Thursday, May 14, 2020

How Supply Chain Resilience Mitigates Against Risks from Pandemics and Climate Change

Whether as a defense against global pandemics or as part of a wider climate strategy companies are exploring ways of improving their supply chain resilience. Now more than ever companies need to increase their efforts to build more resilience into their supply chains so that they can quickly respond to changing demands and disruptions. The COVID-19 pandemic has drawn attention to supply chain vulnerabilities and this article reviews many of the lessons that have been learned as well as their implications for climate mitigation and adaptation efforts. 

The economic impacts from the coronavirus will be substantial. As explained in the seventh annual Kearney US Reshoring Index, COVID-19 will have a "historic" impact on our economies. "[T]he massive operational disruption wrought by the coronavirus pandemic will compel companies to fundamentally rethink their sourcing strategies," the report says. It also says "companies will be compelled to go much further in rethinking their sourcing strategies—indeed, their entire supply chains...More fundamentally, we anticipate that the threat of future crises will compel companies to restructure their global supply chains with an eye toward increased resilience, as well as lower risks and costs, as resilience is the key to operating profitably in the face of ongoing disruptions."

The coronavirus has revealed supply chain weakness including those that contribute to the insecurity of our food system. Although COVID-19 has made procurement a top shelf issue, concerns about these vulnerabilities are hardly new. Supply chain risks were already apparent in 2013. These concerns were reiterated in a 2019 report from Zurich that reviewed the risks to infrastructure and the need for businesses to prepare for rising sea levels associated with global warming.

Supply chain risks are everywhere, including those associated with technologies that are geared towards managing climate change. According to a 2018 PwC report the renewable energy sector could be hampered by a lack of access to minerals and metals and this could disrupt entire supply chains. These pervasive vulnerabilities prompted Barry Parkin, Chief Sustainability and Procurement Officer for Mars Incorporated to say our supply chains are "broken".

Sustainability


Supply chain risk mitigation is a key component of sustainability. The concept of a sustainable supply chains has been around for many years. These supply chains reduce costs through improvements in efficiency and increased resilience to shocks. Corporations like IKEA are integrating sustainability into their supply chains because they understand that this reduces risks and stabilizes costs.  A sustainable supply chain is a key component  of corporate social responsibility and it is composed of five basic elements: Leadership, measurement, collaboration, design, vetting and leadership.

Creating sustainable supply chains requires leadership that includes integrating a wide range of metrics. Such measurement is critical as it provides proof of value and affords insights that can help companies to enhance efficiency throughout their supply chains. Perhaps the most important single dimension of a sustainable supply chain involves collaboration between buyers and suppliers that improves processes and reduce consumption. Such approaches can reduce the risks of disruption and minimize adverse environmental impacts which contributes to increased efficiency, lower costs and higher profits. Research demonstrates that a collaborative sustainable supplier network outperforms a buyer-centric "mission control" supply chain, resulting in a steady supply over the long term, that financially benefits both buyers and suppliers.

Well crafted design can also reduce resource requirements, thereby decreasing costs and impacts.  To be both socially responsible and to mitigate against risk exposure corporations need to carefully assess their suppliers and ensure they have appropriate levels of oversight.

Tracing, monitoring and reporting


Constant supply chain tracing, monitoring, reporting and risk mapping are essential to effective supply chain oversight. The Kearney report suggests that to mitigate against risks companies need to do a thorough assessment of their supply chains. "Companies can protect their supply chains by tracing back needs from customers to suppliers. Your suppliers require real-time monitoring of inputs, and you’ll need daily updates to manufacturers on stock levels, inventory, deliveries, and priorities." The report further states that rapid response strategies should include "creating plants to restart operations and retrain your workforce if necessary."

Pierre-Francois Thaler, co-CEO and co-founder of the corporate social responsibility ratings platform EcoVadis has suggested a few strategies to manage in the absence of onsite supplier audits suspended by the coronavirus. As reported by Environmental Leader, Thaler suggests that evidence-based digital assessments and supplier ratings can help deal with the lack of supply chain transparency and ensure that partners are meeting sustainability and ESG expectations. Thaler notes that such assessments can also help organizations hone their audit strategy and prioritize the suppliers that need an onsite audit.

