McKinsey: supply chain resilience post-COVID-19
Over the past 20 years, global supply chains have become standard in the industry. But, procurement and supply chain professionals have faced a number of ever-more-frequent global and regional challenges in recent years, from natural disasters to accelerating trade tensions between major economic blocs. As a result, there has been a clear shift in focus to the challenge of mitigating risk and assessing the resilience of supply chains.
COVID-19 has highlighted the importance of supply chain resilience in the modern supply chain. It has showcased that even brief, 30-day disruptions caused by supply chain vulnerabilities can result in 3-5% EBITDA margin gaps. With companies seeking new ways to reduce their exposure to supply chain risks, McKinsey estimates that up to $1trn in trade flows in the industrial sector could be rebalanced, with a few countries having the potential to become major destinations of relocated production.
In addition, advances in technology along with the large-scale adoption of automation and digitisation have resulted in the decreased focus on labour cost, further scaling the need for companies to test their supply chains holistically for cost, speed and risk. According to recent McKinsey surveys before and after the COVID-19 pandemic, the percentage of executives saying they expected to increase their organisation’s resilience by rebalancing their supply chains has risen from 70% to 93%.
Measuring the balance between supply chains’ cost and risk means companies must be vigilant. They understand the risks facing their supply chains as well as the mitigation strategies available to minimise those risks. Companies can often choose from a number of risk-mitigation options. For example, certain industrial companies have found that shifting component-production locations can mean a 20% decrease in cost, as well as reductions in logistics and trade risks. By comparison, the same parts can be manufactured domestically with only a 5% cost increase by leveraging Industry 4.0. With supply chain risks always changing, the stress test can’t be a one-off exercise and should be conducted on an ongoing basis.
The time to reimagine supply chains and introduce enhanced capabilities is now, as more opportunities for companies continue to capture first-mover advantages. In a complex, fast-changing and unpredictable environment, there is no simple task, and based on the value at stake, the C-Level will need to be in the driver’s seat. However, a resilience stress test provides a key first step in monitoring risk and helping develop a blueprint.