Resilience versus efficiency: the supply chain balancing act for challenging times

The Covid-19 pandemic forced supply chain managers worldwide to reassess the way they operate. Five supply chain experts discussed the latest causes of disruption and how businesses can mitigate the risks at a recent roundtable


Panel
Carolina Azar, senior director, Moody’s Analytics 
Malcolm Harrison, group chief executive, Chartered Institute of Procurement & Supply
Ralph Kirkwood, head of procurement, FreeFlow Technologies
Josue Munoz, vice president e-commerce global supply chain, Colgate-Palmolive
Christian Tchounda, chief procurement officer, Oryx Energies

Global supply chains were disrupted when the Covid-19 pandemic forced governments to impose lockdowns. The disruption, experienced by most consumers as retail shortages, exposed the fragility of supply chains, particularly those that were heavily reliant on China or involved multiple countries and regions. 

Businesses were forced to adapt, find alternative suppliers, reduce reliance on countries that introduced a zero-Covid strategy, and improve supply chain resilience, while still offering good value. Then, just as economies were reopening post-pandemic and supply chain pressures eased, new shocks, such as the Russia-Ukraine conflict and ongoing US-China trade tensions, started creating disruption.

Complex and continuous challenges 

Carolina Azar, senior director at Moody’s Analytics, says that supply chains are affected by labour and raw material shortages; cybersecurity attacks that force businesses to switch from automated to manual processes; climate and natural disaster threats near warehouses and facilities; additional local and international regulations, especially in regard to environmental and social governance (ESG), and companies struggling to stay in business or filing for bankruptcy.

“There have been two massive supply-side shocks – the pandemic and the war in Ukraine – and these two came together, we hardly recovered from one when along came the other one,” says Malcolm Harrison, group chief executive, Chartered Institute of Procurement & Supply. “But organisations that work in consumer industries have [also seen] demand-side changes.”

Harrison explains that many of the same products were still being consumed during Covid-19 lockdowns, but differences in consumption, such as new product packaging for home delivery, caused a lack of supply in some areas and a surplus in other areas. 

“All of this came on the back of probably the last 20 to 25 years, when, globally, we’ve had pretty benign, well-balanced supply chains, and that’s driven real efficiency – then suddenly, we’ve had all these shocks around the same time and it hasn’t settled down yet,” Harrison says.

The impact of volatility

Three diverse companies were represented on the panel – Colgate-Palmolive is a multinational consumer products company, Oryx Energies provides oil and gas products and services for African markets, and FreeFlow Technologies is a start-up that manufacturers motors for e-bikes. Their representatives shared common and company-specific challenges.

All three panellists cite volatility as a supply chain challenge. For Colgate-Palmolive, Josue Munoz, vice president of e-commerce global supply chain, says the pandemic has driven volatility which caused a global lack of capacity around ports and labour, reducing logistic network capacity, driving unreliable supply for raw and packing materials: “This has made it very difficult in many cases to replenish our networks… It has been going on now for two years.”

Christian Tchounda, chief procurement officer, Oryx Energies, says volatility in demand, price and availability of goods affects supply chains, adding that getting freight to Africa, especially from Asia, continues to be difficult: “We could see delays of one or two months to get deliveries from this region to Africa.”

Ralph Kirkwood, head of procurement, FreeFlow Technologies, explains volatility from a start-up perspective: “Volatility of commodity and component pricing has had a real, hot impact [but] lockdowns right across the globe increased the timescale for the development phases [that rely on suppliers] as we’re trying to bring a product to market.”

Resilience versus efficiency: mitigating the risks

Harrison says more companies are focusing on building supply chains that focus primarily on resilience rather than “excessively on cost.”

“The most expensive thing you could ever buy is something that doesn’t turn up –  if it doesn’t turn up, then you can’t supply your customer and that’s a sale lost, potentially forever,” Harrison cautions. “We’re seeing people focusing back on resilience – and resilience comes in different forms, depending on the supply market that you’re operating in.”

He says that steps businesses can take to weather supply chain storms include “having multiple suppliers, making sure the multiple suppliers aren’t all in one single and distant country” and striking a balance between having more suppliers onshore and using suppliers from low-cost countries.

Managing inventory levels is another challenge when seeking to improve resilience and mitigate against supply and demand volatility. 

“If you’ve got very accurate forecasting and no volatility, you don’t need a lot of stock [but] we’ve seen volatility like we haven’t seen before [so] you’ll probably not be able to manage without a bit more stock in your supply chains – and that’s what we’re hearing people are doing,” Harrison says.

“A combination of high quality, timely third-party data and suppliers’ data [can be transformed] into key metrics and scores that can help assess the overall risk,” says Azar. “Traditionally, we have all been focusing on financial risk [but now] you need to think about financial, reputational, sustainability and regulatory risks altogether to get a comprehensive risk profile. The more data you can get, the more metrics you can create – then you can start to measure trends and see if the risks are trending down or up.”

