Future-Proofing Your End-To-End Supply Chain For 2023

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If the last three years taught us anything, it's that we can't know the future. Addressing the following six key areas will ensure your operations can triage quickly in an unstable economic environment.

The storm clouds are gathering, threatening much worse than the current cold drizzle. Bank of America, Lombard Research and many others project recession will be with us by the end of the year. This is reflected by deteriorating CEO confidence in Q3 according to The Conference Board’s Measure of CEO Confidence™, with findings indicating CEOs are preparing for weakening economic conditions ahead. Consumer confidence has shown a mixed improvement since hitting its lowest levels post-pandemic, with the job market, inflation, interest rate hikes and short-term finances among top concerns.

Given this volatility, leaders must prepare for a wider range of outcomes that have reasonable probability of occurring. The coming year will likely bring an underlying shift and realignment in power dynamics between supply-side (less power) and buy-side (more power) with a ubiquitous focus on cash. Future proofing the end-to-end supply chain in this environment means shifting from finite scenario planning to a “read and react” strategy focused on key markers to ensure your business and operations can pivot quickly to a rapidly changing economic and supply chain environment.

Executives who have multi-tiered business continuity and enhancement plans in the following six areas are well-placed to strengthen supply chain visibility, agility, optionality and resilience in times of volatile change.

1. Optimize your network design and manufacturing/distribution footprint.

The adjustments made during the pandemic will not prepare you for volatilities ahead, but the change from a transactional mindset to a strategic mindset within your supply chain workforce will remain essential. In today’s uncertain world, companies need short interval planning and strategy setting that continually aligns their supply chains and manufacturing and distribution footprints to respond to changing demand trends and disruptors.

Across our client base, we are seeing several organizations evaluating assets amongst utilization shortfalls or considering adjacent markets to counter relatively clear consolidation plays. Whether a slowdown has already triggered these discussions, or your business remains in a relatively strong market, visibility manage risk and capitalize on opportunities to protect profitability through agility rely on staying closely linked to manufacturing footprint and distribution network performance. The traditional goal for goals of getting closer to your customers, while optimizing costs remain, but cannot be considered with understanding the trade-off with resiliency.

For example, one of the largest agriculture and industrial producers in the world wanted to improve their operations and inventory visibility, create a digital model of the end-to-end supply chain, harmonize data across functional silos and automate decision-making. We ran several scenarios that evaluated the number, size and location of their distribution centers and storage locations across their network. Following a proven approach from analysis to implementation of digital solutions, the company improved EBITDA by tens of millions of dollars, enhancing its agility and competitive position in the market.

2. Test the balance within your approach to Sales, Inventory and Operations Planning (SIOP).

A traditional SIOP approach dominated by one element of the business is no longer enough.  We regularly work with sales or engineering led organizations that result in an imbalanced approach where other functions of the organization become transactional without a meaningful seat at the table. With a recession and potentially stagflation, customers will dramatically change buying patterns, making previous forecasting models and algorithms vulnerable. Tightening SIOP planning cycles by an order of magnitude to ensure balance demand and supply while engaging dormant part of the organizations will drive responsiveness and creativity to protect the bottom line. By combining best practice SIOP processes with the network design approach mentioned above, executives can better understand cost breakdowns along the end-to-end supply chain and embed that insight into their SIOP and integrated business planning process. These decision-support tools enhance the SIOP process drive resilience as tribal knowledge is codified and revealing ways to accelerate adaption to a changing landscape.

SIOP often gets reduced to a business process with supporting tools/systems, but ultimately relies on the right operating model. Ensuring the team is aligned on business objectives, metrics, the teaming organization is clear with roles and responsibilities of key stakeholders, etc. all are critical elements to supplement the right process and tools. Getting the right people engaged in the decision process with clear accountabilities cannot be overstated as there are ample opportunities for misaligned incentives and hedging across an organization.

3. Embed resilience and optionality into your sourcing and logistics operations.

The pandemic brought to light hidden vulnerabilities that existed within a relatively efficient global supply chains. With a myriad of new stressors such as interest rates, a strong dollar, energy prices, geopolitical uncertainty, labor shortages and organizing, among many others – enhancing supplier and distribution optionality with an appropriate balance between onshore, nearshore, and offshore is now more important than ever. No one was prepared for the pandemic, nor should companies spend the time and resources to prepare for similar black swan events. What can be accomplished is generally preparing for unknown unknowns through identifying, screening and institutionalizing a higher level of optionality and visibility into business operations through a myriad of tools from traditional dual sourcing to vertical integration to inventory strategies.

The trade-offs early in product development for fragmenting scale are often used as a premise for risk concentration. Working with our clients we endeavour to build a broader fact base early in the program lifecycle on the value of optionality both in ‘normal’ production and continuity planning.  The cost of an extra set of tools or qualifying an internal site as a backup source of supply is often not considered during trade-space discussion where only very simplistic supply and demand scenarios are considered. The incremental cost of this resilience enables companies to pivot and react to increasingly volatile markets is still difficult to size but has earned a discussion.

