Rethinking the Supply Chain
In the post-pandemic rebalancing phase, companies will reevaluate their entire business model—from sourcing to manufacturing to shipping—to be better prepared for the sea change that is taking place. What can the board do?
Directors and C-level executives have faced unprecedented challenges and disruptions this year, shifting the primary corporate goal to mere survival, with strategies focusing mainly on reacting to unexpected upheavals in the marketplace, labor disruptions and unexpected changes in consumer behavior. With normal patterns a thing of the past, at least temporarily, planning for 2021 will take a decidedly different turn.
Board directors are already asking CEOs hard questions about how they will support recovery in FY2021, how they will be able to mitigate the risks that are still emerging, and how they will be able to identify new opportunities not just for survival, but for continued growth as well.
In today’s highly uncertain marketplace, organizations are taking two separate but equal paths: Recover and rebalance their organizations and deal with the unexpected disruptions caused by the pandemic, and look for new ways to drive growth, reduce risk and achieve operational effectiveness amidst a new level of uncertainty.
As directors scramble to grasp this new reality, create new strategies and plan for 2021, they are asking themselves: “What’s the next step?” It is clear that long-term strategy can no longer be “let’s keep doing the same thing.” The pandemic has made previously hidden vulnerabilities visible, and underscored the need for transparency, optionality and re-thinking the supply chain at its most fundamental level.
Stabilize, recover and rebalance
Short-term stabilization may well involve a more tactical, hands-on management approach, but mid- and long-term, it’s time for the Board to take a hand in the second and third portions of this threefold solution: Recovery and rebalancing.
Next year’s planning may have taken a back seat to the short-term imperative of putting out the fires and attending to the short-term disruptions brought about by the pandemic. As a result, FY2021 planning will need to take into account how well the organization has been able to stabilize, as well as creating a new strategy for enjoying a full recovery, and then reassessing the entire supply chain model as part of a long-term rebalancing.
What happened to my supply chain model?
That rebalancing has found directors taking a serious look at long-standing supply chain models. What has worked for years may no longer be practical. A big hidden vulnerability that the pandemic brought to the fore is an over-reliance on a purely cost-driven supply chain model, which tends to concentrate supply chains among a smaller number of large suppliers, and often in a single geographic region. In the case of the pandemic, an overreliance on China caused severe disruptions across all industries, and as a result organizations have had to rethink that cost-driven supply strategy and weigh it against the benefits of a mix of offshore, near-shore and on-shore solutions. The proposition of re-shoring, or at least partial re-shoring, will replace simple arbitrage of cheap labor through single-region offshoring.
That reduced dependence on single offshore regions will not only avoid the risks inherent in such strategies, it is actually less necessary than it used to be. Real wages have been rising in China and India making it less competitive, and on-shored operations are moving more heavily towards digital operations, robotics and innovations like 3D printing. The combination of these two trends makes that labor arbitrage less extreme and allows for a more optimal mix of offshore/nearshore/onshore sourcing and manufacturing.
Finding ways to reduce risk in an uncertain future
Nobody saw the pandemic coming, but those who practiced good planning and risk reduction were at least better prepared for the unexpected. After the pandemic danger has finally passed, there will, at some point, be another major disruption from an unexpected source.
We tend to be resistant to change, especially if everything seems to be working well, the company is growing and profits are high. Why change anything under such conditions? The answer has become obvious. Disasters have a lasting impact on customer behavior. Geopolitics come into play, not just from the pandemic, but from factors like Brexit and trade wars which will drive even greater supply chain disruptions. A white paper from Michigan State University’s Department of Supply Chain Management titled “Is today’s supply chain model dead? Have you got its replacement ready?” reinforces the notion that politics supercedes economics, citing Brexit as an example and claiming “Free trade will likely shift to managed free trade,” while noting that new business models will continue to emerge in every industry.
More importantly, the MSU paper notes that while de-risking will be an essential strategy going forward, that does not have to come with a corresponding limitation in growth. The process of rebalancing will help to manage that uncertainty while still driving EBITDA, cash and growth.
More flexibility must be built into the planning process to account for these changing conditions – and to account for changes that nobody expects. This involves scenario planning, in which the Board and C-Suite game out multiple scenarios (including things like additional disasters and supply chain disruptions, political upheaval, natural disasters, and new customer behaviors). Decision trees can then be developed based on the business impact of each potential scenario.
Finding new growth amidst new risks
Successful companies don’t just survive though, they find new ways to grow even during historically unprecedented challenges and in the face of unexpected risk. A CFO Magazine survey noted that in April, at the height of the pandemic, only eight percent of companies surveyed were delaying their M&A activity and are still looking to expand into new markets.
Yet the acquisitions market remains highly competitive, with a record level of private equity capital unspent, according to a Maine Pointe Perspectives document, titled “Driving value creation in an uncertain world.” Increased volatility has been driven by conditions outside the company’s control. PE firms and other companies with aggressive M&A strategies will need to become more deeply involved in operational considerations and pursue acquisitions which can drive measurable value creation. Acquiring firms in today’s climate need to adopt more innovative strategies. This may involve deep transformation, which includes re-evaluating the manufacturing footprint and supplier optionality, looking more closely at shipping modes, and building a culture of collaboration between all stakeholders.
What can the board do?
In a white paper published by University of Tennessee’s Global Supply Chain Institute titled “Driving shareholder value with your supply chain,” the authors reinforce the notion that shareholder value is inextricably linked to supply chain performance. The paper notes that supply chain disruptions are often devastating to the company’s finances and shareholder value, especially if there is no formal process in place for identifying and managing risk -- and very few companies have such a plan in place. Using the supply chain as a lever to create value can be done even in the worst of times, and today directors are doing so to help move their companies through the devastating results of the pandemic with a three-part strategy of stabilize, recover, and rebalance.
First and foremost, directors need to drive the C-suite and push them away from the notion that it will be possible to return to “business as usual.” There are new vulnerabilities and risks that had not been considered pre-pandemic, and new strategies are in order. After an in-depth “post-mortem,” strategists will need to start with an assumption that the political landscape, customer patterns, and supply chains are all seeing dramatic changes. The organization’s global manufacturing, distribution and supply chain footprint will need to be reassessed, with a focus on agility, optionality and balance as opposed to cost above all else. Part of this reassessment involves de-risking the supply chain with a new strategic sourcing approach, using two or more locations to ensure that it is possible to continue to operate during a crisis, and enhancing the organization’s visibility along the entire end-to-end supply chain.
2021 planning will be unlike any other next-year planning session, as directors face the reality of unprecedented challenge, unexpected risk and the pressing need to drive changes in supply chain business models at the most fundamental level. This long-term rebalancing especially will lend itself to preparing for the next emergency – and finding new opportunities for growth and shareholder value in today’s post-pandemic reality.
Steven Bowen is the Chairman and CEO of Maine Pointe, a firm specializing in driving EBITDA and cash improvements across the areas of procurement, operations, and logistics to enable growth. Bowen has more than thirty years of P&L experience, leading turnarounds, high-growth businesses, and Fortune 1000 companies.