A new playbook for combating supply chain disruption

Businesses are facing a combination of supply chain challenges almost unprecedented in scale and complexity. 

First, there has been a 40-year high in inflation, and an attendant spike in costs. At the height of the crisis a single container from East Asia increased to more than US$10,000 from an average of about US$1,400 in 2019, according to Drewry’s World Container Index, while the cost of sourcing raw materials in the UK rose more than a quarter. Meanwhile the Covid-19 pandemic and the Russian invasion of Ukraine created significant disruption to global supply chains, resulting in constant unpredictability in the retail, manufacturing, automotive, and other sectors.

Left unchecked, these difficulties could cause companies’ considerable damage. We’ve found in our client work that in many industries, the types of shocks to operations that have occurred in recent years have the potential to wipe out 20% to 30% of yearly earnings. To manage the risk from these issues in advance of future supply chain crises, we have developed a playbook that can ensure organisations have the right set of levers in place. It’s a four-part process designed to address both inflation and volatility through solutions that meet near-term challenges, as well as through comprehensive structural changes that build up long-term resilience.

Managing for resilience with long-term strategy

A first crucial part of the playbook comprises effective day-to-day measures to handle volatility, collectively referred to as “firefighting.” These might include anything necessary to keep operations running at a high level, from expediting delivery services to speeding up production by purchasing components on an emergency basis.  

To give one example, we recently undertook a project for a UK-based furniture retailer that was experiencing difficulties meeting a sudden increase in demand. We identified the client’s most pressing issues, which included high demurrage costs resulting from a heavy backlog of inbound containers in ports, as well as damage to productivity when its warehouse reached capacity.

Overcoming these problems required a variety of firefighting methods. To empty the port backlog, we increased the company’s inbound warehouse capacity by 25%. Then to further alleviate warehouse problems and prevent future ones, we implemented a dashboard that provided greater visibility on warehouse KPIs and optimised the warehouse management system’s parameters to ensure better flow and space utilisation.

Building a robust cost control plan

Concurrently developing a cost control plan to rein in ever-rising supply chain expenses is another vital early step. For one UK e-commerce client, firefighting measures were successful in stabilising operations but resulted in significant warehouse, long-haul transportation, and last-mile delivery cost increases.

Several steps were required to offset the mounting expenses. One was conducting a bottom-up evaluation of operator productivity in the warehouse, and proposing changes that would improve the warehouse layout, picking sequences, and other elements. Another was implementing an AI-based scheduling tool that forecasts volume for the next week and plans required labour accordingly.

We also optimised the schedule of long-haul transports, reducing the number of trucks and drivers needed. And we adjusted last-mile delivery areas to increase the number of stops per mile and decrease driving time. Overall, these moves resulted in a 15% improvement in the client’s bottom line.

Guaranteeing supply chain cost excellence

While certainly helpful solutions, firefighting and cost control are not entirely new. Nor do they restore the resilience that companies depend on from their supply chains. Structural reform, the long-term component of the playbook, may be the only way for leaders to accomplish that goal.

No matter what strategies are implemented to do so, ensuring future supply chain cost excellence by developing a sustainable cost base is key. Supply chain disruption caused a German wholesale retailer an 11% year-over-year increase in its cost of goods sold. We first identified the footprint of the company’s warehouse network as the main driver for the increase, and analysed it. Our recommendation, closing three of the 15 warehouses, led to a 20% reduction in supply chain costs while increasing the on-time, in-full service rate to higher than 99%. Additionally, we proposed further decreasing costs in the long-term with a new, fully automated warehouse centrally located in Germany.

Ensuring resilient supply chain structure

Executives also have a host of options available that can fortify their companies before a volatile climate emerges. For example, one method aimed at establishing structural resilience is to reshore. Nearly four in 10 US businesses have plans to return manufacturing stateside, according to a survey by electrification and automation technology conglomerate ABB.  

Implementing a capable sales, inventory, and operations plan, or SIOP, is another lever that many have neglected for too long. Our experience suggests that a SIOP can play an important role in managing the way forward, providing insights into critical changes on the demand side, as well as into supply-side concerns such as sourcing issues with suppliers and changes in lead times. Another useful tactic is to adopt technologies such as sensors to relay information faster and radio frequency identification (RFID) tags to provide location-based data for remote tracking and monitoring. Especially for companies that source in Asia or South America, establishing these means of transparency can be vital.

A project for a Switzerland-based consumer packaged goods company highlights additional avenues for building structural resilience. After ramping up its international operations from 2010 to 2020 — particularly in Asia — the client wanted to re-evaluate its production and warehouse footprint. We started by developing several risk scenarios and evaluating their likelihood and potential impact. Several weak spots in the supply chain became clear: The company was acquiring several single-source commodities from suppliers in Asia, for example, and had a single logistics service provider.

Addressing these issues, we proposed, entailed reshoring a significant portion of the client’s production volume to a new plant in southern Europe, and using certain European suppliers as alternatives to high-risk Asia-based ones. Looking even further ahead, we selected and prepared a supply chain risk management tool to anticipate risk cases more proactively.

Change is expensive, but necessary

Few of these resilience-building strategies come easily or cheaply, of course. In any industry, transparency through digitalisation may be hard to attain. Diversifying the supplier base, though critical for resilience, is expensive. Building up safety stock is a means to resilience but easily can lead to too much inventory and excessive working capital.

After the experience of the past two-plus years, however, C-suite executives cannot ignore the need for these and other foundational changes.  If they’re not attended to, cost-to-serve will continue to rise, securing of capacities at suppliers or logistics partners will remain difficult, and service levels will continue to decline. Therefore, their next task — and perhaps the hardest one of all — will be to control the current situation with targeted firefighting measures, while at the same time thinking about the future and how to set the right strategic direction to achieve long-term competitiveness.