Managing risks and relationships: how to make your supply chain more resilient to shocks

For a long time, supply chain management was about cutting costs and increasing efficiency. Yet the disruption brought about by the COVID-19 pandemic has revealed that companies can no longer view their supply chains as just a cost center.

In their book club webinar Strategic supply chain management: Thriving amid the COVID-19 tsunami in the supply chain, Carlos Cordon, Professor of Digital Strategy and Supply Chain at IMD, and Kim Sundtoft Hald, Professor at Copenhagen Business School, discussed how successful supply chain management involves calculating risk and building relationships as well as exchanging parts and products.

Managing business decisions

The first step should be to ensure that the supply chain is integrated across the finance, sales, marketing, and product development functions. This way, companies will be able to take strategic decisions when external shocks, such as the pandemic, hit.

Take the example of German carmaker Volkswagen. Although its sales fell in 2021 after a global shortage of semiconductors hampered production, profits actually rose as they shifted priorities to focus on higher-equipped cars and allocated supply to vehicles with the highest margin. By integrating the supply chain across business functions, they were able to turn a crisis into an opportunity.

Likewise, for companies that may find it hard to predict sales, such as pharmaceutical companies, having the finance department map out options for building up capacity before they invest in production is vital.

Managing the ecosystem

Barely a day passes without news of a shortage of parts disrupting production. Recently, automakers have had to shutter factories as they couldn’t get hold of wire harnesses made in Ukraine.

The disruption unleashed by the pandemic has already prompted firms and governments to rethink the supply chain ecosystem. The US government is ramping up investment in reshoring chip manufacturing to avoid future disruption, while many companies are looking to regain greater control of their supply chain by bringing parts of it closer to home, or even back in-house.

Vertical integration is also in vogue. Danish shipping group Maersk is buying up trucks and transport companies so they can transport customers’ goods door-to-door.

Managing risk

While bringing more of the supply chain back in-house may be a step too far for many firms, it is important to identify your company’s weakest links and biggest risks, said Professor Cordon.

After the 2011 tsunami in Japan disrupted its supply of semiconductors, Toyota – which pioneered just-in-time manufacturing – decided to build up a strategic supply of two months’ worth of chips with its suppliers. When the pandemic hit, the Japanese carmaker was therefore able to keep factories humming for longer than its competitors. As Professor Sundtoft Hald explained: “Building such resilience into your supply chain gives you the capability to survive in turbulent times.”

Managing the trade-off between efficiency and agility

The push to make supply chains ever more efficient has come at a cost to flexibility, as seen in the pandemic where a shortage of parts prevented firms from producing goods to match supply.

Many firms are moving from just-in-time manufacturing to just-in-case, which made sense, especially with the cost of capital so low. But with rising inflation, companies may soon face a trade-off between the flexibility that comes from building up excess inventory and the cost of holding unused stock.

Tesla provides an example of how to be agile in times of constrained supply. Unable to get its hands on a certain type of microchip, the company reprogrammed the semiconductors that were available to give them additional functionality.

The most successful firms, said Professor Sundtoft Hald, will be able to diagnose where in the supply chain it pays to be efficient, and where they can be innovative.

Managing partnerships

A further lesson from the pandemic is the importance of the relationship between suppliers and their customers.

Take the example of COVID-19 vaccines. The European Commission launched legal action against AstraZeneca after the company failed to deliver vaccines on time. But ultimately this did not lead to them receiving supplies any sooner.

Compare this approach to the one taken by Israel. The country was among the first to receive a shipment of Pfizer’s COVID-19 vaccine after it worked with the pharmaceutical giant to de-risk the supply chain and agreed to provide data on secondary effects.

With the world becoming increasingly unstable and uncertain, sharing risks and rewards with customers and suppliers is ever more important, said Professor Sundtoft Hald. “You can have all the processes in place, but if you don’t have the relationships your supply chain will break down.”

Managing changing consumer demands

The rise of online shopping means many retailers have had to rethink their supply chains. Fashion companies that used to deliver pallets piled high with clothes to stores have had to figure out how to send single items to customers who order via click and collect.

“Individualized delivery is a very different ball game,” explained Professor Cordon.

One Italian maker of helmets saw its sales fall in the pandemic, not due to declining demand, but because it couldn’t reorganize its logistics to deliver individual products to customers. Amazon has capitalized on the needs of small companies to deliver products direct to consumers; third-party sellers now account for 50% of its total sales.

Managing future supply chains

The rise of the circular economy – which involves sharing, leasing, reusing, repairing, refurbishing and recycling – will pose a further challenge for supply chain management.

Take the example of plastics. Many companies have the technical capability to recycle plastics, but struggle to get products back from the consumer, even in countries with high levels of recycling.

The circular economy will also require new supply chains that don’t yet exist. Dutch electronics company Fairphone has produced a longer-lasting smartphone that can be easily repaired and customized by the user. While sales have so far been modest, Fairphone’s founder says the company is a success because it has pushed bigger manufacturers such as Apple to allow iPhones to be sent back for repair.

Companies will also have to figure out how to share the costs of moving to a circular economy, and how to merge supply chains so the waste from one supply chain can become the raw product in another.

While organizations have ramped up investments and started taking the sustainability of their supply chains seriously in the past two years, best practices are still lacking.