Navigating the Realm of Resilient Supply Chains and Risk Management

Strap in for a knowledge-packed episode as we plunge into the world of resilient supply chains, illuminating how they serve as an undeniable pillar of modern business strategy. Ever wondered how you can bolster your supply chain's resilience without letting go of cost efficiency? Pulling insights from President Biden's Inflation Reduction Act, we dissect the elements that expose supply chains to vulnerability and discuss the ripple effects of demand amplification and disruption. We also unpack the notorious bullwhip effect and its impact on supply chains, while delving into the mysterious VUCA model.

Prepare to navigate the stormy seas of geopolitical tension, labor shortages, and the ever-changing global economy, as we address how businesses can mitigate the potential risks looming in their supply chains. We uncover the top ten benefits of possessing a resilient supply chain, highlighting improved reliability, reduced risk of disruption, increased efficiency, cost savings, and much more. And we don't stop there. Listen in as we share priceless strategies for managing risk, from investing in cybersecurity and building redundancy into supplier networks, to the paramount importance of understanding supply chains at the boardroom level. Tune in for an insightful journey through the realm of resilient supply chains and risk management!

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Transcript

Tony Hines: 0:20

Hi, I'm Tony Hines and you're listening to the Chain Reaction Podcast, all about supply chain advantage. Thanks for stopping by today. Well, we've got some good things coming up and I hope you're going to enjoy the episode. We're going to talk about how to make your supply chain resilient and the things that you can do to achieve that, while not taking your eye off the focus of cost efficiency and other objectives that you might have. Well, you may recall, since the pandemic, we've talked a lot about resilience and, of course, in the United States, president Biden introduced the Inflation Reduction Act, and that was all about stimulating the economy, but the emphasis was on controlling inflation too. So the idea was control inflation, keep that under control, but keep the economy going at the same time. He also took a number of steps to make supply chains more resilient and we'll talk about those in just a moment, which is about making supply chains more resilient. And one got the feeling that this making supply chains resilient was a very important aspect of the future of managing supply chains. And when we talk about resilience, resilience also means that those supply chains are protected from the threats that come from outside, externally to supply chains. So all the things that we experienced in the pandemic, such as disruptions, delays and, of course, threats to suppliers because of lockdowns in China and elsewhere. And so when you talk about making a supply chain resilient, it's about making sure that the supply chain can respond when it needs to and, of course, in a military context, that's very important, and a lot of the talk about resilience in the early days was to do with military supply chains and it was about making sure that you had sufficient suppliers to keep planes flying, ships moving and, of course, armed forces enabled and ready. What makes supply chains vulnerable? Well, the acronym that comes to mind is from the US military, called VUCA Volatility, uncertainty, complexity and Ambiguity and it's about tackling those four things that make supply chains resilient. So let's take a look at them Chaining, reaction, reaction, reaction, reaction. Let's take a look at volatility first.

Tony Hines: 2:55

Volatility happens in a supply chain for all kinds of reasons. It can happen through something called demand amplification, and that's when a signal is passed up the supply chain, perhaps from a retailer to a wholesaler, to a supplier and up to manufacturers and, of course, producers, so you can go right up the chain. But each stage in the chain, as that demand is signalled to each of the stages in that chain each of those, what we might call, nodes the retailer, the wholesaler, the manufacturer, the producer and so on. Then of course what can happen is that demand becomes larger at each stage, and so the signal oscillates from perhaps a very low demand figure to a very high demand figure as it's passed upwards, and that's called the bullwhip effect, and that was first noticed by Jay Forrester when he looked at industrial dynamics. What happened when producers made goods and demand was signalled to those producers to produce more, and so that bullwhip can cause volatility.

Tony Hines: 4:08

But it's not just demand amplification that can cause volatility, it's disruption, perhaps shortage of container boxes, factory closures, strikes, natural disasters, earthquakes, volcano eruptions, weather freak storms and, of course, man-made things like wars. So there's a whole range of things, activities, factors that can shape disruption, and it's about identifying the source of disruption and tackling that source. Now there's not a lot you can do about the natural disaster very easily, the difficult to predict, the difficult to prevent, and that's where uncertainty comes in. It's about uncertainty and risk, and we'll come to that a little later. Now a lot of effort has gone into trying to make supply chains resilient and of course it's become perhaps the number one aim for many organizations since the pandemic. So let's take a little bit more of a deeper look at why building resilience is so important. In today's globalized world, supply chain resilience has become a critical aspect of business strategy, and here we look at the top 10 benefits claimed as reasons to build that resilience supply chain.

