The recent pandemic has affected every part of the value chain, from raw material sourcing to end customer. It is testing the commercial, operational, financial and organizational resilience of the majority of companies across the globe. COVID-19 has highlighted risks and resiliency gaps for many organizations. CEOs are looking to get on the front foot when it comes to disruption and innovation, with 67 percent saying they will increase investment in disruption detection and innovation processes.1
As the effects of COVID-19 continue to impact the global supply chain, how should businesses seek to build resilience into their supply chains moving forward? Below are some of the major disruptions effecting supply chains and strategies that are being rapidly deployed by leading organizations to help build resilience and agility.
1. Logistics disruption
The ongoing global logistics disruptions stemming from the COVID-19 pandemic continue to impact businesses and consumers as the flow of consumer goods into key markets such as North America and Europe, South East Asia and India is restricted by the continued shutdowns of major global ports and airports, largely in China, South Korea, and the US.
The major logistics disruptions create a ripple effect across global supply chains that ultimately cause goods to pile up in storage, impacting those ships on their way to ports through diversion or being slowed down as they arrive at major transit hubs, thereby restricting global trade flows and limiting access for businesses to import products and refill their stocks of inventory.
Many reports highlight the very-high likelihood that the December 2021 and January 2022 festive seasons across the region will likely be severely impacted by restricted access to imported products. However, the challenge for many businesses within some of these markets is that it may go well beyond the next three to four months, as there is a likelihood emerging that these disruptions will continue well into 2022 and beyond.
Assuming that these disruptions recede and access to sea and airfreight reverts back to pre-pandemic levels, it will likely take some time before things simply return to normal. In the interim, you should expect to see higher prices (as excessive freight costs are passed onto the consumer), and longer waits for retail shelves to be replenished (especially imported products). Consumers should reset expectations, as items requiring repairs and maintenance could also be delayed in lengthy service queues.
Government and industry leaders are seeking to define strategies that build resilience and boost our domestic capabilities, thereby becoming less reliant on regional and global supply chains. Companies should look to re-design alternative supply chain flows, inventory storage capabilities closer to their customers, and determine how to best enhance last mile deliveries and returned goods.
2. Production delays
Production delays during COVID-19 have become headline news. Manufactures are competing for limited supply of key commodities and logistical capacity, leading to consumers experiencing empty shelves and long purchase lead times. However, it's not all doom and gloom. The pandemic has intensified the focus on supply chain evaluation and evolution. Industry is evaluating and investing in their long-term supply chain strategies, paving the way for a new post pandemic normal.
The days of buffering inconsistent supply with excessive inventory at the lowest purchase cost are quickly becoming a relic of the past. Manufactures are evaluating risk first as a key decision point in their supply chain development.
Through awareness, and necessity to maintain a competitive edge, industry is being propelled to address many long-standing supply issues, re-engineer products' specifications, leading to more resilient and cost-effective supply chains that can position their respective organizations as leaders in this new normal.
3. Over reliance on a limited number of third parties.
Despite the inherent risk associated with focusing on `one major trading partner', many businesses have strong relationships with one major supplier, one large customer (or export market) and/or one major supply chain partner. As we emerge from the COVID-19 slowdown, many businesses recognize the need to better equip their supply chains by identifying alternative trading partnerships. They are actively seeking a broader list of suppliers, alternative markets/customers and alternative transport and logistics providers. Supply chain leaders are also turning the attention of their organizations to third and fourth parties ongoing risk monitoring to not only address inherent and residual risks in near-real time, but also cyber and counterfeiting risks.
Businesses can build greater agility and resilience into their supply chains by working with providers who provide new capabilities as a service. New technologies (trading systems, planning and analytics capabilities etc.) and additional logistics requirements, provided as variable cost solutions rather than long-term fixed overheads, thereby providing more flexibility and better cost control. The outcomes can create a more diversified and strengthened supply chain with greater potential for risk and cost mitigation in the future.
4. Doubling down on the technology investment
The initial investments made in the previous 18 months by many companies were aimed at automating key nodes within the supply chain (such as intelligent automation used to enable efficient, effective and safe operations) including stores, warehouses, manufacturing facilities and even corporate office buildings. In 2022, you should expect to see an accelerated level of investment as businesses seek to enhance critical supply chain planning capabilities by adopting more advanced digital enablers, such as cognitive planning and AI-driven predictive analytics as well as adding greater integrity and visibility into secure supply chains by using advanced track and trace and blockchain technologies.
One can observe that many supply chain managers are currently troubled by a lack of visibility throughout their extended supply chains, as there are so many nodes and participants within the extended chain. Leading organizations are using advanced technologies to significantly improve visibility and thereby become far more responsive to major disruption and variability within their domestic, regional and global supply chains.
5. Commodity pricing
Today, supply chain and procurement professionals are expected to have much more knowledge of categories rather than just being negotiators. A deeper understanding of commodities helps in leveraging the necessary levers and understanding the right price of purchase.
