Some advice for businesses grappling with fragile supply chains

Profile picture for user pwainewright By Phil Wainewright September 30, 2021 Audio mode
Summary:
As businesses grapple with fragile supply chains in a world where black swans have become commonplace, what steps can they take to shape up?

Three black swans on a lake © Wallenrock - shutterstock
(© Wallenrock - shutterstock)

Businesses the world over are grappling with suddenly fragile supply chains. Shipping costs have soared due to clogged ports and a shortage of empty shipping containers. This week, news came of factory shutdowns in China due to power cuts brought on by slowing coal production. In Britain, the government has invoked emergency powers after a shortage of fuel tanker drivers sparked panic buying by drivers at the pumps. Even more bizarrely, the British government is subsidizing a US company to continue fertilizer production it had halted after a spike in natural gas prices — because the carbon dioxide produced as a by-product turns out to be vital to the country's food supply chain. Who knew of the crucial dependencies between such diverse activities?

Each of these on their own would in the past have been regarded as a black swan event — something seemingly so rare that it couldn't possibly have been foreseen. And yet it's as though an entire flight of black swans have suddenly landed as part of some long-cycle migration pattern that is turning the unpredictable and the unprecedented into an everyday circumstance. Part of the explanation is a continuing imbalance between demand from countries where extensive vaccination programs have enabled economic recovery, and supply from largely unvaccinated regions. Anne Robinson, Chief Strategy Officer at supply chain planning vendor Kinaxis, elaborates:

While many of us are in the privileged position of being able to have had access to vaccines — and hopefully we've partaken — there are many parts of the world that have not. Those areas with lower cost labor are often the spots where the beginnings of the supply chain start. That has led to so many of the complications that we're facing right now in terms of availability.

That's probably just the start of it. We still have factories shut down, but there's been pent-up demand for so many things over the last few months as well. So we're seeing rushes of demand on different products and different services. It's also cutting into the availability. Everything's out of whack.

I last spoke to Robinson in July, in wide-ranging discussion on the changing role of enterprise supply chain management. With Kinaxis preparing for the fall edition of its Big Ideas in Supply Chain virtual event next week — you can follow all our coverage here — I took the opportunity to catch up with her again. I was curious to hear what advice she has for businesses as they grapple with today's baffling supply chain landscape. Here's what she told me.

Know your supply chain

Many companies are only in touch with their immediate suppliers — but they may be highly dependent on third-, fourth- or fifth-tier suppliers that provide a vital component that could hold up production of the finished item they're waiting on. Robinson explains:

They might be aware of their first-tier suppliers, but they probably have little to no understanding of the depth of their supplier network. Who's doing what? What are they using? Where are they located in the world? Are you 90% of their spend? Or are you 5% of their spend? ...

If you're out of a third-level part, it may not be your most expensive, it might not be your most fragile. But if you are missing that tiny widget, you're going to stop your supply chain. You really need to have that full transparency.

The impact of chip shortages on the motor industry is a classic illustration of this principle, as Mary Barra, CEO of General Motors, highlighted in comments during a Workday event earlier this week:

I think everyone has now even a better understanding of how complex the automotive supply chain is and how global it is ...

It is definitely changing the way that we're sourcing. Really, it's communicating far deeper into the tiered structure. Because General Motors, we buy very few chips on our own, it generally is through our tier ones and tier twos. So we're re-evaluating and having direct relationships with tier two, three and four suppliers to make sure we're going to have secure supply.

Reduce information latency

The classic trade-off in supply chain planning is between information and inventory. Better information has allowed businesses to hold lower inventory, making supply chains leaner. I asked Robinson whether perhaps we've become too complacent during periods of minimal disruption — in the UK, the government-approved closure of a huge storage facility in 2017 has exacerbated the recent spike in nautral gas prices, while domestic gas suppliers have gone bankrupt after failing to hedge against rising prices. Have we cut costs too rigorously and become vulnerable as a result?

Robinson points out that, in many ways, supply chain planning is now far more sophisticated than it ever has been in the past. The trouble is, our customers have equally sophisticated expectations. She elaborates:

We've got better tools than we have ever had before. We've got better communications than we ever had before. We have so many more options than we've ever had before. So from if you think about our counterparts, 25 years ago, 50 years ago, we're in a completely better situation. But is it more fragile? Yes, because the expectations of the consumer are so much higher.

She puts the emphasis on removing any latency in gathering information about what's happening — not only in the supply chain, but also on the demand side, making it possible to take action more rapidly. She explains:

If something does happen, I don't want to know tomorrow, I want to know in 10 minutes. If you have a line in a factory go down and all of a sudden your yield goes from, say, 97% on your chip manufacturing, and now it's at zero, because you're making nothing, I want to know that as soon as I possibly can.

That means taking advantage of automation and machine intelligence, so that supply chain practitioners are not spending time collecting and validating information that machines could be doing for them, but instead applying their expertise at resolving the issues as they arise. She says:

In those moments of this disruption, you want the human. I want to be there, if something is that next black swan event, I want to be able to know the context of the situation, collaborate with the most relevant people and put it into the story of the moment to make the best decision possible.

How can we balance all of that computational algorithmic superpowers, automate as much as possible, but use the humans for what they're best at? That is, having that conscience, understanding the context and being able to collaborate to make the best decisions.

Look at all the angles

Can we ever have enough information? External information such as social media signals, news alerts and weather forecasts are all becoming useful aids to planning for variations in supply and demand. But how do you know you've got every pertinent piece of information? Robinson cites the example of a coffee shop chain that examined all the parameters that forecast the success of a new store location, and found that the most important factor was whether planning regulations allowed a sign that stuck out sideways so it could be seen from down the street. Would you have thought to include that in your models?

Also don't forget about managing demand, she advises. Build relationships with customers so that you can find ways to influence their consumption patterns with discounts, incentives and guidance.

Dual sourcing won't save the day just yet

One of the responses to recent disruption of long-haul supply chains has been to look at sourcing from more local alternatives. But Robinson warns that oftentimes this won't deliver results quickly enough to help with today's issues. There are regulatory hurdles to overcome, the necessary skills may not be available in the local labor pool, and even without those extra obstacles, it still takes months, and more usually years, before a facility becomes operational. She concludes:

It's not just as easy to say, 'Oh, I'm gonna build a factory up the road and we're gonna start making widget ABC.' It takes time. It takes effort. It takes skill. It takes regulation. If all that comes together, sure!

Having said that, there is more talk these days about 3D printing as an alternative means of sourcing certain components, she says. The technology continues to improve and while it's not speedy enough to produce parts in huge volumes, it may have a place for some hard-to-source components.

My take

Supply chain disruption remains a big talking point as the reverberations of last year's pandemic lockdowns continue to ripple through the global economy. Enterprises need to bring supply chain management and planning out of the back-office and into strategic decision-making to ride out this ongoing turbulence.


For more diginomica stories from Big Ideas in Supply Chain Fall Event 2021 visit our Big Ideas in Supply Chain Fall 21 event hub. The virtual event runs from October 5-6th and sessions will be available afterwards to view on-demand until further notice. Click here to register now.