Tony Hines: 5:31

Number one improved reliability. A resilience supply chain ensures that the consistent flow of goods and services. For example, during the COVID-19 pandemic, companies like Amazon were able to maintain operations due to their resilient supply chains, and they made sure that customers got their orders on time despite the pandemic. So you can see that improved reliability is perhaps the most important aspect. Secondly, reducing the risk of disruptions. Resilient supply chains can significantly reduce the risk of disruption. Toyota, for example, was able to recover quickly from its 2011 earthquake in Japan due to the robust supply chain risk management strategy is already employed by Toyota. In other words, they were prepared. Its preparedness, perhaps, that we're referring to here as one of the key practices that all supply chains need to think about. Then we come to increased efficiency and cost saving, and you may not always put the two together, thinking that efficiency and cost saving is part of resilience, but it can be. Resilient supply chains can lead to more efficient operations and they bring significant savings. Apple, for instance, has a highly efficient supply chain and, as well as designing great products, they're able to keep costs down while they maintain high quality standards.

Tony Hines: 6:56

The fourth thing is enhanced customer satisfaction. By ensuring the timely delivery of products and services, businesses enhance customer satisfaction, and so if you want to be focused on the customer, then one way to achieve success for both the supplier and the customer demanding the goods or services is to ensure that you deliver on time and complete, and that brings with it customer satisfaction. It also brings along trust. The customer will trust you and that trust will result, most likely, in further orders. Further business. Zappos, an online shoe retailer, is known for excellent customer service, and that's largely due to its efficient and resilient supply chain.

Tony Hines: 7:39

Number five strengthening the reputation and increasing competitiveness. Walmart, for example, has a strong reputation for its efficient supply chain, which allows it to offer low prices, but it's also very keen to build resilient supply chains so that it can maintain reputation, build further reputation and stay competitive in the marketplace. Number six is returning to something I mentioned earlier, and that's preparedness for potential risks. This time, businesses with resilient supply chains are better prepared to handle potential risk and uncertainty. Starbucks, for example, has a diversified supply chain that helps it mitigate risk associated with coffee bean shortages, and there are other companies where you'll find that if there's crop failures in certain parts of the globe, they have other suppliers set up to deliver the raw materials they need for their business, so they can keep the supply chain moving and they can continue to satisfy customer demand.

Tony Hines: 8:40

Number seven stability and continuity. Resilient supply chains promise stability. They give continuity. So, even in times of uncertainty, resilient supply chains bring with them stability and continuity, such as that during the Suez Canal blockage in 2021, companies with resilient supply chains were able to re-root ships and minimize those disruptions. So, although there was a cost to many organizations and obviously some businesses were disrupted, the ones that were more prepared and were able to have strategies in place through that preparedness were able to deliver goods that were needed despite the disruption caused by the Suez Canal blockage.

Tony Hines: 9:26

Number eight responsiveness to market opportunities. Nike, for example, has a flexible supply chain that allows it to quickly adapt to changing fashion trends, and perhaps fashion businesses have always been responsive to market opportunities, because that's what fashion is. That's what it's about. It's about identifying a trend and then designing products rapidly to meet that demand in the market and resilient supply chains. If you've got supply chains that are resilient, that will enable faster response times.

Tony Hines: 9:58

Number nine agility to recover from disruptions. Having agile supply chains is very important in a disruptive age and we've experienced that and we still are experiencing the age of disruption. So if you can build those resilient supply chains and you can be fleet of foot, the agile to move production and distribution networks around, reconfigure them at scale at pace, then you'll be more successful than those organizations that can't. After the Fukushima disaster in 2011, nissan was able to recover faster than its competitors because they had more resilient supply chains. So resilience again featured in the ability to be agile and recover fast.

Tony Hines: 10:45

10. Financial Benefits Investment in supply chain resilience can deliver significant financial benefits and, according to one study by Accenture, companies with resilient supply chains have seen 15-25% improvement in plant output and a 20-30% rise in customer satisfaction. Those are big numbers. So, in conclusion, building that resilient supply chain not only helps business mitigate risk, but it also turns disruption into opportunity by adopting robust management processes. It's an investment that delivers substantial returns in the form of improved reliability, efficiency, customer satisfaction and final performance. Now you might ask why do we need resilient supply chains? So let's look at it again in a different way. We need resilient supply chains because of the risks and the uncertainties that businesses face. So let's think about this a little bit more. And, of course, it's not just businesses, it's governments and its defence systems, in that sense, or face challenging times, and so if we want to be in control of what's happening in the supply chain, we need to make sure that it is going to be resilient and it's going to react and bounce back when something disruptive happens.

