Rethinking supply chain resilience in turbulent times

Nowadays, everyone is talking about supply chain resilience. If you follow Delivered, you know that we are too. Just check out the links at the end of this article.

And we're doing so for a good reason. Severe disruptions to business and the economy are becoming more common and more costly. As we were emerging from the frying pan of pandemic-related lockdowns, port congestion, and container shortages, little did we know that we would land in the fire of the war in Ukraine, surging fuel prices, and the return of inflation.

Whether you’re a Scottish barbershop owner or the US Treasury Secretary, understanding why companies and countries need to be resilient is surprisingly similar. Things can’t continue as they are, whether you need to keep the clippers buzzing or oversee the hair-raising business of keeping inflation in check.

According to McKinsey, supply chain disruptions alone will cost organizations an average of up to 45% of one year’s profits over the course of a decade. With the next black swan event likely just around the corner, we must learn from this this situation and change how we think about supply chain risk and resilience. 

From just-in-time to just-in-case

Companies have been shifting parts of their supply chains abroad to improve profit margins for years. As a result, supply chains grew in length and complexity based on a lean, global model of manufacturing that called for low inventory levels, on-time and in-full deliveries, and shorter lead times. Now, the new normal of regular disruption has broken that system.

To become more resilient, companies must move from just-in-time to just-in-case. That means diversified supply bases, planning alternative freight routes, making distribution centers flexible, and building inventory. And state-of-the-art technology will be the key to success. In its 2022 report, From Disruption to Reinvention – The future of supply chains in Europe, Accenture says that technology will enable “resilient, relevant, and sustainable supply chains.” These digital supply chains will provide real-time end-to-end visibility, using digital twins and control tower algorithms to oversee the entire value chain, including Tier 2 and Tier 3 suppliers.

Buffer, diversify, and regionalize

We are seeing this shift first-hand as the challenges in recent years have forced companies to examine the vulnerabilities in their supply chains. Our customers are recognizing that they can't continue business as usual. They want to do things differently and are turning to logistics for help.

In the past, companies could plan procurement months – and sometimes even a year – in advance. Now they have reduced that horizon to monthly and even weekly. It's taking a lot more effort, but the need to be more agile is clear.

According to a 2022 survey by McKinsey, several strategies are being used to bolster supply chain stability. For example, the survey found that increasing inventory was the most common action, with 80% of respondents indicating that they had built up safety stock during 2021. An analysis of almost 300 listed companies found inventories rose on average by 11% between 2018 and 2021, with the largest increases in the high-tech and commodity sectors. Some supply chain leaders said they would have boosted inventories even more if suppliers had been able to fill their requests.

With all the uncertainty, global supply chains are also literally moving as companies readjust their global sourcing. Regionalization is a big trend that we expect to continue as manufacturers and parts suppliers bring operations nearer to the end customer and expand supply bases across multiple countries. During the pandemic, many companies also began to shift part of their manufacturing from China to alternate locations like Vietnam and Thailand. The China-US trade war initially triggered this so-called “China+1” diversification strategy, and many manufacturers expedited it when COVID-19 hit.

As a result, we've been busy crafting multimodal solutions for many customers to ensure business continuity and even lowering carbon emissions during the regional disruptions.

Supply chain resilience means planning for the unplannable

McKinsey’s survey also shows that companies report significant progress in longer-term strategies designed to increase supply chain resilience. For example, 81% of respondents say that they have implemented a dual-sourcing approach, relying on at least two suppliers for components. In 2020, only 55% followed such a strategy. Meanwhile, 44% of respondents say they are developing regionalized supply networks, up from 25% in the previous year. Most respondents expect this momentum to continue.

Despite the war in Ukraine and global challenges, our most recent DHL Trade Growth Atlas predicts trade will grow faster in 2023 than it did over the previous decade. International trade in goods has surged to as high as 10% above levels before the COVID-19 pandemic.

In the current global business environment, logistics providers can help customers rethink certain supply chains, basing them on a sensible trade-off between cost and risk so that they are both efficient and secure. In today's volatile market environments, stable and reliable logistics represent the most critical link in the supply chain resilience chain.