Supply Chain Resilience: How to Future-Proof Your Supplier Network

In short:

• Resilience measures your company’s ability to quickly recognise, react to and recover from a disruption to your supplier network.
• Effectively managing a supply chain in times of crisis requires preplanning, real-time information sources and the ability to make fast decisions based on that data.
• There’s nothing like a pandemic to reveal supply chain vulnerabilities. Here are some (relatively) painless ways to make your end-to-end supplier network more robust.

Over the last few decades, supply chains have become … complicated. Globalisation made intricate, interconnected supplier networks spanning multiple continents, time zones, currencies and languages the norm for most product-based organisations. While that brought cost savings, it also introduced risks that, as some companies learned the hard way, could send the business scrambling.

Supply chains have always faced the possibility of disruptions, from a mishap that impacts just one supplier — like a fire or broken water pipe — to sweeping events like major natural disasters, political and economic instability and other catastrophes. Depending on the nature of the disruption, it could affect one or many links in the chain, including supplier relationships and sourcing, procurement and purchasing, demand planning, manufacturing, inventory management, warehousing and transportation.

Does your company understand the potential risks that lurk within your supply chain? Have you planned for disruptions based on that risk profile?

If your company has not yet done this analysis, now is an opportune time because the coronavirus pandemic has likely laid bare any weak links. Finance teams need to be part of that process. Use that insight into the supplier network to identify areas of fragility or inefficiency and offer to help negotiate relationships with new, alternative business partners.

Those backup sources can keep operations alive and revenue flowing.

What Is Supply Chain Resilience?

On a fundamental level, it’s a company’s ability to quickly recognise, react to and recover from a disruption. Contingency plans are a key building block of supply chain resilience, for example.

However, simply creating a plan and filing it away may lead to a false sense of security. For most product companies, the supplier network is constantly evolving. Your plan should likewise be updated regularly. That exercise includes assessments of business relationships with all current suppliers, a list of potential alternatives, a business analysis of your most critical suppliers based on SKUs and action plans listing what steps to take to keep production alive if any of those links broke.

We advise, at minimum, developing a risk management plan before the unexpected strikes. By creating a contingency plan for a variety of disruptive events, ops teams are empowered to respond quickly and, hopefully, reduce the impact and longevity of a disruption.

Even better, find a second source for at least first- and second-tier suppliers and then actively use those resources. Even if costs dictate a 90/10 situation, active relationships pay off, as we’ll discuss.

How Do You Build a Resilient Supply Chain?

Harvard Business Review notes that many companies lacked visibility into the impact the 2011 earthquake and tsunami in Fukushima, Japan, would have on lower-level suppliers, and they paid the price financially. No doubt the COVID-19 outbreak in China also caught many companies by surprise.

Every disruption is different and presents a unique set of risks. It’s impossible to map out every possible scenario, but by using supply chain mapping, you can plan for the most likely types of events and consider how each would affect operations.

Mapping can be as simple as using a free template; you can also use software tools to draw out interconnections. What’s important is to uncover the areas that will feel the biggest impact from each type of disruption. This stretches beyond knowing your Tier 1 and Tier 2 suppliers and manufacturers. Who are your suppliers’ suppliers? Where do your suppliers source their materials from?

Breaking down your supply chain to this extent is a lot of work, and it can be difficult to track all those upstream suppliers. But the effort will pay off many times over when there is a disruption.

Let’s walk through seven areas of the supply chain impacted by risk and explain how you can increase your resilience:

Sourcing relationships: Increasing the resilience of this foundational link in the supply chain starts with strengthening relationships with current suppliers. Companies should view this as a partnership that benefits both parties and communicate that they recognise the value of each supplier.

Maintaining solid relationships with partners should earn you more flexibility when there’s a disruption and a supplier suddenly sees overwhelming demand for its products. A timely example: face mask and medical glove manufacturers saw demand for their products spike as the coronavirus spread across the globe. In most cases, the distributors and retailers that had worked with these suppliers for years received first priority and could get these items at a fair price.

Redundancy: Supplier-side redundancy is a crucial element of supply chain resilience. Businesses should document the capabilities of all current partners. One supplier could have several facilities spread across multiple countries and be equipped to shift its operations in response to a disruption. Or, maybe it could, with some notice, revamp its manufacturing to make related materials. Ask existing suppliers for documentation on the scale of their operations and their capacity to shift production, both geographically and materially. Suspect embellishment? Get references, talk to companies that use the supplier and ask them to confirm the numbers given to you.

While you may have preferred suppliers, it’s risky to depend solely on one partner to keep your supply chain operational. You need relationships with a number of suppliers that can produce the same or a similar product as the primary one, especially for top SKUs. These suppliers should be spread out geographically, because some disruptions will affect entire countries or regions.

Have a plan to vet backup suppliers on a regular basis, making sure they remain capable of supplying the necessary parts or materials and ramping up production, if necessary. It’s important to note that finding, vetting and onboarding suppliers takes time, and most have long lead times. Shipments from Hong Kong to New Zealand can take between 1 – 21 days, depending on whether they come by sea or air. Given the ongoing fallout from the pandemic and a number of APAC markets having strict product standard regulations — this process can take even longer. That’s why it’s best practice to use these suppliers, even if in a limited capacity — sourcing 10% of a material from them and 90% from less expensive sources — so you can call them into action quickly.

Demand planning: While demand planning isn’t technically part of supply chain practices, it does need to inform resilience discussions. Unless leaders understand how not receiving materials from a certain supplier will affect production, they won’t know how critical it is to line up on-call backups.

Demand planning means having a clear picture of the link between raw materials and products. How would a missed purchase order from Supplier A affect your overall product catalog? Supply chain managers can then review production plans, compare that against expected demand and adjust accordingly.

