Recession proofing the supply chain
Many organisations have enjoyed unquestionable success during the recent economic expansion, including higher margins, product portfolio expansion and a renaissance in talent acquisition, with millions of new jobs created over the past several years. However, signals from multiple sources point to a coming recession within the next 18 to 24 months. A recent Grant Thornton survey of more than 250 C-level executives and business owners found more than three-quarters of respondents expect a recession to occur within the next two years, with the potential to impact a number of critical supply chain attributes, including physical infrastructure planning, new-equipment procurement and critical research and development investments. Faced with these potential challenges, many organizations are embracing the pathway to recession preparedness by adopting a number of strategies designed to preserve recent performance gains and minimize supply chain disruptions.
Organisations can prepare for the uncertain times ahead by adopting a recession mitigation framework that targets the most high-risk supply base, process and delivery capabilities. With such a framework in place, they can quickly develop what can be termed a ready-for-deployment supply chain immune system to minimize any disruptions and preserve the competitive advantage of their supply chain. While some leaders are resigned to acceptance of inevitable recessionary effects, savvy, proactive executives can translate the noise of a recession into actionable, deployment-ready mitigation strategies to capture the highest level of supply chain resilience and agility possible.
Identifying the signs of recession
While knowledge of an impending recession is important, paying close attention and preparing for the potential impact on your operation is mission critical. Grant Thornton’s survey found that nearly three in 10 (29%) respondents have a supply chain resiliency strategy in place. The balance of respondents, 71%, are in various stages of considering, planning or implementing such a strategy.
Based on our research, Grant Thornton has identified seven key recession indicators which, when combined, can provide a useful framework to assess your risk preparedness for a possible economic slowdown. These indicators, when viewed across the enterprise, can also inform your supply chain mitigation strategies:
Global dashboard deterioration outside of normal control limits (e.g. growing inventories, demand drop)
Supply partner financial issues including market contraction and growing backlogs
Internal and trading partner budget contractions and budget freezes
Diminishing margin capture against long-term forecasts
Talent pool shrinkage across core functions due to functional budget issues
Cross-functional continuous improvement investment shrinkage and funding shortfalls
Shrinking cross-functional cooperation and synchronization (“local survival focus”)
Taken together, these seven indicators should prompt a number of introspective questions regarding an organization’s supply chain health, including:
Could diminishing supply partner financial performance potentially transition from periodic issue management to a quantifiable supply risk?
Will our promised “market-known” business process improvements lapse because of internal funding choke-holds?
Can talent attrition become a highly visible concern to key customers?
When will my growing inventory pipeline reach the critical stage of unbudgeted obsolescence, disposal and excess storage costs?
While each question individually poses a tactical risk with (hopefully) only a localized performance impact, the effects of multiple scenarios in parallel pose significant risks to supply chain flexibility, adaptability and ultimately profitability. For those executives who see the signs of a recession as an opportunity to further refine and strengthen their existing supply chains, there are several practical strategies leaders can rapidly deploy as part of an offensive recessionary response.
Building up organisational supply chain immunity
Organisations have a clear opportunity to benefit from a supply chain recession preparedness framework designed to address the seven indicators outlined across the end-to-end supply chain value stream. Holistically evaluating the complete supply chain value stream, an effective supply chain immunity assessment should catalog the most significant supply chain risks, including the magnitude of the possible fallout of each identified risk along with the individual risk trigger point. Armed with priority risks and their associated trigger points, the assessment must then translate into ready-for-deployment mitigation strategies to lessen quantified recessionary impacts, preserve competitive advantages, and lessen market fears. Once in place, the immune system can provide the tailwinds to preserve market confidence and sound financial footing. Key aspects of a successful immune system include:
Contingency SKU rationalization planning to drive out unnecessary cost and complexity when laser focus on higher-margin products become a true recessionary lifeboat
Highly targeted supply contract temporary modifications, including advanced buys for high-risk components, tighter backlog management and improved risk-sharing across the relationship
Customer segmentation refinement to pre-select and plan for service level adjustments should supply constraints become a reality
Cross-functional preparedness to harness available enterprise-wide cerebral horsepower and prevent isolated, siloed recession response plans (e.g. expand the power of S&OP as a functional integrator)
Advanced automation efforts prior to major recessionary impacts to better prepare for, and ethically manage, labor reallocations
Close coordination with strategic suppliers to improve transparency to core supplier cost drivers and appropriately share recessionary concerns and deploy a partnership approach to proactively manage down costs where possible
Ultimately, the assessment, along with the adoption of targeted risk mitigation strategies, can proactively reduce an organization’s overall recession risk profile and the magnitude of any possible disruption. Known and documented risks, proactive mitigation strategies and deployment-ready action plans are the necessary resilience tools for the next recession. Long before competitors are scrambling to adapt, proactive business leaders can take the steps necessary today to set their organisations on the right path. They’ll face down a coming recession with confidence, greater precision and highly ethical responses to challenging supply chain design and resourcing questions.
By Bob Hawkey, Director, Operations Transformation, Advisory Services, Grant Thornton LLP
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NTT DATA Services, Remodelling Supply Chains for Resilience
Joey Dean, the man with the coolest name ever and Managing Director in the healthcare consulting practice for NTT DATA and is focused on delivering workplace transformation and enabling the future workforce for healthcare providers. Dean also leads client innovation programs to enhance service delivery and business outcomes for clients.
The pandemic has shifted priorities and created opportunities to do things differently, and companies are now looking to build more resilient supply chains, none needed more urgently than those within the healthcare system. Dean shares with us how he feels they can get there.
A Multi-Vendor Sourcing Approach
“Healthcare systems cannot afford delays in the supply chain when there are lives at stake. Healthcare procurement teams are looking at multi-vendor sourcing strategies, stockpiling more inventory, and ways to use data and AI to have a predictive view into the future and drive greater efficiency.