Tony Hines: 12:04

And that disruption can occur for all sorts of reasons, and you've heard me talk before about my 7v model, where I look at volatility and the velocity, visibility, variability, virtuality, all the things that make a supply chain vulnerable, and we can focus right down to some common supply chain risks. It may be, for example, that there's poor supply performance. A supplier's financial health is often a reliable predictor of how they will perform. If they're struggling financially, that might be for a cash flow reason or other reasons, but if they've got poor financial performance, they might not be able to get their own materials in and perform their own processes to get goods to you at least on time and complete. So, before you start, if you're going to supply that not meeting its own performance targets, then perhaps you should think again and design your supply chain with other suppliers as backup or replace the poor performing suppliers. I mean, the first thing you should do is actually replace them, and the second thing is, of course, to have contingency plans in place. This is that preparedness again, however, there are other factors that should be considered when looking at both internal and external factors that might impact performance, such as political disruption, financial dependence, natural disasters and, of course, disasters caused by people Maybe wars, maybe pollution, leading to some kind of disruptive uncertainty.

Tony Hines: 13:44

And during the pandemic, for example, demand patterns changed significantly because people were confined to their homes. But now that they're out and about again, companies need to adjust and they need to buy more materials, get those supply chains moving to satisfy the increased demand. But they don't know necessarily how much more, and so it makes it difficult to plan for the type of demand that the future brings. So demand planning complexity is quite an issue. And of course, we've had global labor shortages, with the shortage of school labor, which can disrupt production and it can increase costs, of course, as the price of labor goes up. We've had inflation, which has hit the cost of raw materials, labor costs and everything else that businesses buy, energy and overheads that they incur all become more expensive. We've got a very volatile global economy, and this fluctuation of demand and supply means it's far more difficult for companies to plan effectively. We've also got increasing complex regulatory environments. Changes to regulations can impact various aspects of the supply chain, from sourcing, manufacturing and distribution, and we've seen that in the United Kingdom, with leaving the European Union, that caused all manner of disruption to what were relatively smooth and frictionless supply chains I wouldn't say totally frictionless, but at least there was a lot less friction in the pre-Brexit era than there was after it. And so these regulations do impact the way supply chains can actually work.

Tony Hines: 15:23

We've got increasing geopolitical tension and that's causing risk. From that source, political instability and the wars we've had in Ukraine and now in the Middle East, in Gaza, have quite an impact on the world economy. And so it's not just in those centers where the activity is that's problematic in supply chain terms, but it's the knock-on effect, the ripple effect, that spreads out from it. There's also reputational risk, so any events that disrupt your supply chain are likely to hit you in the reputation department. So you have to prevent your reputation from suffering. You've built your reputation over a long period of time and you want to keep it where it is, and that's difficult when disruptions occur. They're not your fault, but nevertheless you need to resolve them to satisfy your customers.

Tony Hines: 16:19

And then there's natural disasters and climate change risks. So things like earthquakes, floods, extreme weather conditions all disrupt production and distribution. And then in the digital world. Cyber attacks have increasingly threatened and actually disrupted supply chains, and they also compromise sensitive information that you might be holding about customers, products and all sorts of things the normal data that you keep inside your organization. Then we've got legal risks. You might fall foul of a customer's wish to sue you for a breach of contract, or there might be non-compliance legal risk that you have to deal with because you're not meeting the regulations set down by governments and you have to incur legal cost. There may be legal risks from things that you're unaware of, but of course, being unaware is no defense. Then there's environmental risk from things like having sustainable products and maintaining those sustainable products and those sustainable supply chains, because you don't want to contribute to CO2 emissions or to polluting rivers with plastics or nitric oxide and so on.

Tony Hines: 17:36

And then there are labor strikes. They can disrupt supply chains too and production can be hit and that can upset the market and you can lose your reputation again through such things as a labor strike. Raw material shortages might also halt production. The government might change its ideas on regulation, it might change its policies towards something, and that can all impact supply chains. So these are uncertainties. Government's job is to create certainty in the business environment, but sometimes they don't. They actually create more uncertainty than certainty, and then suppliers may go bankrupt, or they might just be inefficient, so they can't deliver on time or they can't deliver the quantities that you want. And then, of course, there's hostile actions taken by other states or terrorist attacks. There are thefts, criminal activities, corruption, acts of war. All those things can disrupt supply chains, and that in addition to all the other things that can go wrong in the supply chain, such as transportation issues, shortages of supplies of transport, distribution, raw materials just the normal everyday things that create risk in our supply chains, and so that's why it's important to have strategies in place that can reduce and mitigate that risk.

