MD Genesis Corporate Solutions
One of the main challenges that as caused by the Covid-19 Pandemic has been the supply chain crisis. Never before have companies had to deal with a crisis of this magnitude.
It has either crippled companies or reduced them to a fraction of their former selves. Dealing with this crisis has left many companies facing financial distress as they do not know how to increase profitability or stabilise cashflow.
I recently read an article written by McKinsey which discusses this in more detail.
Network resilience: Footprints on the move
The article points out that the turbulence of the past two years has forced many organizations to address vulnerabilities in their complex, highly globalized supply networks. But the 2020 and 2021 supply chain pulse surveys revealed a significant gap between respondents’ ambition and their action. While many respondents said they wanted to diversify their supply base and boost in-region sourcing, the most common action in response to disruption was increases in the inventory of components and finished projects.
Bigger buffers and safety stocks are still seen as an important tool for supply chain resilience. Eighty percent of respondents told us that they increased their inventories during 2021; separate McKinsey analysis of almost 300 listed companies found that inventories increased by an average of 11 percent between 2018 and 2021,1 with the largest increases in the high-tech and commodity sectors. Some supply chain leaders have told us that they would have increased inventories even further if suppliers had been able to meet their requests.
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The article adds that while higher overall stock levels have become the norm, McKinsey’s research suggests that companies are now looking for smarter ways to ensure resilience while keeping inventory costs under control. Seventy-one percent of respondents expect to revise their inventory policies in 2022 and beyond.
Companies are also reporting significant progress in longer-term strategies designed to increase network resilience. For example, 81% of respondents say that they have implemented dual-sourcing strategies during the past year, up from 55 percent in 2020. Forty-four percent of respondents, up from 25 percent the previous year (an even larger relative jump), say they are developing regionalized supply networks (Exhibit 2). Most respondents expect this momentum to continue. Sixty-nine percent of supply chain leaders told us that dual sourcing will continue to be relevant in 2022 and beyond, and 51 percent think the same about regionalization.
The article points out that disruption has reshaped almost every supply chain. Ninety-seven percent of respondents say they have applied some combination of inventory increases, dual sourcing, and regionalization to boost resilience. Supply chain leaders believe that these efforts are paying off: Eighty-three percent told us that the footprint resilience measures they have taken over the past two years helped them minimize the impact of supply chain disruptions in 2022. For example, respondents from the commodity, consumer goods, and chemicals sectors were most likely to say that recent geopolitical disruption has not resulted in significant supply chain challenges this year; it is these industries that have focused most on structural changes such as nearshoring or network redesign. This situation may change as disruption continues, however, since data collection for our survey was conducted in the spring of 2022.
Digitization: Building on success
The article points out that Previous surveys revealed that most companies ramped up their digital supply chain investments significantly over the past two years. Digital tools have been critical to companies’ efforts to improve the resilience of supply chain planning and execution.
That story continues in our most recent survey: in almost every sector, more than 90% of respondents report that they invested in digital supply chain technologies last year. Only two sectors—automotive and healthcare—report lower-than-expected investments. For the automotive sector, that finding hints at implementation delays, while healthcare companies may have slowed their pace of digitization following several years of rapid progress. Overall, just over 80 percent of respondents expect to make further investments this year and beyond.
However, the focus of these investments is changing significantly, a shift that can be attributed to the success of recent digitization projects. Last year, supply chain visibility was the top priority for companies, with 77 percent of respondents saying they were investing in this area. This year, with little more than half saying they have supply chain visibility systems in place, it has fallen to fourth place.
The article adds that As companies address their visibility issues, digitization efforts are shifting to the next big challenge in supply chain management: capturing the demand signal. In this year’s survey, respondents report that the top two priorities for digital investments were demand and supply planning, cited by 74% and 69%, respectively. Fifty-eight percent of respondents are prioritizing inventory optimization.
The article adds that, of the companies looking to invest in advanced planning systems, more than two-thirds say they expect to use the technology offered by their existing supply chain software provider. This is indicative of a continued market shift away from specialized point solutions for specific tasks and toward integrated end-to-end technology platforms. DIY isn’t dead in the supply chain sector, however: thirty-seven percent of respondents tell us that they expect to develop at least some supply chain software in-house, with most focusing on specific point-solutions such as visibility dashboards.
Digital talent remains a significant challenge for companies. In McKinsey’s 2020 survey, only 8% of respondents felt they had sufficient in-house talent to support their digital ambitions. By 2021, when many large digitization projects were in full swing, that number had dropped to just 1 percent. The situation has improved somewhat in the past year: in our latest survey, 10 percent of companies indicate they now have the talent they need. Respondents from the high-tech sector report the most progress in acquiring digital talent, with 20 percent more respondents than last year saying they had sufficient talent to meet their needs. Respondents from the automotive, aerospace, and defence sectors, by contrast, were much more likely than last year to report “limited” or “no” in-house digital supply chain talent.
The past two years have also seen a marked shift in companies’ approach to talent acquisition. In 2020, 70% of companies were building talent by reskilling their existing labour force. This year, the primary approach, used by 68 percent of companies, was outside hiring. That shift might reflect the dramatic increase in labour mobility that has occurred worldwide following the lifting of coronavirus restrictions.
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Risk management: Steady progress
The article points out that while companies have made radical changes in the way they use technology to manage their supply chains over the past two years, the development of their supply chain risk management capabilities has been much more incremental.
Risk remains a priority for most respondents in McKinsey’s latest survey, with 83% of respondents experiencing at least some raw-materials shortages over the past year. Ninety percent say that they want to further increase resilience, and almost three-quarters expect to increase the budget allocated to resilience-related actions. Over the past 12 months, two-thirds of companies have implemented new supply chain risk management practices; among the most popular approaches are new processes to monitor supplier-related risks.
However, understanding the status of complex, multitier supply chains is still proving extremely challenging. Forty-five percent of respondents tell us that they either have no visibility into their upstream supply chain or that they can see only as far as their first-tier suppliers.
The article points out that there are some signs of progress. Last year, a paltry 2% of respondents said they had a good picture of their supply chains down to the third tier or beyond. This year, that fraction has increased to 17 percent, with the greatest progress in sectors with shorter, simple supply chains. In the consumer products and retail sector, for example, 21% of respondents feel they have sufficient multitier transparency. Forty-three percent of respondents from the commodity sector believe their organizations have sufficient supply chain resilience measures in place, even though only 14 percent have a good view of third-tier suppliers. Deep supply chain transparency remains especially problematic for the automotive, aerospace, and defence sectors, with only 9 percent of respondents confident in their third-tier supplier visibility and none expressing satisfaction with their supplier visibility at all levels.
Phahlani Mkhombo is the MD of Genesis Corporate Solutions and is a Senior Business Rescue Practitioner.
