McKinsey report urges firms to avoid ad hoc supply fixes

As supply chain upheaval shows little sign of abating, McKinsey is urging organisations to ditch out-moded and short-term strategies, and focus on proactive management, with a view to building long-term resilience.

The report says that the “the rapid decay of a decades-old model of supply chain reliability and efficiency” is now a key feature of CEO agendas. 

The report references the pandemic, war in Ukraine and spiralling inflation as “prolonged shocks to production that have the potential “to wipe out 30-50% of one year’s earnings”. 

It adds that many of the supply shocks arising from Russia’s invasion of Ukraine are yet to be felt, because many companies have safety stocks for exported materials, and as they get depleted disruptions will become more frequent.

Short-term fixes ineffective for supply chains built on predictability

McKinsey says that in today’s world, short-term, ad hoc measures to restore predictability to a supply system that was built on cost optimisation - and at a time of far greater predictability - is becoming increasingly difficult.

“To restore the needed resilience, supply chain operators need to consider a range of options, including structural reform,” McKinsey urges.

Co-author of the report is McKinsey Partner Knut Alicke, who leads the organisation’s Supply Chain Executive Academy, which stages events designed to share supply insight and expertise.

He says: “Structural reform may be the only way for leaders to restore the resilience that companies depend on from their supply chains.”

The McKinsey report suggests an evolutionary three-step process that can lead to “optimal resilience”:

Short-term solutions could work at a time when supply chains were more predictable than they are today. Preparing for long-term uncertainty and possible upheaval may encourage companies to build resilience into their supply chains. This process could evolve in three stages:

Cross-silo strategies. Day-to-day strategies to meet demand - such as expedited delivery services - can help but don’t build resilience, says McKinsey. Instead, CEOs should consider cross-silo operations for an agile response to fast-moving events.

Create a nerve centre. This is to consolidate organisational responses. McKinsey says it can coordinate and manage proactive responses to issues “that might range from caring for distressed colleagues to testing financial stability under a range of scenarios”. 

It suggests that such a nerve centre could be organised under four categories: people, operations, decision-enabling tools and an early-warning system to signal potential political developments, cyberthreats, or regulatory issues.

Bankrolling supply resilience is huge CEO challenge - McKinsey 

The report concludes: “CEOs recognize that none of these actions come without costs, and that it may be hard to count on long-term resilience to pay for the investments required to achieve it. 

“After the experience of the past two-plus years, chief executives may need to define the circumstances in which they think consumers would pay a premium to ensure the availability of goods. 

“They could also consider exploring whether suppliers will accept discounts to help ensure demand for their products and absorb the costs through more productive operations. Perhaps the hardest task for CEOs could be convincing investors to accept resilience as the new table stakes and to change their view of expected risk-adjusted returns.”