Supply Chains Return to the Top of CEOs’ Agendas
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Five ways leaders can address growing instability and disruption risks without getting bogged down in tactical issues.
Author
* David Garfield
September 30, 2024
Summary
After the severe shock of COVID-19, the most visible form of supply chain problems is fading. However, this relative calm felt by executives is unsettling. Beneath the surface, supply chain risks have become serious, systemic, and strategic. Risk management cannot rely solely on procurement and operations teams, no matter how smart or skilled they are. Boards and CEOs need to put supply chains back at the top of their agendas. A leadership team that provides financial, operational, and organizational flexibility and understands that current supply chains require new thinking rather than just adjustments can reduce the likelihood of having to manage crises in this era of transformation.
The term “new normal” may be one of the most dangerous phrases in business. It implies a state of equilibrium where we can find and maintain a safe and stable place, free from sudden changes that could cause our assumptions and plans to collapse. This is what people believe is happening with supply chains – an incorrect perception.
Current Risks Facing Supply Chains
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Three trends have made supply chain stability significantly lower than in the two decades before COVID. These are not just short-term shocks (such as port strikes) but profound changes that could jeopardize operations, sales, profit margins, and even corporate value.
### Ongoing Conflicts
“History repeats itself,” a logistics executive said in The New York Times when the Suez Canal was closed again this June. CEOs and boards need to get used to this situation. Stability in the Middle East remains fragile; US-Russia relations are the most tense since the Cold War; there is hot war at Europe’s doorstep; and with increasing tensions between the US and China, hostility in East Asia has become more frequent.
### Deglobalization and Trade Restrictions
Global trade is no longer as open. According to the World Bank, nearly 3,000 new trade restrictions were implemented in 2023, a fivefold increase from 2015. The number of regional trade agreements has halved since the first decade of this century.
### Sustainability
Reducing environmental and social costs associated with supply chains has become a priority driven by investors, employees, regulators, customers, and companies themselves. Issues related to sustainability can disrupt supply chains, which is a cross-functional and cross-departmental issue that also impacts corporate reputation and government relations.
Avoiding Supply Chain Crises
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These trends individually and collectively mean that any company faces significant and often unpredictable structural disruptions in its supply chain. Even if a supply chain is currently running smoothly, the foundation it rests on is much less stable than CEOs are accustomed to.
CEOs and boards can lead supply chains without getting bogged down in tactical issues through five ways:
### Understanding an Irreversible Reality
The just-in-time supply chain model from before the pandemic has become obsolete. COVID did not break this model but revealed where and how it could be broken.
### Enhancing Financial Flexibility
Top managers can build a buffer against disruptions by enhancing financial flexibility. Strengthening balance sheets, reviewing credit lines, bolstering risk management and defense capabilities (such as cybersecurity) can reduce the risks or impact of supply chain shocks.
### Creating Operational Flexibility
CEOs and boards can promote and oversee operational flexibility. They must ensure that automation and smart factory solutions aim for plant flexibility to quickly shift production from one product or facility to another.
### Increasing Organizational Flexibility
Organizational flexibility serves as a strong defense against supply, operational, and distribution disruptions. It is more than just the tools and capabilities under “agility” (which are too project-focused). Organizational flexibility stems from culture.
### Leveraging Transformational Technology
Technology can provide senior leaders with greater visibility and accountability into what is happening within their supply chains. Real-time monitoring and management of supply chains have become possible in recent years.
CEOs and boards cannot rely solely on remote oversight through dashboards and occasional factory visits. They need to deeply understand where vulnerabilities and opportunities lie, and find ways to avoid the former and leverage the latter, ensuring that their companies fully utilize new resources for visualizing, analyzing, and strengthening supply chains. A leadership team that provides financial, operational, and organizational flexibility and understands that current supply chains require new thinking rather than just adjustments can reduce the likelihood of having to manage crises in this era of transformation.
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Source: Harvard Business Review