4. Establish cash management ‘standards’ in supply chain and operations.

Cash is Queen, more so during times of recession and inflation. Executives are already under pressure for cash relief to navigate the current global environment. With over 80 percent of a company’s costs and working capital tied up in the supply chain and operations, according to the Global Supply Chain Institute, you can’t afford to superficially assess this core area of focus.

To preserve cash, in addition to optimizing your accounts payables and receivables processes, executives should first think about resetting raw material cost expectations with signs of deflation already showing in post-peak material pricing. We are seeing a supply base looking to engage in longer term arrangements to secure demand as a softening market reduces their negotiating leverage. Get ahead of the curve before your market forces encourage competitors to start pricing in reductions to consumers.

As a management consulting firm focused on end-to-end supply chain, the right levels and positioning of inventory have become increasingly important and is drawing the most current interest from clients amidst unstable and softening demand patterns. Looking at the inventory through the key levers of service levels, forecast accuracy and supply chain / operational constraints remains foundational. As important is building in standard expectations for raw materials, WIP and finished good congruent to the set-up of your business. This provides and instant view of where the business is vs. expectation across the value chain.

Additional visibility, coupled with a more effective SIOP and network design will also provide an opportunity to reduce costs in MRO, plant, machinery and fleet management. These should be in line with a reduction in customer demand and tied to an optimized demand/labor management plan. Finally, take a hard look at planned investments in automation, network expansions, innovation or other capital expenditures. They need to be prioritized, with a clear line of sight into ROI and timing to drive accountability.

5. Strengthen contingency planning.

Do you have a recession playbook? If not, you should. With some raw material prices continuing to rise while others drop significantly, executives need to prepare for customers demanding price reductions or even delaying orders – but all action must be tailored to the industry and business in play as effects are unique, sometimes even within different lines of business. To mitigate risk, we recommend not only looking at suppliers, but also driving visibility into suppliers’ suppliers. Further, in our discussions with CEOs, they tell us they need help with uncertainty across a wide array of issues such as: lead times, post-covid consumer shifts/branding, SKU rationalization, rising costs, labor shortages, addiction to price increases, stagnate growth, etc.

With inflation, geopolitical tensions and the threat of recession rising, having a plan B will not be enough. Companies need a structured approach to consider higher variability and how they plan to react and what escalation and contingency planning looks outside those finite outcomes. With the debate on a ‘hard’ or ‘soft’ landing from interest rate hikes ongoing in the U.S., preparing for a short and shallow and a depression both have merit.  Establishing a low-calorie playbook while also thinking about the back end of that recession is a tough ask as organizations struggle with ambiguity as much as individuals.

6. Accelerate your approach to practical environmental, social and governance (ESG) with ROI.

ESG hype sometimes overshadows its practicality, but most CEOs consider it a matter of ‘when’ not ‘if’ sustainability considerations will be elevated and prioritized by C-Suites alongside growth, profitability and other traditional business objectives.  Managing potential risks of poor ESG hygiene that could threaten brand integrity overnight while setting a structured path to focused and sustainable improvement is the balancing act facing most CEOs. ESG lands as a top-10 business priority for CEOs according to Gartner’s survey for 2022-23 and is likely only to increase in urgency with a retiring baby boom generation being replaced with a much more ‘purpose’ driven entry level workforce matched by increasing shareholder scrutiny. Executives are in search of effective ways to accelerate their approach to accounting for and netting out greenhouse gas emissions, sustainable sourcing, and gain transparency across their end-to-end supply chain to reduce risk but also develop an engaged workforce and capitalize on the emerging consumer demand for sustainable products and services.

Executives can apply a meaningful ESG or sustainability lens as they review their plan, buy, make and move operations. Reviewing your carbon exposure as you optimize your footprint, seek to gain transparency to risky working conditions, and learn of potential supply discontinuities all present ESG improvement opportunities linked directly to business objectives. ESG requirements and reporting are expected to become more rigorous and invasive, CEOs that prioritize sustainability ahead of regulation will have a first mover advantage and opportunity to develop, potentially exclusive, partnerships with a limited resource pool of ESG innovators in the marketplace to drive ESG with ROI.

The Smart Way Forward

The impact of rapid change on the end-to-end supply chain over the last three years are evident. Addressing the six key areas highlighted above is a health check to ensuring your operations can triage quickly in an unstable economic environment. If you haven’t added strategic talent and brought the supply chain organization into your core strategy planning, evolving risks will threaten hard won stability gained since the start of the pandemic. Continuing to invest in and leverage the talent and capability you have built over the last few years is the first step in alleviating the likely challenges ahead.

As we begin to see a rebalance of demand and supply with post-Covid consumer demand finding a new normal coupled with capacity increases for trends with staying power, leverage will begin increasing for consumers back in the value chain despite efforts for major players to hold on to high margins facilitated by pricing. As such, the above factors should be considered in the light of a broader holistic supply chain and operations perspective. Focusing on a single element for incremental change will not be enough. A more systems-level (end-to-end), enterprise-wide approach, will ensure that you overcome short-term challenges while institutionalizing a resilient, efficient and opportunistic end-to-end supply chain operating model.

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