Manufacturers can take a range of actions, including integrating their supply chains for visibility and using digital twins to model supply chain functions, in order to create resiliency.
The COVID-19 pandemic significantly disrupted supply chains and drew attention to their inherent vulnerabilities. The continuing disruptions have underscored the need to further modernize the foundations of modern supply chains. Strengthening the foundations will not only help manage risk but also position enterprises to weather disruptions seamlessly and even gain advantage from them. Here we will look at two core concepts in successful supply chain transformation: resilience and agility.
The Pandemic’s Impact
The full scope of the pandemic’s disruptive impact on the supply chain is still taking shape, but some salient data points are already available. A cross-industry survey of executives by the World Economic Forum found 76% of respondents pointing to COVID-19 as a significant disruptor of their supply chains and their businesses. The disruptions manifest in numerous ways. For example, nearly two-thirds of manufacturing business and IT executives surveyed by Oxford Economics and NTT DATA said that pandemic-related disruptions were driving significant reductions in their technology investments.
At the same time, the International Labor Organization reported that pandemic-related disruptions to supply chains led to income losses exceeding $3.5 trillion. And the NTT DATA-sponsored 2022 26th Annual Third-Party Logistics Study saw almost one in three shippers and third-party logistics providers citing a net negative financial impact from the pandemic. Developing more resilient supply chains will help curb such impacts of supply chain disruptions going forward.
Resilience in supply chains is the degree to which the supply networks can withstand disruption.
The manufacturing supply chain encompasses all the activities required to turn raw materials into finished products, such as planning, sourcing, manufacturing, distribution, and returns. As such, resilience is the degree to which supply chain networks withstand disruption and minimize the impact on revenues, costs, and customers. Manufacturers must have the agility required to shift activities swiftly and the data needed to inform such shifts in service of meeting commitments to, and responding to changes in demand from, customers.
Gaps in today’s supply chain hinder the agility manufacturers need. These include:
- Lack of end-to-end visibility in the supply network
- Difficulty in forecasting demand
- Insufficient data at the edge to enable informed decision-making
- Sole-source contractual relationship with suppliers
- Outdated inventory management strategies
- Dependency on overseas manufacturing operations and suppliers
- Logistics issues, and in particular port congestion issues
- Changing consumer behaviors and the need to manage consumer expectations
Strategies to Build Resilience
While there is no universally applicable formula for increasing supply chain resilience, approaching the transformation with well-defined strategic objectives can help businesses stay on track. The overarching goal is to develop nimble and agile end-to-end supply chains, tailored to evolving environmental dynamics and market needs. Some of the strategies and techniques you should consider include:
Strategies to Build Resilience
- Diversify manufacturing operations and sourcing – Reduce the risk of geographical dependencies by diversifying manufacturing operations and sourcing functions. Geopolitics must be a critical consideration for organizations before evaluating supply alternatives, with organizations qualifying suppliers in other countries based on sourcing and quality norms. Manufacturers must also consider manufacturing SKUs in multiple locations to build more resilience into distribution networks.
- Establish multi-tier supplier relationships – Organizations often lack visibility to suppliers beyond tier one. Manufacturers should consider diversifying their supplier base with suppliers operating from different regions and geographies. Having multi-tier relationships with suppliers will help reduce risk. However, it is equally important to understand the risk of doing business with the Nth tier vendors.
- Integrate supply chain networks for visibility – Collaborating with trading partners can reduce the impact of disruptions. This includes building collaboration and visibility through business commerce networks, enabling a logistics control tower, and establishing collaborative planning, forecasting, and replenishment. Investments in supply chain strategy, planning, and operations could serve organizations well in the future, beyond the current global pandemic.
- Leverage scenario-based supply chain modeling with digital twins – Building digital twins for modeling supply chain scenarios enables organizations to run what-if conditions and assess supply network risks. A supply chain digital twin should analyze the supply chain interactions from macro changes in demand down to inside the four walls of an enterprise. It should enable functions such as the prediction of SKU flows, demand variability identification, and scenario testing, using live data such as incoming shipment schedules, vehicle locations, and inventory levels, to assess the supply chain’s current state and provide updated forecasts. The digital supply chain twin must simulate a model that integrates with the surrounding IT environment of databases and business intelligence tools.
- Build reserves to absorb shock – Carrying excess inventory has an impact on working capital, but strategic reserves are intended to protect against “black swan” events that are rare but can cause an existential threat to the business. Organizations should consider having a buffer of safety stock in order to continue serving customer needs while dealing with disruptions.
- Make data-driven decisions – Leveraging data and analytics will enable organizations to unlock opportunities and make better decisions. Supply chain analytics serve two main purposes. First, they allow businesses to identify risk and inefficiencies. Second, they enable businesses to use data to identify, prioritize, and address opportunities. Measuring and reporting on the correct metrics is key to creating resilience in supply chains. Some metrics can increase forecast accuracy, enable working capital improvement, improve risk management, reduce stock shortages, reduce lost sales, reduce inventory holding costs, and enable operating margin improvements.
Measuring Supply Chain Resilience
To better understand supply chain vulnerabilities and failure points, organizations must consider utilizing supply chain resilience frameworks and supply chain digital twins to evaluate process areas within the network. The objective of this assessment is to evaluate an organization’s relative vulnerability in key supply chain areas, model them in a digital twin, and examine the results of the scenarios. For example, consider a case wherein a tier-one supplier is impacted. The model will provide visuals of and report on the number of pending purchase orders against the supplier waiting to be fulfilled, the impact of delayed shipment and customer commitments, the tier- two alternate source of supply the customer should look for, the risk of doing business with the second-tier suppliers, and other factors. The digital twin assigns weightage to the risk based on a predefined configuration.
Creating resilience in supply chains is not an optional exercise for manufacturers, but rather a fundamental necessity. It requires a multi-faceted approach that varies based on your organization, industry, customers, and role within your business network. The good news is that many companies have already started looking to improve their supply chain resilience. It’s just a matter of capturing the right data, contextualizing it, and determining how to deploy the data for the best results. M
About the author:
Baskar Radhakrishnan is Strategic Advisor, Manufacturing Industry Solutions at NTT DATA. The company is a member of MLC.