Supply Chain Disruption Q&A: Supply Chain Resilience Comes at a Price

In this interview, Harshad Kanvinde, Practice Lead for Supply Chain and Strategy at Slalom Consulting, talks with us about supply chain resilience and the real implications of diversifying supplier networks.

While so many in the retail and supply chain industries are acknowledging the tangible benefits of diversifying supply networks, Kanvinde walks us through how significant an endeavor it really is. And, what organizations can be doing to improve supply chain resilience in the meantime.

Read the full interview below to learn more about:

• The types of organizations that were more prepared to manage a major disruption like COVID-19
• How the supply chain will change as a result of the pandemic and what businesses can start to do now to prepare
• Why resilience must win over cost optimization when rationalizing the two—and why that’s counterintuitive to most supply chain professionals

Supplier networks: You can’t just lift and shift #

Lots of discussion around diversifying supplier networks—is that even an option right now? #

Supplier diversification is a sound strategy, but if you aren't already on that path it’s not something you can do overnight. Even under normal circumstances, it's a super complicated and difficult thing to do. There's a process involved and it can take up to a year, maybe more, to do it.

First, you have to consider that this is a natural disaster that is impacting everywhere. Production stopped but it’s outside of the supplier’s control. You can’t just lift and shift.

Then, if you have a long-standing relationship with the suppliers, you’ve spent years developing that. Reaching the same level of efficiency and costs with new suppliers is another multi-year journey.

Lastly, it depends on the industry. If you manufacture electronics or you're in the aerospace industry—that gets even more complicated. For aerospace, there are so many regulatory compliance certifications that are required for every part that goes into a final product. It’s no joke and it’s not quick.

So the short answer, diversifying your supply network is not easy and it isn’t a realistic solution for managing the current situation.

How will the supply chain industry change as a result of COVID-19? #

The supply chain will absolutely change as a result of COVID-19. It’s already starting to and that will only accelerate once we’re on the other side of this thing.

While diversifying your supply network may not be a “right now” thing, it will happen. Single sourcing from just one region is proving to be too lean and unsustainable. We’re seeing that cause and effect right now. Everything was in China, so what options were there when China went offline?

Even if it takes years to move the supply base, businesses are going to do it and it will be worth it. That level of flexibility is required to survive a disruption like this. Hopefully, we won’t be here again for a very long time, but the businesses that were already focusing on flexibility are in a much stronger position.

Supply chain resilience: The time it takes is worth it #

Can you be both flexible and cost-effective? #

In a purely intellectual discussion, everyone would agree that, yes, doing things like diversifying your supplier network to mitigate risk makes sense and it’s what you should do. But unless you are looking that situation in the face and have to act on it, it will never happen. For real transformation to occur, you need an emergency.

It’s the same reason why new innovative business models don’t take hold in established companies. It’s probably the right thing to do, but how would that budget appropriation decision meeting go? It would get shot down 90% of the time.

Remember the earthquake in Japan? Major companies were affected and everyone saw what was happening. The case was made that resiliency is really important, but how many companies actually followed through on that? Not many.

Hopefully, we can treat this disruption differently. Maybe the length of time and magnitude of it will help keep the need to be resilient top of mind for the new generation of leaders. I also think that ongoing uncertainty will encourage leaders to consider more innovative solutions that help them shift channels and strategies more quickly. Again, going back to the notion of supply chain flexibility, which is really just another way to say “resilience”.

Let’s talk resilience #

What does supply chain resilience mean?
#

To be resilient, you must be able to react to various scenarios quickly. An example of supply chain resilience is the vertically integrated supply chain. When one company owns all the assets, it can respond quickly because it doesn’t have to navigate partnerships or dynamics outside its own company—it has complete control. But, vertical integration is extremely expensive, making it economically unfeasible for most companies.

The majority of the current global supply chain is based on collaborating with partners to offset the costs of owning everything. Under that model, the goals of partnerships tend to center around efficiency and cost-effectiveness, not resilience. Right now, we are currently seeing why that doesn’t always work well.

For an organization to be resilient without vertically integrating, leaders must make a choice between optimizing for cost or optimizing for resilience. When the goal in a partnership is resilience, that looks very different than when the goal is to keep costs low.

Going back to the notion of supplier diversification: If you have one partner today on which you heavily rely, but you’re considering adding a few more so you aren’t as dependent on just one partnership, that will take time and resources to build that flexibility and optionality in. But, in times of disruption, you’ll have more options.

Another example is having a goal around customer obsession. Whenever your customer demand shifts, you make sure you can quickly adapt to address that demand really well. If that’s your company goal and the basis on which you build your partnerships, then that dynamic is different from cost efficiency. Different goals require different decisions to be made when events occur.

Are there other implications of resilience? #

If a company transitions from lean to flexible or resilient, there are various impacts or, again, decisions that need to be made along the way. For example, you still need to think about your inventory intelligently—just because you expand your supplier network by 3x partnerships doesn’t mean you produce 3x more goods.