“The priority should be to shore up procurement channels and re-evaluate inventory management norms, i.e. stockpiling for assurance. Health systems should take the opportunity to renegotiate with their current vendors and broaden the supplier channel. Through those efforts, work with suppliers that have greater geographic diversity and transparency around manufacturing data, process, and continuity plans,” says Dean.
But here ensues the never-ending battle of domestic vs global supply chains. As I see it, domestic sourcing limits the high-risk exposure related to offshore sourcing— Canada’s issue with importing the vaccine is a good example of that. So, of course, I had to ask, for lifesaving products, is building domestic capabilities an option that is being considered?
“Domestic supply chains are sparse or have a high dependence on overseas centres for parts and raw materials. There are measures being discussed from a legislative perspective to drive more domestic sourcing, and there will need to be a concerted effort by Western countries through a mix of investments and financial incentives,” Dean explains.
Wielding Big Tech for Better Outcomes
So, that’s a long way off. In the meantime, leveraging technology is another way to mitigate the risks that lie within global supply chains while decreasing costs and improving quality. Dean expands on the potential of blockchain and AI in the industry.
“Blockchain is particularly interesting in creating more transparency and visibility across all supply chain activities. Organisations can create a decentralised record of all transactions to track assets from production to delivery or use by end-user. This increased supply chain transparency provides more visibility to both buyers and suppliers to resolve disputes and build more trusting relationships. Another benefit is that the validation of data is more efficient to prioritise time on the delivery of goods and services to reduce cost and improve quality.
“Artificial Intelligence and Machine Learning (AI/ML) is another area where there’s incredible value in processing massive amounts of data to aggregate and normalise the data to produce proactive recommendations on actions to improve the speed and cost-efficiency of the supply chain.”
Evolving Procurement Models
From asking more of suppliers to beefing up stocks, Dean believes procurement models should be remodelled to favour resilience, mitigate risk and ensure the needs of the customer are kept in view.
“The bottom line is that healthcare systems are expecting more from their suppliers. While transactional approaches focused solely on price and transactions have been the norm, collaborative relationships, where the buyer and supplier establish mutual objectives and outcomes, drives a trusting and transparent relationship. Healthcare systems are also looking to multi-vendor strategies to mitigate risk, so it is imperative for suppliers to stand out and embrace evolving procurement models.
“Healthcare systems are looking at partners that can establish domestic centres for supplies to mitigate the risks of having ‘all of their eggs’ in overseas locations. Suppliers should look to perform a strategic evaluation review that includes a distribution network analysis and distribution footprint review to understand cost, service, flexibility, and risks. Included in that strategy should be a “voice of the customer” assessment to understand current pain points and needs of customers.”
“Healthcare supply chain leaders are re-evaluating the Just In Time (JIT) model with supplies delivered on a regular basis. The approach does not require an investment in infrastructure but leaves organisations open to risk of disruption. Having domestic centres and warehousing from suppliers gives healthcare systems the ability to have inventory on hand without having to invest in their own infrastructure. Also, in the spirit of transparency, having predictive views into inventory levels can help enable better decision making from both sides.”
But, again, I had to ask, what about the risks and associated costs that come with higher inventory levels, such as expired product if there isn’t fast enough turnover, tying up cash flow, warehousing and inventory management costs?
“In the current supply chain environment, it is advisable for buyers to carry an in-house inventory on a just-in-time basis, while suppliers take a just-in-case approach, preserving capacity for surges, retaining safety stock, and building rapid replenishment channels for restock. But the risk of expired product is very real. This could be curbed with better data intelligence and improved technology that could forecast surges and predictively automate future supply needs. In this way, ordering would be more data-driven and rationalised to align with anticipated surges. Further adoption of data and intelligence and will be crucial for modernised buying in the new normal.
These are tough tasks, so I asked Dean to speak to some of the challenges. Luckily, he’s a patient guy with a lot to say.
On managing stakeholders and ensuring alignment on priorities and objectives, Dean says, “In order for managing stakeholders to stay aligned on priorities, they’ll need more transparency and collaborative win-win business relationships in which both healthcare systems and medical device manufacturers are equally committed to each other’s success. On the healthcare side, they need to understand where parts and products are manufactured to perform more predictive data and analytics for forecasting and planning efforts. And the manufacturers should offer more data transparency which will result in better planning and forecasting to navigate the ebbs and flows and enable better decision-making by healthcare systems.
Due to the sensitive nature of the information being requested, the effort to increase visibility is typically met with a lot of reluctance and push back. Dean essentially puts the onus back on suppliers to get with the times. “Traditionally, the relationships between buyers and suppliers are transactional, based only on the transaction between the two parties: what is the supplier providing, at what cost, and for what length of time. The relationship begins and ends there. The tide is shifting, and buyers expect more from their suppliers, especially given what the pandemic exposed around the fragility of the supply chain. The suppliers that get ahead of this will not only reap the benefits of improved relationships, but they will be able to take action on insights derived from greater visibility to manage risks more effectively.”
He offers a final tip. “A first step in enabling a supply chain data exchange is to make sure partners and buyers are aware of the conditions throughout the supply chain based on real-time data to enable predictive views into delays and disruptions. With well understand data sets, both parties can respond more effectively and work together when disruptions occur.”
As for where supply chain is heading, Dean says, “Moving forward, we’ll continue to see a shift toward Robotic Process Automation (RPA), Artificial Intelligence (AI), and advanced analytics to optimise the supply chain. The pandemic, as it has done in many other industries, will accelerate the move to digital, with the benefits of improving efficiency, visibility, and error rate. AI can consume enormous amounts of data to drive real-time pattern detection and mitigate risk from global disruptive events.”