How Covid-19 is reshaping supply chains

10:31pm 16th December 2021

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Companies have only partly addressed the weaknesses in global supply chains exposed by the coronavirus pandemic. In the face of new challenges, finishing the job is even more urgent, according to a recent study by McKinsey & Company entitled, How Covid-19 is reshaping supply chains.

In May 2020, with much of the world still in the grip of the first wave of the pandemic and lockdowns leaving many companies struggling to keep their businesses running, the management consulting firm conducted a survey of supply chain senior executives from across industries and geographies. It revealed that the vast majority of respondents (93%) intended to make their supply chains far more flexible, agile, and resilient.

12 months later, in the second quarter of 2021, McKinsey repeated its survey with a similarly diverse group of supply chain leaders. This time, it asked respondents to describe the steps they had taken to shore up their supply chains over the past year, how those changes compared with the plans they drew up earlier in the crisis, and how they expected their supply chains to further evolve in the coming months and years.

'Quicker to build inventories than factories' 

"In our 2020 survey, just over three-quarters of respondents told us they planned to improve resilience through physical changes to their supply chain footprints. By this year, an overwhelming majority (92%) said that they had done so.

“But our survey revealed significant shifts in footprint strategy. Last year, most companies planned to pull multiple levers in their efforts to improve supply chain resilience, combining increases in the inventory of critical products, components, and materials with efforts to diversify supply bases while localizing or regionalizing supply and production networks. In practice, companies were much more likely than expected to increase inventories, and much less likely either to diversify supply bases (with raw-material supply being a notable exception) or to implement nearshoring or regionalization strategies.”

Different industries have responded to the resilience challenge in markedly different ways, the study observed. Healthcare players stand out as resilience leaders. They applied the broadest range of measures, with 60% of healthcare respondents saying they had regionalized their supply chains and 33% having moved production closer to end markets.

By contrast, only 22% of automotive, aerospace, and defense players had regionalized production, even though more than three-quarters of them prioritized this approach in their answers to the 2020 survey. Chemicals and commodity players made the smallest overall changes to their supply-chain footprints during the past year.

Some of these differences among sectors can be attributed to the structural characteristics of the industries involved: for example, chemicals and metals are asset-intensive sectors with large, expensive production sites. Investments in new capacity can take years to complete. Other respondents told us that they had struggled to find suitable suppliers to support their localization or near-shoring plans, the study underlined.

Despite these challenges, regionalization remains a priority for most companies. Almost 90% of respondents surveyed said that they expect to pursue some degree of regionalization during the next three years, and 100% of respondents from both the healthcare and the engineering, construction, and infrastructure sectors said the approach was relevant to their sector.

Risk management 

The pandemic pushed risk to the top of virtually every corporate agenda, the study noted. For the first time, most respondents (95%) say they have formal supply chain risk management processes. A further 59% of companies say they have adopted new supply chain risk management practices over the past 12 months. A small minority (4%) set up a new risk-management function from scratch, but most respondents say they have strengthened existing capabilities.

The actions taken by companies varied according to the pre-crisis maturity of their supply chain risk management capabilities. Companies with little or no risk management experience tended to invest in new software tools, while higher-maturity organizations mainly focused on the implementation of new practices, the study found.

The proactive monitoring of supplier risks was the primary focus of these efforts, yet significant blind spots remain in most companies’ supply chain risk management setups. Just under half of the companies in our survey say they understand the location of their tier-one suppliers and the key risks those suppliers face. But only 2% can make the same claim about suppliers in the third tier and beyond. That matters because many of today’s most pressing supply shortages, such as semiconductors, happen in these deeper supply-chain tiers.

Digitization

The study highlighted that with so much interest in advanced analytics, it comes as little surprise that the crisis has been a catalyst for further digitization of end-to-end supply chain processes. “An overwhelming majority of survey respondents say they have invested in digital supply chain technologies during the past year, with most investing more than they originally planned.

Today’s ongoing and planned digitization efforts are most likely to focus on visibility, as companies strive for a better picture of their supply chains’ real-time performance.

Talent remains a major barrier to accelerated digitization, however, and the skills gap is widening. In McKinsey's 2020 survey, only 10% of companies said they had sufficient in-house digital talent. And by this year, that figure had dropped dramatically, to only 1%.

Respondents report a range of ongoing actions to address the digital-skills gap, including reskilling (55%) or redeploying (30%) existing staff, hiring new talent from the labour market (52%), and taking on specialist contract staff for specific projects (21%).

Supply chains at inflection point

The study concluded that over the past year, supply chain leaders have taken decisive action in response to the challenges of the pandemic: adapting effectively to new ways of working, boosting inventories, and ramping their digital and risk management capabilities. Yet despite that progress, other recent events have shown that supply chains remain vulnerable to shocks and disruptions, with many sectors currently wrestling to overcome supply side shortages and logistics-capacity constraints.

“Most worryingly, these new problems are emerging just as senior leaders are turning their attention away from supply chain issues. In many sectors, there are signs that the rate of investment in digital supply chain technologies is slowing down. Talent gaps are wider than ever, end-to-end transparency remains elusive, and progress toward more localized, flexible supply-chain structures has been slower than anticipated.”

It added. “The coming months could turn out to be critical for supply chain leaders. Some companies will build upon the momentum they gained during the pandemic, with decisive action to adapt their supply chain footprint, modernize their technologies, and build their capabilities. Others may slip back, reverting to old ways of working that leave them struggling to compete with their more agile competitors on cost or service, and still vulnerable to shocks and disruptions.”

By Stuart Todd

Source: lloydsloadinglist.com

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