Supply chain volatility has never been greater
Currently, supply chain issues are the most pressing issue facing firms. CFOs and C-suite executives are operating in unprecedented volatility and disruption, unlike anything we have seen since WWII.
The sheer scale of the problem is mind-boggling. Transportation costs are up seven-fold and in some instances more than that. According to some estimates, shipping from China now takes 90 days, not 45, and supply chain firms are prioritising shipping the most profitable items, leading to shortages across the board.
Brexit is also compounding pandemic-related issues. The lorry driver shortage in the UK, for instance, has reached the point where Christmas is under threat. Retailers are already bracing for stock shortages, with Halfords, Iceland and Dunelm all reporting empty
shelves are likely from the middle of December 2021. The impacts on sellers and the broader value chain could be tremendous.
Why The Supply Chain Paradigm Needs To Change
From 1980 onward, logistics was a “commoditised” industry. Practically all 3PL firms offered very similar services, so the way to differentiate them was by comparing their price per truckload. Naturally, companies chose the most affordable option.
This approach worked during times of economic stability and low consumer expectations. But in today’s volatile environment, that’s no longer true. Customers care about delivery speed and stock levels more than ever before, with prices taking a backseat. The real value is stock availability and keeping the delivery promise.
Traditionally, supply chain companies dealt with the problem of volatility by holding additional inventory and capital. However, because of the industry’s competitive landscape, this tactic is no longer feasible. Companies that just increase their costs necessarily squeeze their margins.
In this context, the old fashioned approach of partnering with third-party logistics firms and relying on them to take care of everything feels risky. Major brands suddenly feel less comfortable outsourcing their logistics operations to companies operating under different incentives.
So, how should the CFO and C-suite respond? Ideally, they need to push for a paradigm shift in how the supply chain functions. Nobody is suggesting throwing out 3PL partners, but there is a growing need for more accurate and timely supply chain information from customers. If your logistics partner is not able to tell you exactly where your items are in the process as well as geographically, at any given point in their journey, you can turn to technology for more answers. The capabilities offered by supplemental blockchain-enabled digital solutions, such as those available via Supply Chain Platform‘s provide independent real-time data. Connecting supply chain players digitally allows everyone to receive advanced disruption warnings and adjust their processes accordingly before the crisis hits.
How Can CFOs Help COOs Adapt Supply Chains To The New Environment?
PWC has a clear message for CFOs and the C-Suite: if they are struggling to meet today’s supply chain volatility and transportation challenges, then they will doubly struggle to meet tomorrow’s. Thus, it’s essential for chief financial officers to remain engaged in conversations with their chief supply chain officers (CSCOs) and broader supply chain and transportation leadership. But what, specifically, can they do?
Prepare To Meet Rising Customer Demands
Supply chain firms would be forgiven for thinking that consumers have become less demanding of logistics solutions. However, the opposite appears to be the case. Despite the disruption caused by Brexit and the COVID-19 pandemic, consumers expect to be able to order goods today and receive them tomorrow. Shipping issues change their perceptions of the brands, with negative experiences potentially discouraging purchases and endangering margins.
Therefore, CFOs need to engage with COOs to discuss how they improve transport reliability in today’s environment. Supply chain precision is part of the solution, but so too is understanding how consumer expectations are changing. Supply chain leaders who can understand and interpret data coming from their customers quickly put themselves at a competitive advantage.
CFOs should encourage COOs to go beyond their regular tools (such as request for proposal and backward-looking datasets), and introduce new methods to avoid margin compression. Potential options include real-time data analytics, omnichannel data sources, and integrated supply chain planning.
Improve Transportation Budgeting
Transportation is also becoming more volatile. Peaks and troughs in demand are more common than in the past, leading to both physical and financial disruption. Therefore, CFOs need to address how their COOs are going to deal with these issues going forward.
Already, we see major logistics providers setting aside around 10 percent of their 2022 budgets to develop systems to better deal with these supply issues. They’re using advanced technology to create a “network picture” of their supply and demand situation, allowing them to make better decisions.
