Supply chain challenges aren’t just a result of the Covid-19 pandemic—and they aren’t likely to go away any time soon.
But there are ways that CFOs can lessen their impact. Jeff Staub, CEO of Boston-based supply chain and operations consulting firm Maine Pointe, spoke with StrategicCFO360 about the complexities of supply chain issues, practical steps CFO can take to respond and how to best position companies for the future.
What is the root of the supply chain and operation challenges being faced by organizations today?
Today’s supply chain ecosystem is seeing more than the usual amount of challenges, and they are not all temporary and not all of them are the result of Covid. Pent-up consumer demand is causing an imbalance in product demand and manufacturers’ ability to fill it.
For decades cost cutting and leaning out manufacturing, supply chain and logistics has been the primary objective of middle management. The result is a finely tuned, but relatively fragile system that is experiencing a moment of resonance. Now companies are finding themselves facing what would ordinarily be the enviable position of seeing potential revenue growth—but without the resources necessary to capitalize.
Specifically, three areas are driving the largest impacts: a workforce in transition is demanding more of employers with labor shortages and skills mismatches shifting the balance of power; inflation is driving instability in commodity prices over the near- to medium-term, resulting in higher input costs and margin erosion; and supply chain shortages and high-friction logistics are inhibiting throughout and disrupting productivity.
How long are these challenges likely to continue?
We expected the unprecedented supply chain challenges we are seeing today to continue through mid-2023, with the fourth quarter of 2022 showing clear initial signs of improvement. However, due to tensions with Russia and Ukraine escalating considerably with difficult to predict implications, extended disruption should be expected with China’s posture toward the invasion and the resultant U.S. and Western Europe reaction to their position being the most important indicator to monitor.
While some factors such as Covid are temporary, they have accelerated permanent trends in consumer activities and the corresponding supply chain landscape which will be rebalancing over the next 12 to 18 months. The labor shortage will continue to be a challenge, especially for high fixed-cost operations where asset movement is difficult or impossible. While automation continues to advance, adoption rates haven’t been able to close the gap of personnel needs, with manufacturers struggling to fill over 46 percent of open roles due to a skills mismatch and a reduced labor pool this year.
The inflation factor is difficult to project. While the first signs of inflation were said to be a temporary side effect of Covid, more recent analysis from the Federal Reserve indicates it’s likely to last longer than expected. We should be prepared for the end of a very long run of low interest rates and what it means for the manufacturing and supply chain businesses.
Finally, geopolitical events continue to have an impact on global supply chains. The unfolding unrest in Ukraine will disrupt oil and gas supplies globally, and Western energy companies with presence in Russia may find it difficult to continue doing business there. This may mean higher prices in the months and years ahead. The result may also further exacerbate inflation and add to transportation costs across all commodities, including food.
Given some of the complex challenges being faced, what can executives do practically to improve supply chain performance now?
While it may be impossible to avoid some level of near-term firefighting, the best positioned companies are creatively exploring all options from band-aid solutions to structurally addressing risk in their supply chain and manufacturing strategies depending on the perceived magnitude and length of disruption. There is little that can be done by companies to address the root cause of macro factors like inflation and Covid, but companies must explore optionality in the supply chain and drive productivity in manufacturing to increase overall resilience.
Solutions run the gamut from typical to unique, including deepening supplier commitments to be first in line for available demand; changing financial postures on cash to build inventory; pulling in labor from neighboring countries; intervening directly through M&A activity; insourcing to directly manage risk; redesigning products to open up new suppliers; and even chartering aircraft to manage logistics challenges.
In addition, developing and enhancing visibility and useful knowledge through predictive data analytics, simulation and decisioning support are also allowing companies to minimize the churn created by disruption.
It’s clear that multiple risk events have exposed many supply chains. What should companies do to future-proof their business and prevent these sorts of issues from impacting them in the future?
While solving supply chain challenges now, companies must simultaneously go about the process of establishing their future supply chain operating model as well. Risk management is always challenging due to the natural short-term focus on challenges that dissipates over time.
We see two key trends accelerating due to current conditions. First, a move from traditional failure mode analysis and mitigation to structural risk management and resilience through predictive measures and optionality. Larger companies have too often relied on leverage with the supply chain to achieve outcomes, instead of utilizing their value chain visibility to put in place predictive forecasting and scenario planning.
Secondly, we are seeing a retreat from overly honed systems that maximize cost and cash at the expense of resilience and leave no room for variation. This includes re-evaluating a broader range of outcomes across key business functions like forecasting, planning, inventory strategy, logistics, mix and location of suppliers, and manufacturing footprint.
What role will digital transformation of the supply chain play in improving visibility, mitigating risks and encouraging growth?
It’s always helpful to break down digital transformation into manageable pieces. A comprehensive strategy, involving both people and process in a transformative way, is comprised of three components:
Visibility and risk go hand in hand. Digital increases useful knowledge, shortens learning curves, and supports better decision-making, while also providing real-time visibility with higher levels of responsiveness and predictability.
Digital reduces human intervention by digitizing and automating the workflow, and eliminates waste between value chain steps that typically involve multiple hand-offs with supply chains.
Digital changes business models, resulting in positive disruption to how we bring goods and services to customers.
What is the CFO’s role in re-evaluating and digitizing the supply chain?
The biggest factor in a successful digitalization is that it requires a cross-enterprise view. Too often, digital adoption is stifled due to siloed business cases. The CFO’s office is best positioned to see the end-to-end impact of digital adoption, and to help resolve the ROI question for the business while also being able to see and understand the broader strategic implications.
Geopolitical factors play a major role in supply chain challenges. What can a company do to gain control over these often-frustrating global challenges?
Neither the CFO—nor any member of the C-Suite—can control geopolitical risk, but they can understand the likelihood of disruptive forces and the impact on their business. Understanding geopolitical risk factors is essential in creating a more effective end-to-end supply chain and operation from an onshore, nearshore and offshore perspective.
Recent geopolitical tensions in China and Eastern Europe threaten relatively long runs of stability in lower-cost countries with high levels of infrastructure. These tensions look to be a long-term challenge, which begs the question of relocation to the next wave of LLC countries like Vietnam or Malaysia, or alternately, relocating to the U.S. or nearshore with the right investments, or by segmenting the process. For example, final assembly in Mexico, with global redundancy in supply and automation for key components.
It’s therefore essential for CFOs to understand the end-to-end supply chain, and know not just their suppliers, but their suppliers’ suppliers, and identify their exposure and potential sources of supplier and manufacturing optionality.