The ultimate balancing act

Building a holistic supply chain strategy

Global businesses are acutely aware of the impact of supply chain disruptions. Often, the problem stems from a one-dimensional focus on operating cost only.

At BearingPoint, we see the designing of a world-class supply chain as being a balancing act. Controlling cost is obviously important, but so is risk mitigation, flexibility, implementing a resilience strategy and ensuring sustainability holistically across the chain.

We believe that implementing these five core principles will deliver a first-rate supply chain strategy:

1. Breaking down the supply chain silo
2. Careful multi-sourcing
3. A balance of nearshoring and offshoring
4. Centralising contingency planning
5. Integrating sustainability into all decision-making

Critically, these principles must be embedded into the strategy at its very heart, rather than simply being add-ons.

Too many businesses still operate their supply chains in a siloed way. Supply chains interact with many parts of a business, from procurement to commercial and from marketing to operations. Most silos will have a cost KPI focus, which is easy to manage, linked to profit margins and the bottom line. But this ignores the reality that costs need to be optimised across the supply chain, not for individual silos.

What the focus on cost additionally fails to do is to take into account the value of flexibility. Flexibility here means the ability to adapt supply chains to events both sudden and gradual. The more committed over time and distance a supply chain is, the more inflexible it will be, and the more prone to disruptive events.

Following the Fukushima nuclear disaster, several automotive companies discovered that although they had checked their multiple sources of components back three or four tiers, they hadn’t gone far enough. It turned out that several seemingly distinct suppliers shared the same origin source of a simple 10-cent component, based near Fukushima. The disaster resulted in catastrophic disruption to those automotive supply chains.

To construct a multi-sourced supply chain, the arms of your chain must be truly distinct from one another.

The reason that nearshoring has been underused as a strategy for many years is that it has traditionally been seen as more expensive. Again this is attributable to the cost focus within a single silo. It is a procurement decision that does not take into account end-to-end cost, investment, risk and flexibility. The result has been a persistent tendency to source from long distance without understanding the implications.

Nearshoring is particularly effective when applied to specific categories of product. The riskier a product is, and the more uncertain the demand for it, the more nearshoring comes into its own, as it gives your business greater flexibility to respond to that fluctuating demand, and produce it in smaller quantities. Conversely, the simpler a product is to sell, and the more predictable the demand for it, the more you can capitalise on the cost benefits of long-distance offshoring.

Both events, while not predicted, are not entirely novel in the history of supply chain management. In the grand scheme, they represent relatively minor disruptions. The problems they caused were massively exacerbated, however, by a lack of contingency planning by the firms who were most affected.

A supply chain strategy is only as good as the degree to which it takes into account unexpected events such as these. For this reason, it’s imperative that contingency planning is built into the strategy from the very start. Contingencies can affect the entire structure of a supply chain, along with key choices including whether or not to multi-source. But many businesses have found that it’s too late to deal with contingencies by responding when they happen. Contingency planning cannot be an add-on to an existing strategy – it must be part of your long-term design.

In 2013, a garment factory in Bangladesh collapsed with the unthinkable loss of 1,134 lives. The factory was an origin source for a number of high-profile Western brands. In dealing with the reputational fallout of this devastating event, many brands, including those affected as well as others, subsequently claimed that it was simply not possible to trace their supply chains back to environments like the one in Dhaka. The validity of this claim was greatly undermined by the fact that journalists were able to trace the brands sourcing garments from the factory in a matter of days, simply by visiting the site and combing through the debris.

The moral of the tale is simple. Claiming ignorance about sustainability concerns is now untenable as an approach to designing supply chains.

On the environmental question, sustainability directly impacts sales and market perceptions, so can’t be ignored. It has to be treated as a necessary cost. Shipping products thousands of miles may save a little in terms of operating cost, but it’s far from the best thing to do from an environmental perspective, and can result in significant negative PR. For this reason, nearshoring may be a better answer, even though it may appear more costly on paper.