Tony Hines: 19:07

So the key question is what should you be doing to mitigate supply chain risks? Well, it's a combination of strategic planning, investment and technology, as well as building strong relationships with suppliers. So here are some of the strategies you may want to think about. You can strengthen supply chain risk management by improving end-to-end transparency, by creating a total view of the supply chain to identify any weaknesses, even some that may be hidden, so to unpick them and to look at the reasons why there are weaknesses in the supply chain and you can very quickly, once you identify those weaknesses, you can begin to do something about them. You can invest in tools that mitigate the impact of an anticipated as well as expected disruptions in your supply chain, using things like artificial intelligence, machine learning and, of course, the Internet of Things, bringing automation into the game, bringing a digital transformation to your business, so you get better intelligence that create better insights to what's going on in the supply chain, because quite often, supply chains are full of fog, and that comes about not because anybody wants to design supply chains that aren't visible and transparent, but it happens because systems and processes don't work as they should, and so if you can get better processes in place and you can get better systems that can bring transparency and visibility to that supply chain, then that's going to improve things, and so using technology is key.

Tony Hines: 20:47

You also want to think about investing against those cybersecurity threats, because they can be significant, and you want to build robust, resilient supply chains, and you've got to keep them secure. Another thing you could think about is building redundancy into supplier networks. So identify, pre-qualify and bring on board backup vendors so that you're just planning in case something goes wrong and you have to remove a supplier from the network. So at least if you've planned for it, you've already got other people in mind who could fill the roles. The last thing you want to do is to have to replace them. I have very short notice when you've got no idea of who that could actually be, who could fill a role that somebody is currently doing maybe quite well in your supply chain, but you need to be thinking that what happens if suddenly they disappear from that supply chain? What sort of risks are you going to be facing? And then you need to plan for that contingency by having plan B.

Tony Hines: 21:49

The other thing that's quite important and some manufacturers have been very good at this over time Toyota was very good at doing this and that's to design products with common components that can help minimize any shocks to the system. So if you've got a reasonable idea of making your goods with common components, that means you're less at risk from somebody who's supplying you with something that's bespoke. And, of course, when we think about OEM suppliers, you might be thinking, for example, microchips, microchips if you have to rely on one company that makes them for you specifically and it's a bespoke chip for something that you do, then the risk is greater. But if you can buy chips which are not necessarily bespoke but can perform in different things that you make, then obviously that's the thing to do. By common components. You can also think about diversification, diversifying suppliers to help you mitigate your risk. So if you've got more suppliers in place and you've got backup suppliers on hand, then you can think about having sufficient inventory held by somebody else that you can call upon when you need it. So diversify your supply chain portfolio to spread the risk.

Tony Hines: 23:08

And also, supply chains are boardroom level concern these days. Supply chains if you don't understand them, you're in trouble. You need to know that your supply chain is central, it's the backbone, it's the nerve center of your business quite often and it has to be managed carefully. So the board and the senior managers in the organization, who aren't necessarily supply chain specialists, need to understand the strategic nature of supply chains and they need to bring some understanding of the supply chain as a strategic initiative. So push it right up the agenda. Talk about supply chains, bring it to people's attention, get the investment. It needs more investment. In some organizations it's pushed down the company and that's because maybe the people at the top don't understand its central importance to the business. And without supply chains you won't have a business.

Tony Hines: 24:06

And that brings me to think about the talent that's employed. You need to invest in talent, you need to invest in systems and you need to have good data analytics. These are three things that are central to having those things in a supply chain. Talent brings with it better understanding, better planning, better possibilities and systems to provide visibility, transparency in that supply chain, as do the data analytics. So this can help to understand supply chains, avoid issues and, of course, think about those longer term risk management goals that you might have.

Tony Hines: 24:45

Build better relationships with supply chain partners, make them strong, because cooperation can help you respond quickly when you've got a disruption. If you've got a strong partnership with a supplier, you can always call on that supplier for help, and that's very important. In any supply chain, you're not on your own, but you've got strong partners who can help you out in times of crisis. And, of course, access to real time data is essential. If you're going to adapt a transport mode, then you need to know how things are performing in real time. You can adapt distribution routes, you can plan differently and the dynamics, understanding the dynamics of what's going on in a supply chain are very important to avoid any disruptions. So, for example, if you know there's a holdup at a particular port, you can plan a shipping operation differently, you can send things by road transport or you can fly things if necessary. So, whichever way you think about it, real time data is essential.

Tony Hines: 25:46

So if you implement those strategies that we've just talked about, you can build resilient supply chains capable of withstanding disruption and at least quickly recovering when they occur. And that's the important point. It's not just about withstanding disruption although that's the best way to deal with it but if disruption happens, you can quickly recover. Well, that's it for this week's episode. I hope you've enjoyed it, I hope it's been informative and I hope you'll be able to build that resilient supply chain so that you can achieve supply chain advantage. I'm Tony Hines, I'm Simon Lough and I'll see you next time. Bye, for now.

Sheila Jepson: 26:53

You've been listening to the Chain Reaction podcast written, presented and produced by Tony Hines.