Supply chain shocks are happening more frequently than in the past, and they’re more severe when they occur. Companies must transform their supply chains to be more resilient.
That was the message Julian Fischer, Partner at McKinsey & Company, delivered to a group of business leaders and execution management professionals earlier this week at the Bay Area stop on Celonis World Tour 2022. I caught up with Fischer after his session.
“If I look at supply chain at the moment, and the clients that I serve in their supply chains, there is a perfect storm, which is brewing,” Fischer said. “The amount of disruption that we see at the moment is just unparalleled.”
Julian Fischer, Partner at McKinsey & Company
COVID hasn’t gone away, there are still lockdowns in Shanghai, the semiconductor shortage is ongoing and the crisis in Ukraine (which is first and foremost a humanitarian crisis) are all causing immense disruptions in global supply chains. And, there is the 800-pound gorilla in the room…inflation and the dramatic rise in energy prices, commodity prices and labor costs. The annual inflation in the US in April was 8.3% and rose to 9% in the UK, the highest since 1989.
“All of these factors at the moment are converging,” Fischer told me. “They are adding up and nobody knows precisely how they're all going to play out over time.”
To address the increasing frequency and severity of supply chain disruptions, companies need to reshape their supply chain processes.
“We have to rethink supply chain,” Fischer said. “We have to rethink how we run our operations and how we serve our customers globally.”
According to Fischer and McKinsey, the old-school way of thinking about supply chain management is built around lowest cost, lowest inventory, just-in-time (JIT), inventory as working capital, quarterly planning, and the like. As he put it, people with this mindset would say, “You're just delivering boxes from A to B, how hard can it be, right?”
Turns out in the modern world it can be very hard. Supply chains need to be more digital, integrated, transparent, agile and sustainable. Process transparency, shorter planning cycles (two weeks compared to quarterly), holding inventory to mitigate risk, planning for remote work, nearshoring and business continuity management should all be on the radar of supply chain managers.
Fischer also urged the audience to start the conversation with their colleagues, corporate board members and c-suite executives to figure out whether their supply chain can and should become a competitive advantage. He said:
“If the answer to this question is, “yes”, [you] need to invest because the competitive advantage is something you can’t buy, and probably shouldn’t outsource either. It's something that you invest in, and that you build over time because it makes a difference. If you simply outsource the process or buy it in, there will be no differentiation. And then by default there will not be a competitive advantage.”
Along with this new way of thinking about the supply chain, the speaker shared the following common characteristics of companies with best-in-class supply chains:
End-to-end (E2E) visibility on risks across the value chain from tier N supplier to customers
Digital anchored actions to reduce vulnerability and exposure to shocks
Regular stress testing and reassessment
CEO agenda including both resilience and efficiency to ensure a reimagined supply in the future
Resiliency metrics balanced against growth and cost metrics, built into performance management systems
New tools and people capabilities to ensure both resilience and efficiency
Governance and process to manage resilience over the long term
Enforcement of procurement requirements on suppliers, ensuring transparency across the supply chain
Technology is a huge differentiator when it comes to building a supply chain that’s a competitive advantage Fischer said. He continued:
“Many clients that I serve have started to use process mining technology to create transparency, to better understand vulnerability, to link it with sustainability targets as well. And to fully understand where and how does the process really works? Where do we have the biggest exposure points at the moment in terms of risk, and how do we then clean up a process because transparency is fantastic. And it's the first step.”
Transparency isn’t enough however, Fischer said companies must turn that transparency into actions and implementations:
“This is what I would encourage each of you to do: talk with your colleagues and think through how to take this new-found transparency that can today be very fast to gather using technologies such as Celonis, and focus the energy and brainpower of your teams to focus on how to turn this insight to action.”