction”, argues Jonny Michael – founder and CEO of JMCL Consulting.   “It’s understandable, businesses want to maximise profit.  However, this short-term thinking leaves businesses highly vulnerable.   If resilience isn’t built into critical supply chains this can be far more costly”.

Where things are coming from / going to, who is involved and the adaptability / responsiveness of your supply chain is either a significant risk to your business or a competitive advantage.   When a candidate on ‘The Apprentice’ has their business idea criticised for sourcing goods from China by Sir Alan Sugar – a man whose business was built on doing exactly that – it shows how dynamics have changed.

Where should you begin when reviewing supply chains to balance cost with resilience?   We’ve identified 3 key starting points:

1. Prioritise Suppliers

We’ve featured the Kraljic matrix before as a tool to help categorise suppliers and their importance to your business.

For example, suppliers in the top right quadrant represent business-critical activities and are best considered as partners who require a more considered approach to risk management and service quality. Consider not just your own risk but your suppliers’ exposure to likely external drivers as a risk factor that should be accounted for.

2. Consider ‘cost of disruption’ in sourcing decisions; Assess Risk

Whilst choosing a ‘near-shore’ supplier over a Far-East supplier may appear to drive unit cost, understanding the impact of change / disruption provides a true ‘cost of ownership’. Assess risk and be aware of the real probability of that risk occurring.

3. Consider external factors – e.g. Macroeconomic conditions / Inflation

Supply chain resilience isn’t just reliability of supply and delivery times.  The last two years have also brought the impact of things like currency volatility,  inflation and the cost of credit into sharp relief. 

4. Analytics and Digitisation

Use data analytics to identify and mitigate risk and use digital tools to act on the insight. Inventory management, for example, is a good area in which to use these tools.

When implemented effectively, investments in Supply Chain Resilience both reduce risk and increase a firm’s agility.   Each disruption is temporary, but the threat of disruption is constant.   Understanding exposure and the actions that can be taken to reduce exposure are vital activities.

With the right approach you can save yourself the cost of distraction and disruption and even achieve a competitive advantage.  Let us help you review your supply chain resilience.  Contact MD Jonny Michael at j.michael@jmclconsulting.com or call 07831 390161.