Long-standing low and recently falling margins in construction are in danger of becoming an expected norm. But does it really have to be that way?
Now, perhaps more than ever, it is critically important for business leaders to have a forensic understanding of their supply chain, including its strengths and potential risks – so that they can make key strategic decisions and, in the current context, respond to market disruption rapidly.
Justin Benson, consulting partner, discusses the importance of ongoing supply chain assessment, highlights some of the challenges involved and outlines how businesses can look to do this effectively.
1. Why is it important for businesses to assess supply chain resilience now?
New technology, new entrants and new consumer behaviours have created significant market disruption – as have the macro level shocks of Brexit and of course Covid-19. If all this disruption has taught businesses anything, it’s the importance of having robust, well-managed supply chains.
However, it’s difficult for businesses to have a full view of their supply chain, let alone understand how resilient they are, and this often only becomes apparent when it’s too late and business continuity has been compromised. Assessing supply chain resilience on a continual basis allows businesses to gain a deep understanding of their supply base, as well as their distribution and logistics operations, so they can identify areas of weakness and make the most of opportunities.
During the pandemic, the disruption that was already underway in many market segments accelerated significantly, and consumer behaviours and preferences shifted dramatically too. This has exacerbated the importance of having a complete view of the supply chain and, critically, how robust it is.
2. How frequently should such assessments be carried out?
This often depends on the type of business and its supply chain complexity. However, with disruption now prevalent in every marketplace, it is critical to keep supply chain resilience under continuous review.
Many companies are monitoring their supply chain in ‘real time’. Many manufacturing processes are automated and deliver substantial amounts of data for monitoring the efficiency of production. To assist with this, the wider supply chain now offers a variety of tools and data for monitoring supply chain performance in areas such as inventory control, and monitoring spend on a daily or even hourly basis. It is important to consider the tools and techniques available to assess supply chain performance regularly, spotting change quickly or indeed predicting changes in future demand for the company’s products and services.
In addition, the rise of the green agenda during the pandemic is encouraging many businesses to take a fresh look at their supply chains with sustainability in mind. Investors are asking companies for assessments of their environmental and social governance (ESG) to determine enterprise value. If the company’s carbon footprint is high, investors are arguing for lower enterprise values due to the investment that will be required to meet customer demands or ensure compliance. For businesses that want to be at the forefront of these changes, assessing and reconfiguring supply chains now to improve ESG performance will improve resilience, help grow market share and increase the value of the company. In addition, developments such as the recent European Parliament vote on supply chain due diligence underline how important it is for businesses to ensure that they maintain an ongoing and deep understanding of the entirety of their supply chain.
3. How challenging is it to undertake a robust assessment of supply chain resilience?
The greater the complexity, the greater the challenge. Businesses should apply three lenses when assessing resilience – risk, performance (cost versus value) and capability.
Risk is a key issue for supply chain operations at the moment and is a challenging area to assess effectively. Businesses are exposed at multiple points across their supply chains and highly integrated organisations can have thousands of suppliers. The range of transactions often makes it difficult to track what is being supplied and when, limiting the ability to manage supplier risk. This means that poor visibility of risk areas and their potential impact can be a real threat – from reduced revenue, inflated costs and disruption to production processes, through to damaged credibility with customers, investors and other stakeholders.
Performance is also a challenging element to evaluate. This involves understanding whether the right balance between cost and value is being achieved across the supply chain. The costs of raw materials, energy and labour are volatile and have increased due to economic constraints and the huge global increase in demand for delivery services during the pandemic. In order for operations to continue production effectively and provide customers with good quality items at affordable prices, regular adjustments need to be made. An end-to-end view of the supply chain is therefore critical. Understanding the supply chain impact of external factors such as the pandemic and changes in consumer demand allows businesses to ‘pull the right levers’ with their suppliers, logistics operations and manufacturing capacity – enabling them to manage costs, while dealing with changes in demand.
Finally, capability is a challenging area because businesses need to be able to assess whether they have the right systems and people in place to respond quickly and effectively to external factors. Over the years, it has become increasingly challenging to recruit and develop the right talent who are passionate about supply chain and have the right understanding of the roles, responsibilities and application of systems and methods.
4. What are the strategic benefits of having an in-depth understanding of the supply chain?
There are three core strategic benefits from a board-level perspective: agility, flexibility and improved control.
With understanding comes agility. With quality operating systems, businesses can access real-time inventory data and adapt to global constraints. This gives businesses and their suppliers peace of mind during unexpected scenarios. Even in the event that certain geographical areas of the supply chain experience external issues or shocks, businesses can still access the latest information on their system. This enables them to deploy resources from elsewhere to maintain production and achieve customer satisfaction.
Unexpected events will inevitably occur and risks will crystalise, so businesses need to be able to respond to these challenges. Having insights based on robust data means that businesses can make better strategic and operational decisions quickly. Resilient supply chain management allows organisations to collaborate with vendors in order to adjust the flow of products based on changes made at facilities or distribution points. Being connected in this way allows businesses to have full control of how they manage their inventory and respond to prevailing challenges.
Good control of the supply chain means knowing and seeing exactly where inventory is located at any point in time. By working with data and building the right logistics operation, businesses can have a single view of their inventory and costs across their entire network. This visibility provides them with improved control and better insights, enabling them to make the right short and long-term decisions to mitigate risk, manage cost and flex capacity requirements.
5. How should businesses go about assessing supply chain resilience?
The key to assessing supply chain resilience effectively is reliable data and achieving visibility as a result. Before making changes, business leaders need to know what is happening at all levels of the supply chain so they can identify areas of weakness and risk, as well as opportunities.
Deploying the right tools can provide powerful data visualisation capability, enabling businesses to see what is going on in real-time to support faster and more impactful decision making. Building an end-to-end view of the supply chain enables businesses to balance often competing factors, such as ‘cost versus quality’ or ‘make versus buy’ decisions. In addition, as well as logistics and inventory, linking key elements across the product development cycle, such as design, engineering and procurement, are important to minimising ‘baking in’ costs early in the process. Typically, 85% of the cost of producing and delivering a product is built in during the design stage.
Through constructing a detailed model, businesses can achieve a view of the whole supply chain, making it possible to conduct a sensitivity analysis based on ‘what if’ scenarios. This modelling exercise provides a window to the supply chain, often disproving received wisdom, addressing ‘taboo’ subjects (such as ‘sacred cow’ products or services), and enabling the right recommendations to be made for the business. This in turn drives supply chain resilience and helps to realise efficiencies. Ultimately, this approach will enable businesses to see whether they are performing effectively, with the right cost base, while mitigating risk and responding to changing customer demands.
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The challenges and benefits of building supply chain resilience and how businesses should look to future proof their supply chain as an enabler of competitive advantage.
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