CFOs can encourage COOs to take advantage of improved analytics. Superior analysis can identify transportation cost savings, often in real-time. They can also support them by identifying and quantifying tax/tariff barriers across countries, making it easier to understand trade opportunities.
Adapt To Supply Chain Volatility
Supply chain firms do not know when the next crisis will strike or economic shutdown will occur. As of Q3 2021, countries are opening up, but that could all come to an end with a new virus outbreak. To compound the problem, there are structural reasons that explain why dealing with disruption is more challenging than in the past. Supply chains are more interconnected and geographically distributed than before, with most products passing through multiple countries and assembly lines before delivery to final consumers. Thus, CFOs need to confirm that COOs are ready for the next wave of volatility.
Part of this is adjusting the supply chain to take reliability into account, not just cost. Going into 2022 and beyond, some brands may feel it is better to bring supply chains onshore and accept higher domestic prices than to rely on a more stabile logistics flow from countries like China, thousands of miles from Western markets. Greater domestic integration avoids factory shutdowns which have marred the post-pandemic era so far.
Boost Supply Chain Talent
Of course, adapting the supply chain to the new reality isn’t going to happen automatically or fast. It requires experienced and talented supply chain managers who know how to operate in high-volatility environments.
Thus, from a generational perspective, supply chain leadership teams need to put the groundwork in place to encourage the appropriate talent. After all, data-driven supply chains will require professionals who understand the technical side of supply chain management.
How firms appeal to new talent within and outside their organizations is critical. The market for talent is competitive. Strategies should centre around getting young professionals to hold supply chain issues in high regard. For example, appeals could be made on the basis that advanced supply chains reduce waste, cut carbon footprints and improve sustainability.
Supply chain firms that can attract talent put themselves at a competitive advantage. Resonating with young professionals helps build productive talent pipelines that bring more skill into the firm.
Raising The Issue With The C-Suite
CFOs can also support COOs by raising the issues they face with the C-suite.
Evidence suggests that upstream and downstream collaboration to strengthen the value chain could generate leading shippers’ double-digit savings. Thus, transportation volatility is a major issue and should be a board-level conversation.
The key is to help executives understand the value of investing in the right solutions and partners – and why it should become a major budget item.
There are several ways that the C-suite can adapt the supply chain to the needs of 2022 and beyond. According to PWC partners Kevin Keegan and Brian Houck, supply chain firms need to:
- Build more resilience by balancing risk and costs and eliminating single points of failure (such as relying excessively on a single supplier)
- Prioritise trusted supply chains that promote security, honesty and reliability. Transparency is now a value-added factor
- Focus the supply chain on the consumer, using risk-sensing capabilities to remain ahead
- Invest in the supply chain to improve accountability and improve the customer experience
Executive-level decision-making can, therefore, leverage organisational factors to reduce the impact of supply chain volatility for COOs. Going beyond merely using analytical tools, CFOs can encourage boards to make structural changes to their operations. Bringing manufacturing back to EMEA and USA headquarters, for instance, reduces risks associated with low cost outsourcing models.
Identify Missing Capabilities
Lastly, CFOs can identify missing capabilities in the supply chain to support its ongoing evolution. They can do this by creating a list of the capabilities that are missing and will be needed two or three years down the line.
How To Implement Changes
Given the sheer scale of issues facing the supply chain and COOs, it is easy to imagine many CFOs feel overwhelmed in trying to support. It’s worth asking, therefore, whether you should use a digitalization consultancy – a firm that understands how to improve your existing supply chain planning and management software. Outside support can confirm whether you need supply chain digitization and how you can implement it.
In summary, CFOs can help COOs better manage their supply chains by creating better organizational and operational conditions. While the environment is tough, technologies now exist that can support the changes that you need to make. The most successful firms will be those that not only provide their COOs with risk-mitigating tools but also change their strategies to reflect the new consumer reality. Following this period of intense volatility, supply chains can’t afford to go back to business as usual