Supply chain resilience ...
… can be defined as a company's ability to prepare for and adapt to changing conditions to withstand or recover quickly from external disruptions. When it comes to supply chain resilience the key metrics to consider and evaluate the supply chain performance are (1) Time to awareness (2) Time to action (3) Time to recover and (4) Time to survive.
Resilience can be affected through various measures along the value chain of an organization (e.g., procurement, transport and logistics or manufacturing) and optimal resilience can only be achieved through a carefully planned combination of measures along the whole value chain. But as historical data, especially in the wake of the Covid-19 pandemic, has proven, many companies primarily focus on their procurement set-up when making supply chain resilience decisions.
Therefore, this article will focus on the procurement aspects of supply chain resilience and provide an overview of key levers that can be applied to increase resilience. We have identified four key categories of resilience levers:
- 1Predictive forecasting levers such as forecast excellence build the basis for all other levers by increasing transparency and collaboration.
- 2Commercial / tactical levers like spot market sourcing relate to the tactical inventory and supply commitment management best suited for the short-term.
- 3Supply base levers relate to a change of the firm’s supplier network to build up redundancies (e.g., dual sourcing).
- 4Product levers such as product standardization can help to reduce variants and thus improve flexibility and reduce supplier dependency.
Looking at supply chain resilience efforts today, it becomes clear that the time of ensuring maximum resilience at any cost is over. Therefore, we present an indicative cost-impact matrix to illustrate how the available levers affect not only the level of resilience achieved but also how they affect overall costs. We are convinced that finding the right trade-off between resilience and costs will be the key theme going forward for companies that seek to improve supply chain resilience.
Why talk about supply chain resilience?
In the past years, supply chain disruptions have been among the biggest challenges and threats for firms across all industries. Studies show that 89% of companies faced a supplier risk event within the last five years1. In addition, in 2021 the real GDP growth within the Euro zone was expected to have been 0.5% higher without supply bottlenecks2.
Recent interlocking events hereby range from geopolitical to structural causes. Geopolitical disruptions such as sanctions and tariffs (e.g., US-China), the war in Ukraine and port congestions like the Suez Canal blockade put companies’ supply chains under pressure. The Suez Canal blockade alone led to a hold-up of $9.6bn in global trade per day3. On the structural side, scarce critical components such as semiconductors or unknown supplier ESG practices pose threats to a firm’s operations.
As a result, many companies shifted their focus from a cost management to a resilience perspective in an attempt to respond to these disruptions. The results of the 2022 PwC COO study4 further highlight the apparent need for resilient supply chains as a key part of the COO agenda:
29%
of COOs see supply chain disruptions as their key operational challenge in 2022.
80%
of COOs say improving supply chain resilience is very important for their firm’s growth.
75%
of COOs state their firm invested in supply chain resilience in 2022.
Moving forward, predictions show that the frequency of supply chain disruptions will continue to rise5. Challenging events with global implications such as the Covid-19 pandemic or the war in Ukraine will likely not remain unique scenarios, especially regarding the tense current geopolitical situation. The importance of building up more resilience will therefore remain, and while the period of seeking more resilience no matter the cost might have passed, the question remains: Resilience – priceless advantage at what cost?
Supply chain resilience as a capability-driven approach
Supply chain resilience can be defined as the ability to prepare for and adapt to changing conditions and withstand and recover rapidly from disruptions. Becoming resilient, however, is a highly strategic endeavor and entails a solid long-term agenda as well as clear short-term execution.
We take a capability-driven approach to defining supply chain resilience with three key building blocks. A combination of these three elements enables a sound supply chain resilience strategy:
Reliability
- + Robust response to predictable events
- Example
During the semiconductor shortage, an automobile manufacturer increases security inventory for all semiconductors across the board to prepare for foreseeable geopolitical disruptions.
Flexibility
- + Best solution for predictable events
- Example
The same manufacturer establishes a collaborative demand mgmt. tool to pro-actively identify critical semiconductors across suppliers and implement tailored solutions based on underlying causes.
Agility
- + Fast response to unpredictable events
- Example
During an unforeseen supplier bankruptcy, the company can respond quickly by shifting volumes to a pre-existing alternative source.
Additionally, building a resilience capability requires the right set of processes, tools, and people to better mitigate the impact of events. Hence, four key enablers can be identified to move from a baseline reliable supply chain to a resilient one. First, to achieve flexibility and improve a robust response to predictable events to an optimal one, connected supply chain processes need to be implemented. Building on that, organizations need to foster technology enablement to further optimize the implemented processes.
Secondly, in order to improve the response to unpredictable events and achieve an agile supply chain, the organizational as well as supply chain design needs to be set-up accordingly. Regarding people and organization, the cross-functional collaboration among divisions needs to be supported and people need to be enabled and trained to work in a more agile environment. Once the internal change management is achieved, the supply chain network needs to be structured to allow for a fast reaction to disruptions with e.g., flexible manufacturing and alternative sourcing.
Exhibit 1: Capability driven definition of supply chain resilience
From the cost management to the smart resilience era
Recent supply disruptions and the increasing importance of resilience emphasize a necessary change in the mindset of procurement, summarized in the movement from purely cost management to an era of smart resilience. Here, the key challenge is no longer to achieve minimum costs but rather to define the right trade-off between cost and time.
To assess the level of supply chain resilience a company has implemented we identified four key metrics: time to awareness, time to action, time to recover and time to survive.
