Making your supply chains more resilient is a priority as you look to the future in light of COVID-19 impacts and ongoing geopolitical tensions in Eastern Europe. We’re seeing a once-in-a-generation restructuring of supply chains, pivoting away from previous approaches to supply chain optimization.
While optimizing supply chains for cost has been the conventional wisdom, this approach can create supply chains that can prove sub-optimal in terms of risk.
In this insight, we offer a four-step process to make the most of the opportunities generated by continued disruption to create resilient and risk-optimized supply chains.
Step one: Establish the current state of your supply chain
Visualizing your supply chain is a great place to start. There are many software tools that let you do this, allowing you to overlay risk maps on top of the value chain. This can provide a reasonable indication of the perils to which each node – the fixed locations of your own, your suppliers’ and customers’ operations – is exposed.
For example, a retailer in Florida can see how exposed its distribution centres are to hurricane risk. It could then start considering targeted mitigation measures, depending on the risks at each location.
Initially, the company might not have sufficient data on all of its suppliers to assess them in the same way. However, the manufacturer knowing where it interacts with supply chain partners is a good foundation and can show where risk might be concentrated.
Step two: Forecast risk and cost
For each node in the supply chain, forecast two variables, starting with the ‘time to recovery.’ This quantifies the time it will take for the node to be operational after a disruption event. Risk engineering studies carried out as part of the insurance placement process usually provide you with enough information to estimate time to recovery.
Next, quantify the losses to each downstream node, and consequently, the business, from different durations of the time to recovery.
For organizations with complex supply chains, it might not be worthwhile doing this for each node. Instead, you could do this for the nodes with the highest exposure, such as those known to have bottlenecks and delivery problems.
It’s important you consider the different mitigation solutions in place at each node. For example, you need to estimate losses considering buffer stocks, alternative suppliers, spare machinery and capacity at sister plants, amongst other factors.
Step three: Optimize supply chain risk
Optimizing a supply chain is not a trivial endeavour. Let’s consider a supply chain with just five nodes. Now assume that for each node, there were only four possible risk mitigation solutions you could enact or choose to sanction in combination. This would still generate hundreds of different risk mitigation scenarios you would need to evaluate and cost to identify the optimal overall strategy.
Now imagine having to carry out a cost and evaluation exercise for a more complex supply chains with many more nodes and additional mitigation solutions and combinations of these. The total number of overall mitigation scenarios you would need to evaluate across the chain to reveal the optimal strategy could easily run into the hundreds of thousands, if not millions.
Such complexity is why you should consider tackling supply chain optimization algorithmically.
The output from algorithmic exercises can provide the cost and the risk for each combination of strategies for each node. Graphically mapping this allows you to identify the combinations that would lead to the lowest risk for a given cost or vice versa, or the full range of optimal solutions. You can then compare this against your organization’s risk tolerance to select the strategies that are aligned with your risk profile.
Step four: Introduce complexity slowly
The supply chain optimization steps detailed above represent a complex undertaking. Starting small prevents you from biting off more than you can chew. Tackling the full complexity of the supply chain from the beginning might lead to a less than optimal organizational response.
Let’s imagine a global manufacturer of packaged food that sources a key raw ingredient from a territory where climate change is already impacting supplies. Understanding how that node of the supply chain will look like in 15 years and prioritizing, for example, where else it might source its key ingredient, potentially deploying a first-mover advantage, is probably more important than having a full assessment of every node across its global supply chain.
You can introduce complexity gradually. Start with a deep dive into your second and third tier external suppliers, for example, before making more granular assessments that look at individual components and their impact. Establishing the broader impacts of climate change over a 20-year time horizon, evaluating the impact of reconfiguration of supply chains to meet ESG commitments, assessing the change in risk when selecting new suppliers are all enhancements you can add over time.
Having an initial framework in place will provide you with the foundation for building a supply chain that is not only cost-efficient but also resilient against a constantly evolving risk landscape.
For more insight and practical tools on how you can optimize your supply chain, get in touch.