Spend transparency remains poor. While the category price is available, the detailed break up of price in terms of the material component, wastage, conversion, labor, premium added are not defined. Often category pricing is not indexed to the basic commodity price, which has produced cases where the category prices don't move in sync with respect to commodity pricing, for example the pricing of paper-based packaging such as corrugated boxes - very few organizations have a scientific way of indexing prices for these items. In many organizations, commodity purchase decisions are more based on experience than based on a structured mechanism. Timing of purchase and quantity becomes crucial while making these decisions.
To overcome this, teams are focussing on digital transformation and technology - seamless flow of information across value chain and insights delivers faster decision making. Organizations are leveraging spend analytics tools and software packages to increase visibility of where, how and when they spend. Consolidation of spend enables improved buying leverage and negotiating power to help drive value or push for improvements. Often spend consolidation acts as a precursor to vendor consolidation and ESG segmentation and helps in reducing the variation in quality and pricing for the same type of product / service across geographies
6. Workforce and labor
The COVID-19 period has been riddled with uncertainties and labor market shortages have further complicated post-COVID-19 recovery scenario for many industries. The shortages are for both white and blue collared workers alike in terms of both skills and numbers. Apart from the labor constraints due to the improvement in post-COVID-19 demand, there are several other non-COVID-19 related factors in play that organizations should look into to mitigate the staffing related issues.
The onset of new technology has fundamentally changed the way supply chains operate globally. The consumers are becoming more demanding, and this is leading the supply chains to change and evolve at a faster rate. Modern operations are focused on technology and innovations, and as a result, supply chains are becoming more complex. With this, the boundary between blue collared and white collared workers are diminishing. Technology cannot operate in silos and it needs workers equipped with right skills and capabilities. Hence, supply chain and manufacturing operations need a blend of both physical and technological skills to sustain and grow at present and in the future.
The changes in the demographics are also impacting the overall resource pool. Organizations should rethink their approach to recruit and engage Gen Z, who will increasingly become part of the active workforce in the near-future. The motivations and aspirations of new generations should be considered to keep the younger cohort of workers inspired with a purpose.
With these aforementioned supply chain issues dominating board-level discussions for some time now, many organizations have experienced a resulting loss of focus on their existing transformation mandates. Driver shortages, logistics provider capacity issues, inflation, shipping delays, increased freight costs, depleted inventory levels, labor shortages and dealing with demand peaks have all dominated discussions and required attention. Operational leads have been required to shift their focus from large change projects to keeping the business running day-to-day and ensuring both staff and customers immediate needs are satisfied. Boards are now learning how to balance the oversight of crisis response with the strategic thinking that is required beyond these immediate challenges.
Whilst they have been taking a back seat over the last 12-18 months, it is however these transformation mandates and their successful implementation that are likely to determine an organization's success post-pandemic. It is now more important than ever to ensure operations are as flexible and resilient as possible, so it is vital that these projects are carried out, keeping operations up to date and avoiding unnecessary added cost and resource requirements that can be experienced if existing operations are not modernized.
Management should ensure that they adopt a scalable, crisis management process, ensure they have sufficient leadership capability in place, and document their experiences and learnings throughout the pandemic to ensure they are able to balance the short and long term priorities so focus on essential change projects is not lost.
There are several considerations to assist companies as they face these challenges:
- Operations should be flexible and resilient enough to adapt and adjust in real-time to changes in trade flows, new regulations, the impact of COVID-19, climate change, trade tensions and other geopolitical movements.
- Technology should be effectively utilized to help reduce operating costs, provide visibility, and diversify the way customer needs are met.
- Capability to adapt to digital operations and drive actionable improvements from data is important.
- Fleet management and supply chain networks should be responsive to increasing customer requirements.
- Collaboration and supplier partnerships, and ongoing risk monitoring are all needed to de-risk the supply chain.
To address the rigidity, companies should focus on building a network of trusted vendors (customers, supply chain partners, and suppliers) to help manage disruptions and support business continuity. Cultivating a resilient supply chain means that the organization can be better at anticipating, reacting and planning against the unexpected by enabling cross-functional integration and collaboration with its ecosystem of vendors.
KPMG professionals work with clients to develop detailed supply chain strategies. These strategies facilitate full gap analysis and implementation of tested approaches through integration of target operating models. Strategic elements include evaluation and recommendation of alternate sourcing markets, inventory reduction strategies, service level up time improvements and adopting strategies that build in supply redundancy and incentive-based supplier performance criteria.
KPMG Powered Enterprise | Supply Chain is an outcome-driven solution designed to support your organization in addressing the challenge of organizing a complex, dynamic supply chain. It helps you to better meet the demands of customers and respond to market changes, while striving to maximize efficiency gains both now, and in the future. A helpful jump-start to your digital transformation, enabled by technology and real-time insights.
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1 KPMG 2021 CEO Outlook