March 29, 2023

Supply Chain Resilience: Why the time to build resilience is now

The news has made it clear that managing risk and increasing resilience across the supply chain.

Lalith Srivasta

We live in a rapidly changing world.

Facing ever-increasing customer demand and stiff competition, companies have spent years boosting efficiencies and cutting costs. Stark reminders in the news have made it clear that managing risk and increasing resilience across the supply chain has never been more important.

Prolonged product shortages during long recovery periods after disasters have managed to shine the spotlight on the lack of preparedness in our complex multi-tier, multi-dimensional supply global chains. As companies face uncertainty due to tightening government regulations, rising environmental concerns heightened geopolitical risks, and frequently occurring disasters, organizational resilience is one of the key parameters demanding the attention of executives and supply chain managers alike.

Supply chain (or organizational) resilience not only enables companies to manage small day-to-day fluctuations, but also absorb, adapt, and quickly recover from catastrophic disasters. In a rapidly changing world, some companies are now using supply chain resilience strategies as a competitive advantage by successfully navigating fluctuating customer demand, especially during periods of heightened uncertainty.

Supply Chain Resilience in Today’s Business Context

Organizational resilience is the ability of an organization to successfully confront the unforeseen disruptions in its supply chain. In today’s business context, supply chain resilience no longer implies merely the ability to manage risk but risk management also includes being better positioned than competitors to deal with, and even gain an advantage from disruptions.

Because the numbers and types of threats that can undermine a supply chain are now greater than ever, resilience has taken on even more significance in supply chain management.


When Resilience breaks down

Organizations without a proper resilience plan run the risk of experiencing a supply chain breakdown. Resilience is a forecasted measure aimed at delaying the effect of disruption or shortening the period during which an organization's supply chain cannot match the market demand.
For example, Toyota experienced longer recovery times after a 2011 earthquake in northeast Japan, one which caused a tsunami that killed more than 22,000 people. The reason for the prolonged disruption? Toyota’s low inventory of semiconductors. It took three months for Renesas Corp (Toyota’s major supplier) to resume production. Severely lagging behind competitors Nissan & Honda, Toyota took about four months to get its Japanese plants back to full capacity and six months to get its North American facilities back to full capacity.


Lessons Learned - Resiliency Planned

After the 2011 earthquake, Toyota worked to identify the most at-risk items with the intent of preventing a similar disruption in the future. The automaker came up with a list of about 1,500 parts it deemed necessary to secure alternatives for or to stockpile.

Toyota’s business continuity plan (BCP) required suppliers to stockpile anywhere from two to six months' worth of chips for the Japanese carmaker, depending on the time it takes from order to delivery. To offset supplier inventory costs, the company returns a portion of the cost-cuts it demands from them each year during the lifecycle of any car model under so-called annual cost-down programs. This resulted in Toyota largely weathering the semiconductor shortage of 2021.


Keys to Adapt and Transform a Supply Chain

Forecasting accuracy and seeing problems early (or before they happen)
Forecasting a crisis like an earthquake is hard. However, identifying adverse weather events like storms is possible. Complemented with the continuous exchange of data, companies can see their problems early and come up with strategies to cope with disruptions. For example, PepsiCo carefully watches impending weather events in and around their Asian co-packing facilities and has plans in place to use an American facility as needed to fulfill the demand in their coconut water supply chain.

Short-term flexibility: Peloton’s response to the challenges and opportunities presented by the COVID-19 pandemic is a great example of flexibility.
The company saw a dramatic increase in demand for exercise machines in the US, with connected fitness subscription workouts growing over 300% in their most recent quarter. Due to unpredictable lead times caused by congestion at the port in Long Beach, customers faced extended delivery wait times for their equipment. In response, the company spent $100 million on the expedited ocean and air shipments to bring its products from Asia. Even though those shipping methods can cost ten times as much as ocean freight.
To ensure they could build and deliver on the new opportunities, the company decided on those short-term solutions to prevent customers from choosing to move to competitors.

Long-term planning:Taking the long view is a key to supply chain resiliency. As demonstrated by Toyota or PepsiCo, identifying the critical nodes, which are the bottlenecks, and being ready to expand capacity is crucial for long-term success.

Bottleneck Identification: In the case of Toyota, parts with long lead times (semiconductors have an average lead time of 26 weeks) can be a bottleneck. Therefore, the company decided to maintain a strategic inventory of these critical components as a buffer against shortages.

Adding spare capacity: For PepsiCo, the coconut water supply chain meant dealing with a perishable product. To deal with possible adverse weather events or labor unavailability, PepsiCo has planned for spare production capacity with an American copacker.


Lessons Learned - Resiliency Planned

A risk assessment and resiliency plan should not be limited to an organization. Companies should work with their suppliers across the multi-tier ecosystem to identify risks and reduce the potential of disruptions.
A digital twin of the entire supply chain comprising of all multi-tier partners, like the one offered by TADA, helps to:

Uncover hidden exposure/risk across multiple tiers.
Reveal supply chain dependencies and bottlenecks.
Promote discussion & learning by sharing information.
Enable prescriptive actions using cutting edge ML models.
Manage high-risk suppliers by diversification in sourcing/manufacturing locations.

The delicate balance of supply chain resilience is made possible by prior planning and good decisions. Those key outcomes are supported by technology that gives 360-degree visibility into the entire supply network and gives leaders all the right data, at the right time, in a format that they can use.