Shortening and diversifying


The global nature of modern day supply chains means that events in one part of the world can have far reaching impacts. This is true of pandemics and climate impacts which can be expected to increasingly reverberate up and down supply chains. These impacts wreak havoc on procurement, production and logistical tactics. It is therefore reasonable to consider reducing risks by shortening supply chains. This involves efforts to minimize the distance and the steps associated with procuring resources to make supply chains more resilient and reduce climate change causing emissions. Shorter supply chains reduce transportation time and costs and make companies less vulnerable to global supply chain disruptions. However, shortening supply chains is not a panacea, entirely local sourcing could put a company at a disadvantage when a local event wipes out local supplies.

The tendency to blame global supply chains for the pandemic and to suggest that all we need to do is buy local is facile. International supply chains, which Parkin described as "the engines of global growth" are critical to the well-being of millions of people around the world. Eliminating global supply chains would not only increase poverty, in many cases it would decrease efficiency are erode profitability. 

Companies need strategic planning and this will require different tactics for differing realities. So while shortening the supply chain can make sense in many contexts, solutions need to be assessed on a case by case basis. Companies should leverage a diverse array of global supply options. One of the most important things they can do is diversify their sourcing to ensure that they have ready access to materials from a wide range of locations. As explained in the the Kearney report companies should "spread the risk" and avoid "putting all their eggs in the lowest cost basket".

Additional guidance and resources


There is a wealth of information on sustainable supply chains. A white paper from Enviance titled "Digging In: The Nuts and Bolts of Supply Chain Sustainability" is a good starting point. It focuses on first steps and includes success stories as well as tips for involving stakeholders, forging partnerships and operational changes that can increase efficiency.

The Future of Supply Chain is another report that covers the challenges and innovations in supply chain management. The report addresses the importance of collaboration, as well as the ways that information can be used to make supply chains more efficient. More recent guidance on integrating sustainability into procurement can also be found in the ISO 20400:2017 document. Kearney has also created a site for business leaders dedicated to navigating the COVID-19 crisis.

Some excellent supply chain guidance has come out of consultancies like  BSR which is a global nonprofit business network dedicated to sustainability. They encourage the use of tools like the Science-Based Targets initiative. BSR also created something called the Climate-Resilient Value Chains Leaders Platform which includes multinational corporate giants like Coca-Cola Company and Mars. 

CERES is another non-profit that is providing supply chain guidance. The sustainability focused company was named after the Greek harvest goddess who taught humans how to grow food.  CERES has a roadmap for corporate sustainability and the Ceres Company Network includes more than 50 corporations that are working on improving the climate resiliency of their operations by shoring up their supply chains.

The way forward


Whether due to pandemics or climate change we can expect increased supply chain disruptions going forward. Companies can be more resilient by making their supply chains more sustainable. In addition to mitigating against risks from disruption, sustainable supply chains have the capacity to proactively address the over-exploitation of scarce resources.

To minimize exposure to risks from disruption companies need to assess, evaluate and optimize their procurement operation. The Chief Sustainability and Procurement Officer for Mars Incorporated explained that in order to fix systemic supply chain weaknesses, "we must shift to long-term models for corporate buying that are anchored on building mutuality, reliability, resilience, and risk management into the core of our buying patterns."

COVID-19 has taught us many things and as stated in the Kearney report "the lessons learned during the crisis should be codified to inform future work as you grow your business." Companies need to rethink their sourcing strategies and re-imagine their supply chains. This entails carefully reviewing their procurement strategies and conducting scenario planning to assess their risk exposure.

There is a wealth of available data that gives companies a starting point they can build upon.  However, each company will need to create supply chain strategies that address their specific circumstances and requirements. These efforts are not only about minimizing risks from disruption and maximizing profitability, they are also a matter of survival.

Related
COVID-19 Exposes Supply Chain Vulnerabilities that Cause Food Insecurity
The Sustainable Supply Chain Imperative 
Building Resilience to Supply Chain Disruptions due to Climate Change
Sustainable Procurement: Environmental Social and Economic Supply Chain Considerations
Video: Future Supply Chain 2016

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