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The modern supply chain is facing some unprecedented challenges right now, and procurement is in a prime position to be able to help solve some of these issues while also reducing overall supply chain risk for their organizations. In “Risk, resilience, and rebalancing in global value chains,” McKinsey Global Institute covers a lot of ground on the supply chain risk front, but also singles out a few key realities that companies are facing and the steps they can take to mitigate risk.
After analyzing 23 different industry value chains to assess their exposure to specific types of shocks, the research firm found that supply chain “shock” varies according to industry. Aerospace and semiconductors, for example, are susceptible to cyberattacks and trade disputes, because of their high level of digitization, R&D, capital intensity and exposure to digital data flows.
Some of the key procurement-related findings in McKinsey’s report include:
- Shocks inevitably seem to exploit the weak spots within broader value chains and specific companies. “An organization’s supply chain operations can be a source of vulnerability or resilience,” it points out, “depending on its effectiveness in monitoring risk, implementing mitigation strategies, and establishing business continuity plans.”
- Some of these vulnerabilities are inherent to a given industry; the perishability of food and agricultural products, for example, means that the associated value chains are highly vulnerable to delivery delays and spoilage.
- Industries with unpredictable, seasonal and cyclical demand also face particular challenges. Makers of electronics must adapt to relatively short product lifecycles, and they cannot afford to miss spikes in consumer spending during limited holiday windows.
- Other vulnerabilities are the consequence of intentional decisions, such as how much inventory a company chooses to carry, the complexity of its product portfolio, the number of unique SKUs in its supply chain, and the amount of debt or insurance it carries. Changing these decisions can reduce—or increase—vulnerability to shocks.
- Companies’ supplier networks vary in ways that can shape their vulnerability. For example, spending concentrated among just a few suppliers may make it easier to manage them, but it also heightens vulnerability should anything happen to them.
Complexity isn’t a Weakness
Buyers should also understand that supply chain vulnerabilities often stem from the structure of supplier networks in a given value chain. “Complexity itself is not necessarily a weakness to the extent that it provides companies with redundancies and flexibility,” McKinsey points out, “But sometimes the balance can tip. Complex networks may become opaque, obscuring vulnerabilities and interdependencies.”
For example, a large, multinational company may procure goods from hundreds of different tier-one suppliers. Each of those tier-one suppliers in turn can rely on hundreds of tier-two suppliers. “The entire supplier ecosystem associated with a large company can encompass tens of thousands of companies around the world when the deepest tiers are included,” McKinsey points out.
Finally, the number of tiers of participating suppliers can hinder visibility and make it difficult to spot emergent risks. As a result, “suppliers that are dependent on a single customer can cause issues when demand shocks cascade through a value chain,” the firm notes.
Improving Resilience
On a positive note, McKinsey says that 93% of supply chain leaders are currently taking steps to make their supply chains more resilient. Some of the strategies they’re using include:
- Building in redundancy across suppliers
- Nearshoring their manufacturing operations
- Reducing the number of unique parts that they use to build their products
- Regionalizing their supply chains
“Most companies are still in the early stages of their efforts to connect the entire value chain with a seamless flow of data,” says McKinsey, which sees digital as a vehicle that can deliver “major benefits to efficiency and transparency that are yet to be fully realized.”
The firm calls the creation of a comprehensive view of the supply chain through detailed sub-tier mapping a “critical step to identifying hidden relationships that invite vulnerability.” The problem is that most large firms have a “murky view” beyond their tier-one and perhaps some large tier-two suppliers. “Working with operations and production teams to review each product’s bill of materials can reveal whether critical inputs are sourced from high-risk areas and lack ready substitutes,” McKinsey suggests.