The context changes. Maybe instead of having one inventory policy across the SKU set, you base your policies on micro-segments and how different sets of inventory are consumed—basically creating micro-supply chains. It sounds complex, but resilience doesn’t equate to being wasteful. It’s within the smaller initiatives that more lean principles are applied. In the end, the tradeoffs are different.

If you sell high-margin beauty products, the important thing there may be fulfilling the order in full as much as possible for the retail customer. Because the margins aren’t the problem for that product set, you may be okay with LTL shipping where you take a hit on that particular transaction. If you’re selling toilet paper, where the margins are low, you’ll be less willing to take a hit on transportation so you wait so you can send an FTL shipment to gain more efficiency. Within the context, you aren’t spending more than what's necessary, but the goals call for different paths.

Many businesses have taken a one-size-fits-all approach. But, resiliency won’t happen if you are applying that blanket policy to all your products regardless of the different dynamics that exists between different product categories. The approach needs to change.

The takeaways #

Know when and where to make changes quickly #

The immediate focus, even as society starts to reopen and whatever that is going to look like, is on cash. Cash is king. So for retailers, where is your inventory and how can you move it through different channels, offload it, or even store it for a later season? How can you get things out, on whichever channel, in whichever country or region—how can we move it efficiently and unlock some cash. Because we don’t know what’s going to happen next, we’re still in a level of survival mode.

Longer term is all about digital—but that was true pre-COVID-19. Hopefully most businesses won’t just pick up where they left off, but will learn from this and really focus on how digital can help tackle real challenges and opportunities, like customer obsession. If you're not using digital in that transformative way, why are you wasting your money and someone else's time? Don't go and start 100 pilot projects just so you can say that, "I'm doing something in AI."

Customer obsession is about more than just following consumer behavior trends #

I don’t know. We are seeing new shopping behaviors as a result of the pandemic, but what’s their staying power? Will consumers fundamentally shift their behavior or will things go back to normal?

Consider grocery. I’m ordering my groceries online, but I hate it, and that won’t be something I keep doing when it’s not a necessity. I know there are a lot of people out there that feel differently. So behaviors have changed, but it’s difficult to predict if those are long-term changes and to what degree new business models are needed to support them.

But, there is a larger issue than determining how to support new consumer behaviors. Businesses must be more adaptive. Instead of just solving for one challenge, like evolving buying behaviors, organizations must focus on how to be more nimble. Amazon has been nimble for a long time, they’ve already proven it’s the right way to operate.

Today, the way decisions are made gets in the way of that. They are mired in process and center only around efficiency. But I hope we see shifts in the way organizations are structured so they can be more nimble, make decisions faster, be faster. For example, don’t worry about redundancies. If two teams are working on the same thing, you’re optimizing for speed and that takes precedence. So, can I innovate fast? Can I solve problems fast? What kind of leadership mechanisms do we need?

Figuring out how to make better decisions is key. Then, you can focus on the functional elements and infrastructure capabilities that are needed to make that happen. The result is a business that is adaptable and can quickly respond to change when it occurs.

Resilience, visibility, and a new mindset #

Supply chain leaders are used to disruption, but hopefully this one is treated differently—as an opportunity. Maybe the length of time and magnitude of it will help keep the need to be resilient top of mind for the new generation of leaders. I also think that ongoing uncertainty will encourage leaders to consider more innovative solutions that help them shift channels and strategies more quickly. Again, going back to the notion of supply chain flexibility, which is really just another way to say “resilience”.

How can new technologies unlock capabilities across the organization so that you’re prepared for anything? What decision-making practices need to change in order to do that? How drastically does your mindset around efficiency versus resiliency need to change?

Finally, it all comes down to context. How well do you know your products and your customers? Is there an opportunity to micro-segment, tailor inventory allocation and availability by region, by customer profile, by whatever other dimension is critical for your business to better serve your customers? In the end, the supply chain is inherently local. Keep an eye on the global supply chain, but empower your people to innovate locally—not just when you’re trying to get through something as big as COVID-19, but even when you’re in a period of stability and just trying to get through a Wednesday.

About Harshad Kanvinde

Harshad is a leader in Slalom’s Strategy and Supply Chain practice. He helps clients in several industry sectors including CPG, Retail, Aerospace, Automotive, and Technology, address their thorniest strategic problems through Strategy Development, Business Model Innovation, and Digital Transformation.

Prior to Slalom, Harshad worked at Amazon in their Fulfillment by Amazon (FBA) business, where he focused on Inventory Allocation and Transportation initiatives to improve Seller experience, increase product selection on the platform, and reduce outbound shipping cost.

Prior to Amazon, Harshad worked at Ernst & Young (EY), where he helped start a Joint Venture (JV) business with Procter & Gamble (P&G) to commercialize P&G’s manufacturing and product development know-how and led manufacturing transformations at CPG clients.