Time to
awareness
(TTAW)
Time to identify the incident – ideally even before an incident occurs
Time to
action
(TTA)
Time to start counter actions
Time to
recover
(TTR)
Time to restore to full functionality
Time to
survive
(TTS)
Maximum duration that supply can match demand after an incident
Exhibit 2 illustrates the effect of smart resilience on the introduced metrics compared to a supply chain that focuses purely on cost efficiencies. Setting up a reliable supply chain can shorten the TTAW and disruptive events can be recognized even before they occur. In addition, it would also increase the overall TTS. A flexible supply chain setup can ensure that counter measures can be undertaken quicker, which has an immediate positive effect on the required TTA, and an agile supply chain adjusts quickly to the new circumstances and restores full functionality as quickly as possible. Viewed holistically, all three capabilities, if implemented correctly, can have a considerable effect on costs and TTS, as they extend the point at which the supply does no longer meet the demand.
However, not achieving resilience at all costs, but obtaining a competitive resilience is key.
Exhibit 2: The key metric of supply chain resilince is time
Building resilience in procurement
Disruptions can affect various elements of the supply chain, all of which possess their own levers to increase resilience. Therefore, ensuring resilience needs to be a holistic and integrated approach – especially in times of disruptions – and can not only be achieved by looking at one building block of the supply chain but rather by a combination of different levers. Nevertheless, industry feedback has shown that most companies primarily start with addressing strategic levers within the reigns of their procurement function. Hence, this article will focus on levers linked to procurement as this provides the furthest upstream element of the supply chain to strategically improve resilience. Exhibit 3 further illustrates the importance of procurement when building resilience, as most chosen levers by companies are tied to sourcing activities.
For further information on potential resilience levers on more upstream supply chain elements (e.g., manufacturing), we would like to refer to our dedicated material on resilient footprint design and our novel “Safe-shoring”6 approach which were published earlier this year.
Exhibit 3: Measures in response to supply chain disruptions
Source: ifo Business Survey, July 2022
What procurement levers to apply
The variety of levers available to procurement to increase supply chain resilience can be categorized into four main groups, see Exhibit 4.
Firstly, the category of predictive forecasting contains measures which focus on increasing transparency within the supplier network to foster close and real time collaboration with suppliers. Real time transparency across the supply chain minimizes the risk of being surprised by, e.g., supply shortages and gives the network the opportunity to jointly prioritize next steps. These levers can be applied system wide as they are not limited to specific suppliers or commodities.
Commercial / tactical levers represent mostly cost-intensive levers aimed at tactically ensuring sufficient supply through long-term commitments or active inventory management (e.g., increased security buffers or active spot market demand management). These levers are generally easy to implement but do not create a sustainable resilience improvement. Concentrating on spot market sourcing for example creates a quick short-term relief but can send the wrong signal to key suppliers regarding long-term relationships and end-to-end transparency.
Exhibit 4: House of resilient procurement
Next, supply base levers address the current structural set-up of a firm’s supplier network. Among others, this category includes levers such as make vs. buy and footprint adjustments which both can have a substantial impact on resilience but involve complex analysis and time intensive implementation processes if new capabilities / infrastructure needs to be created.
Lastly, product levers pertain to increasing the share of standardized components to reduce supplier dependencies and create more opportunities to engage with different partners. On the other hand, changes to the product design can negatively influence product customization and requires additional adjustments from other players in the value chain (e.g., R&D or production).
Careful consideration of cost-impact trade-off of resilience levers
As already mentioned, optimal supply chain resilience is not achieved by applying one single lever, but only by combining several levers that are coordinated with each other. When deciding on the appropriate mix of levers to apply, a careful analysis needs to be undertaken not only on their impact on resilience, but also the trade-off between resilience and total cost of ownership. At least initially, most actions come with a considerable upfront investment (as seen in the previous chapter). An industry-agnostic evaluation for some levers regarding the cost-resilience trade-off can be seen in Exhibit 5. Moreover, the exhibit shows a mapping of the presented levers to the key capabilities of supply chain resilience – reliability, flexibility, and agility.
Exhibit 5: Cost-resilience trade-off for procurement levers
* Indicative placement of exemplary levers
It is essential to note that when assessing the cost impact, one should not limit the analysis to increased initial costs, a pitfall especially the procurement function is historically prone to. While most resilience measures come with significant investments, considering a total cost of ownership is key. In avoiding disruptions and identifying them early on, additional costs can be more than offset over time.
Moreover, a specific evaluation and quantification of the levers’ costs strongly depends on the respective industry and company specific details.
Anchoring resilience in procurement setup
To make sure the resilience levers can be carried out consistently, procurement would also need to adjust its setup to anchor resilience as a priority in the organization properly. On the one hand, it needs to properly prioritize resilience as one of its core dimensions for value creation (together with the more tradition dimensions such as material cost reduction). On the other hand, it also needs to consider breaking up resilience into different dimensions of the operating model (see Exhibit 6). As an example, the procurement governance needs to take the resilience metrics into consideration, when evaluating the setup of the overall supply base. It would also need to introduce suitable technology to improve supply chain visibility beyond tier-1 suppliers, so that disruptions more upstream in the supply chain can be recognized earlier on.
Exhibit 6: Our vision of a procurement operating model
Felix Renz and Jannik Fachtan also contributed to this article.
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