As shoppers in the U.S. faced shelves empty of toilet paper and hand sanitizer in late March and April, we all became much more aware of supply chains than before. Though supply chains have been an integral part of my professional life for years, they are now a part of daily conversations. Across industries, supply-chain resiliency has risen to the top of the C-Suite agenda. Company executives are looking to more deeply understand their supply chains, shift from “just-in-time” to a more robust inventory management approach, and increase their supply chain transparency and resilience.
New research from my colleagues at the McKinsey Global Institute looks at risk and resilience across 23 industry value chains and dozens of supply-chain executives, and shows a company could lose a year’s profit due to a significant supply-chain disruption. Based on those results and the probability of actual occurrences, companies can expect disruptions to erase an average 44 percent of one year’s profits over the course of a decade. Yet fifty-four percent of executives said they don’t have clear visibility into their supply chains beyond Tier 1. With the COVID-19 pandemic fresh in their minds, an overwhelming 93 percent reported in May that they plan to take steps to make their supply chains more resilient.
Here’s the way to reimagine supply chains and increase resilience:
Shocks are probable, but disruption can be manageable
Supply chain disruptions are not new, but shocks are increasing in frequency and severity. Supply chain executives report that their industries have experienced material disruptions lasting a month or longer every 3.7 years on average. Shorter disruptions have occurred even more frequently.
When a tsunami hit Japan in 2011, all of Toyota’s operations in Japan were shut down for nearly two months after a magnitude-9 earthquake. Production in the United States declined by 30 percent due to a shortage of parts produced. To become more resilient, the company used a combination of tactics, notably the construction of a comprehensive database of thousands of its suppliers and the hundreds of thousands of parts to quickly identify how to shift components across sites when needed, so that disruptions at one location would not affect global operations. When earthquakes again struck Japan in 2016 and 2019, Toyota kept production stoppages to two weeks or less and avoided disruptions in its worldwide operations.
Sustainable resilience requires digital
Companies have historically been reluctant to invest in this sort of resilience before a shock occurs, believing that the benefit simply was not worth the cost. Certainly, more frequent shocks help change that cost-benefit calculation. But there’s another reason to reexamine that equation: new technologies are changing the economics of supply-chain resilience.
Investing in resilience with digital capabilities at the core can pay off not only in the long term, but also in the short term. Most important, digital tools can enable business leaders to build agile and structural resiliency measures into their operational models regardless of where, how and when a shock occurs. Automation can increase efficiency by reducing input costs and increasing productivity, while also giving companies more, and in some cases new, options to maintain workforce productivity in the event of closures from a severe weather event, or a pandemic.
One of the greatest benefits of using the full potential of digital is the ability to monitor, connect, and collaborate across the supply chain. That’s because critical weakness can often lie several tiers deep, among companies’ suppliers, and suppliers’ suppliers. Nike NKE , for example, relies on fully outsourced manufacturing, utilizing more than 500 factories across 40 countries. The company has invested heavily in digitizing its operations and supply chain, using RFID tagging to track goods from end to end.
Shortages of paint additives, plastics, and specialty chemicals have led to shortages of components across multiple industries in recent years. In some cases, the original equipment manufacturer at the end of the supply chain was unaware that the material was even required for their products.
To respond to changing demand forecasts at the start of the crisis, a chemical manufacturer increased its suite of digital tools and dashboards by 30 percent. They provided staff with real-time visibility into material shortages and the ability to respond to changing demand forecasts. The company’s digital order-tracking system also allowed it to spot problems and rapidly identify the root causes of non-delivery. Those tools allowed the organization to increase its output during the pandemic.
To minimize this risk, companies can pre-qualify critical suppliers by using supply-chain mapping tools to identify lower-tier suppliers from publicly available information, asking them to share information on their own critical suppliers, or encouraging suppliers to conduct their own resilience stress tests. One company in the chemicals sector has used its digital infrastructure to manage supply and production risks during the COVID-19 pandemic.
We have an opportunity to redefine resilience and write a new narrative where resiliency and efficiency can occur simultaneously, with minimal cost. In a complex, fast-changing, and unpredictable environment, the time to enhance digital capabilities and build supply chain resilience is now.