The need for supply chain resilience has been a hot topic for many companies in this post-pandemic era, as Steve Wall, Chairman of The Sequoia Partnership and Advisor to ChAI, raises in this guest blog. The discussion takes a look at the subject from both an inventory and a capacity perspective but the answer is not that simple. Increased efficiency is key for increased resilience and Wall makes four key points on how to achieve that. This is where ChAI comes into the picture: to be used as a core asset in building efficiency and resilience for the companies whose products we depend on every day.
In the wake of the pandemic, the question of supply chain resilience has emerged as a critical concern for many companies. But is this justified – and if so how can it be achieved and will it stick?
1. Is Supply Chain Resilience a Genuine Problem?
For the popular press the mantra that emerged after the Pandemic was that we should move from “Just in Time to Just in Case”. The implication being that supply chains failed due to insufficient inventory buffers and running too lean. But is that true?
Looking at the actual data Supply Chains rose to a massive challenge with considerable success. This challenge was sometimes due to the peculiar effects of the pandemic, and sometimes due to the massive, synchronised, global bullwhip that enveloped markets and companies in the developed world. According to The Economist:
- UK hand sanitiser import tonnage rose by almost 500% between 2019 and 2020. Yet the price increased by only 20%
- In 2021 semiconductor shipments increased by 15% globally and 30% in the USA – compared to 2020. A remarkable achievement in an industry where high capacity utilisation is critical to economics and thus unit cost.
Again - quoting:
"The Economist looked at 17,000 different commodities which America imported from 1989 to 2022. For each year, we counted the number of commodities where the physical quantity of imports declined from the previous year. This measure hints at situations where a supply chain genuinely “fails”. In 2020 the failure rate, we estimate, was only marginally above average. Even in the midst of a once-in-a-generation pandemic, the vast majority of supply chains flowed normally."
So the case that Supply Chains were remarkably resilient – but obviously with some ultimate capacity constraints – looks strong.
2. But what about inventory – are we too lean?
According to PWC, global inventory levels are estimated at a staggering $7.5 trillion, which doesn’t sound lean to me. Maintaining inventory is often necessary for efficiency. However, it's essential to evaluate whether this working capital is truly effective. With all of our clients, big and small, our experience of bringing real precision to inventory control has been that approximately 30% of their working capital was inefficiently utilized or wasted. That’s circa $2.5 trillion of working capital that is already not working.
2.5 trillion is a number that is hard to imagine – but let’s briefly try.
- One billion seconds ago: Bill Clinton was elected President of the USA; Yeltsin was President of Russia; John Major was Prime Minister of the UK.; the Barcelona Olympics took place; the Space Shuttle and Concorde were still operating; MacDonalds opened its first restaurant in China and The Sequoia Partnership was founded. In Short – I well remember 1 billion seconds ago and probably so do you.
- 2.5 Trillion seconds ago the first humans were leaving Africa and heading for Asia. I don’t remember that!
$2.5 trillion would pay off the aggregate external debt of 80% of the countries in the world. It is a lot of wasted cash. Simply throwing more cash at this issue is neither intelligent nor effective in building supply chain resilience.
3. So maybe spare capacity?
It is similar with carrying spare (redundant) capacity. Carrying excess fixed cost in the form of spare production capacity will simply increase unit prices. And if or when that capacity needs to be deployed it will need to be staffed by workers that are trained, and it will need proven experience (and in some cases certification) for making the products that are mapped on to it. That is a formidable and, in the teeth of another pandemic, probably insurmountable challenge.
Many years ago I worked in Air Traffic Control – where resilience is truly critical. For electricity supply to the air traffic control centre we had triplex (and to an extent quadplex) redundancy:
- Three generators, each capable of supply the whole facility, rotating between:
- One actually providing the supply;
- One on hot standby – so running without load and able to cut in within seconds if needed;
- One in a cyclic, planned maintenance to make sure it will function to specification when needed.
- We could also fall back to the National Grid if all generation failed.
- We had triplex wiring – so all equipment had three wiring rings they could get power from. We cycled between the rings daily to be absolutely sure they all worked at any time.
Of course – this is hugely expensive. In air traffic control it is deemed worth it. A competitive enterprise could not carry this burden and survive – unless all its competitors were also forced to carry it by legislation. Attempting to enhance resilience by making supply chains more inefficient is likely to harm a company's competitive position in the long run.
4. So what can you do if increased fixed and working capital are not the answer?
Increased resilience needs to be accompanied by increased efficiency.
- Get precise control on inventories and redeploy your share of the $2.5 trillion productively. Maybe some strategic stocks of key components rather than excess stock of the wrong stuff.
- Increase agility. Better design for flexibility of production and sourcing (at line and factory level). We are still often using “hard coded” production lines when it has been possible to build in programmability for several decades
- Implement effective S&OP and S&OE – making sure highly trained management teams are fed with great data and superb scenario planning tools (including a digital twin of your entire supply network) – so that they can react quickly and appropriately to challenges as they arise.
- Deploy AI supply intelligence tools to spot issues at the earliest possible time.
There will still be constraints – e.g. in ultimate capacity. But let’s ensure that we can do the best possible job with what we have when the next major event strikes.
While the COVID-19 pandemic felt like a rare event, there have been multiple pandemics in the 21st century, although most had limited impacts. The COVID-19 pandemic was unique in its synchronized global effect, leading to supply chain disruptions and bullwhip effects. The concept of supply chain resilience extends beyond the simple choice between just-in-time and just-in-case inventory management. Companies accustomed to demand-driven supply chains struggled to adapt to supply constraints, although many managed to cope. Despite these challenges, the case for significantly increasing supply chain resilience is debatable. The logic of intentionally introducing inefficiency into supply chains for the sake of resilience is questionable, with some suggesting it's a pretext for political agendas such as reshoring and nationalism.
Apparently Napoleon said:
'The torment of precautions often exceeds the dangers to be avoided. It is sometimes better to abandon one's self to destiny.'
He has a point. Let’s not incur costs of precautions that are not justified by the risks we are trying to avoid. But let’s not “abandon ourselves to destiny” either. There are things we can do if we apply our minds.