And there are other factors here. Every company needs to know what its top-performing 20% of SKUs are, which have the highest profit margins and which are quickest to sell through. That information is invaluable if you need to modify production schedules due to raw-material shortages or semi-functional manufacturing floors. It allows you to prioritise manufacturing of these products and ensure you're not using limited raw materials to produce products that deliver the lowest margins or that might end up sitting in a warehouse. For future planning, remember to mark times of disruption as outliers so they can be excluded.

Manufacturing: Business leaders need a plan for meeting demand when production teams and/or facilities cannot operate at full capacity. Say you are implementing social distancing and need to turn to subcontracting or additional shifts just to fill existing orders. Should you turn to subcontractors or temporary workers? If that’s a logical solution, subcontractors and temp agencies should be preapproved. In the immediate wake of a disruption is no time to be checking references. If a facility cannot produce at normal levels, are there third-party contract manufacturers that could take over for a limited period, and how does that impact your bottom line?

On the other end of the spectrum, it’s smart to have a similar plan for a sudden, unforeseen increase in demand (hello, toilet paper). Companies may need to take advantage of the same resources if this happens, in addition to, instead of in place of, current facilities and employees. Flexibility and creativity are essential in adapting to either situation.

Inventory management: You need accurate, up-to-date visibility into current inventory, including both finished and unfinished goods, to respond properly to unexpected changes in your supply chain. By looking at available inventory, expected demand and incoming orders, a company can make informed decisions and prioritise appropriately. Do you have enough inventory on-hand to keep selling for a month or so? Or is there limited supply that requires turning to those backup manufacturers right away?

As a safeguard, you could build up inventory reserves of essential materials for popular products so you’re not immediately scrambling after a disruption. This is an upfront investment and could incur storage costs but offers valuable leeway during challenging moments.

Note: Inventory management is a key piece of the supply chain puzzle. If you find you have excess inventory of the wrong products eating up space and cash, it’s a good time to coordinate with sales and marketing to run promotions to move it out.

Warehousing: Your business may need to temporarily house inventory at another location for a number of reasons. A warehouse could become unusable because of a flood or broken equipment, for example. Production could increase due to surging demand, or there could be excess inventory of certain products where demand has slowed.

Outsourcing typically makes the most sense when creating a contingency plan for warehousing, often with a third-party logistics (3PL) provider. While a 3PL may be more expensive than a business warehousing its own products, it’s a fast and relatively simple solution. After moving inventory to a 3PL site, a company could set it up as an additional location to maintain visibility into inventory and control over what is received, shipped or assembled there.

Customer service: When orders are delayed or can’t be fulfilled due to a supply chain disruption, maintain a clear line of communication with customers: What’s causing the problem, what you’re doing to resolve the situation and best estimates of how it all affects timelines. Even though customers may be frustrated, transparency and prompt communication will help build long-term satisfaction and loyalty.

A contingency plan should include a clear message for all customer service personnel and sales reps to share with customers who want updates on the status of their orders or have questions. The message should be clear, honest and timely.

Example of Supply Chain Resilience: Poolwerx

Founded in 1992, Poolwerx is the largest pool service company in the world. A franchise business, it has over 160 stores with over 670 vans across Australia, New Zealand and the U.S. As COVID began to spread around the world, the team implemented proactive measures to build supply chain resilience.

In close consultation with distributors and suppliers, the team created a matrix to monitor manufacturing, inventory, and delivery which helped them identify potential problems 6-8 weeks in advance. They also negotiated with suppliers to take bigger orders, less often, and with extended 90-120 day payment terms. This helped them stay one step ahead during times of uncertainty.

Mitigating and Monitoring Risk

Responding appropriately to a supply chain disruption requires constant monitoring.

By building a resilience plan and then using it to make necessary adjustments to your supply chain, your company identified potential risks. Now, you need a plan to develop an “early warning signal” so you can spot threats as promptly as possible and activate plans before competitors are also searching for backup suppliers.

Once you’ve mitigated potential negative effects by taking proactive measures, continue to follow the disruptive event as it evolves, and modify your response accordingly.

But those who monitored how the Delta variant took hold in other parts of the world may have foreseen this becoming a substantial problem in APAC too. These companies could better prepare for supply chain disruption.

As you emerge from a disruption, whether the coronavirus or something less dramatic, do a post-mortem analysis of how the supply chain held up, and look for ways to add value in the future. A few things to consider:

• Is supplier distribution optimised, or are you relying too heavily on some partners?
• What pieces of your supply chain are onshore vs. offshore, from raw material providers to manufacturers to warehousing and distribution partners? Is it the right mix?
• Are there any areas of the supply chain that are currently standalone but that could be centralised or integrated?
• Are there any areas of the supply chain that seem redundant and could be consolidated?
• Did your contingency plan work the way you thought it would? What could you improve before the next disruption arrives?

Investing in Supply Chain Resilience

There are additional costs, at least initially, that come with building supply chain resilience. Mapping your supply chain, finding backup suppliers and other partners and pulling in demand planning and other functions requires significant human and capital resources.

However, as has hopefully become clear, your company could recover those expenses in weeks, if not days, if there is a major supply chain disruption. Just the ability to shift operations on the fly to other partners, with minimal interruption to top SKUs, could save thousands or even millions of dollars, depending on the nature of the disruption and size of your organisation.

It is a necessary investment for any product-based business, even more so for those with complex global supply chains.

While supply chain disruptions can’t be avoided, businesses that can address them proactively, following a thoughtful contingency plan, will minimise disruption. Not only will that help the company’s bottom line, it should ensure a better customer experience.