The most expensive thing you could ever buy is something that doesn’t turn up – if it doesn’t turn up, then you can’t supply your customer and that’s a sale lost, potentially forever

Kirkwood says that as a start-up, FreeFlow Technologies does not have the resources to build up big inventories, so the company takes a more nimble approach: “Making sure all your supply is not based in the one area is key, [having] multiple sources of supply close to customers.” He also adds: “There’s no substitute in my view for being able to get boots on the ground to actually get to see what your suppliers are about.”

Procurement and supply chain functions have been challenged by longer lead times with Asian and European suppliers, as well as finding alternative suppliers within Africa. Tchounda says the company’s strategies for mitigating this risk include investing locally for raw materials where possible, and good relationship management with suppliers: “This needs to be done in advance, to make sure you are one of the preferred customers of your supplier, that is the best way to get material when a crisis is happening.”

Tchounda outlined the importance of supply chain stability from the onboarding stage through to the delivery of goods. He said the qualification process is important when starting work with a new supplier, including a thorough know-your-customer registration that allows Oryx Energies to make an assessment of the company (financial health and corporate governance), its production process, its supply chain and ISO certification.

“The biggest risk is sometimes on the supplier side and, particularly in Africa by small and medium enterprises (SMEs), the procurement function is not very developed, so there is the need for the right skill set to make sure that the supply chain is under control,” Tchounda says. “We are developing suppliers that are located in that region to improve and provide more data to us.”

Munoz agreed that resiliency can be driven by moving production closer to consumption locations, along with having no single source supplier of materials and agility when adjusting inventory for supply and demand volatility: “Make sure you use data better, that your processes become exception-driven – that is what you have to do to make sure you prepare yourself for a world that I think is going to continue to be volatile and really surprising for the next few years.” He adds that Colgate-Palmolive differentiates real time supply chains and “right time” supply chains. 

“Everybody thinks [‘real time’ means updating supply chains] by the second, by the minute … but that can be very costly,” Munoz explains. “The term we use is ‘right time’ – what is the right time and frequency so the response of the process [enables you] to provide excellent service to all your customers?”

Future-proofed, sustainable supply chains

Transparent, sustainable supply chains that fulfil regulatory, shareholder and consumer demands for ESG excellence have become increasingly important, although obtaining information about subjects such as workers’ rights and environmental stewardship along supply chains can be difficult. 

Harrison says that transparency for sustainability is “an added layer of complexity”, particularly when 90% of Scope 3 carbon emissions are in supply chains. He reports that this process will “evolve significantly over the years to come” as businesses measure multiple aspects of ESG.

A combination of high quality, timely third-party data and suppliers’ data [can be transformed] into key metrics and scores that can help assess the overall risk

For FreeFlow Technologies, a company that promotes green mobility, Kirkwood says entire organisations need to consider sustainability: “Instead of just looking at ESG risks from a company perspective, you need to start thinking right along the supply chain, so those in supply chain and procurement need to lead the conversation and educate the organisation in that kind of thinking.” 

The role of people in supply chains is another important aspect of future-proofing supply chains. Tchounda cites “talent management” as the biggest priority for Oryx Energies.

“We clearly need to have the right set of skills in the organisation to make sure we are aligned and able to deliver our commitments,” Tchounda says. “It includes different elements – ESG, resilience, transport and logistics, raw material shortages – we need different types of knowledge to deliver our objectives.”

Kirkwood agrees that having the right skills are crucial to building resilience: “There’s a lot we can learn in terms of risk management about how to adapt from the investment world – I think they do it pretty well and that’s the type of skill set we need to develop over the next few years.”

“You have to adjust your processes to make sure they are responsive to changes in the environment and you have to have the right systems to provide you with the visibility and the analytics to enable you to react to the variability that you are seeing in our environment,” says Munoz.

“Resilience is being able to adapt to anything that is thrown at you – having a clear vision around sustainability and a framework that drives everything you do in your organisation is your first step,” Munoz added. “Once you have that, [you can] define any action you take [or] any decision that you make, which gets the organisation closer to the vision around being more sustainable and making the world a better place to live.”

Azar brings the conversation back to the core values that will help businesses prepare for supply chain risks without neglecting sustainability goals.

“Awareness, awareness, awareness,” is how she sums up what companies need to do to ensure they are working with resilient companies along supply chains. “What are their sustainability frameworks, business goals, financial solvency plans, ethical and reputational behaviours, labour practices, corporate governance and social responsibility, and practices to protect the environment and society?  If you can understand more than just the financials, and can really understand how suppliers are planning to support their mission and vision, meet their targets and deal with uncertainty and vulnerabilities, then you will understand who you are doing business with.” 

For a 360° view of your suppliers across financial, sustainability, reputational and operational risk factors, to help you analyze vulnerabilities and anticipate potential disruptions across the supply chain, visit moodysanalytics.com/supply-chain