The 3 Rs of the Supply Chain (Resilience, Responsiveness and Reinvention)
Houston Skyline View
In my previous blog two weeks ago we discussed the Reinvention of the Supply Chain Function. Yesterday, I was fortunate to be in attendance at the Supply Chain Symposium in Houston organized by the Houston Strategy Forum and hosted by Ravi Kathuria. My first time at a Houston Strategy Forum event, and clear it was worth my time. The energetic host kept the panelists (all senior executives in the supply chain function) and the audience on their toes with his vibrant quips and challenging questions. It was an engaging forum and thought provoking to many of us in the audience with years of experience in the supply chain.
Clearly the Covid-19 pandemic and the subsequent disruptions to the supply chain were at the forefront of the discussion. How should a company prepare for such black swan events? As Taleb(1), discusses so eloquently in his book - “The Black Swan” how do companies prepare for such disruptions that are outliers and have an extreme impact without concocting explanations after the fact (If you haven’t read Taleb’s book you should add it to your reading list). For those who were stuck at the airports or had to change their travel plans or couldn’t get to their destination over the holidays, the Southwest Airlines debacle which impacted both travelers and its employees must still be fresh in your minds. As I am writing this it appears that there is an emerging crisis within one of America’s behemoth semiconductor companies Intel. It appears that Intel Inside is ugly at this very moment. Just today the Wall Street Journal reported that China is putting in export controls on the advanced manufacturing used in the production of solar panels. With more than 80% of the worlds solar panels coming from China, this will be a black swan moment for countries like India, U.S.A and the EU all of which have laid out plans to significantly increase their solar power generation capacity.
It was evident from the conversations yesterday that companies in their board rooms are getting more knowledgeable about their supply chains. Stakeholders and even supply chain professionals who have not paid sufficient attention to the different tiers in their supply chain are starting to take notice. There is an increase in engagement with their supply base to understand their bottlenecks and issues that could have an upstream impact on them. The smarter companies are going further in their supply chain and trying to identify their dependencies on the 2nd and 3rd tier of their supply chain. Logistics carriers that have a long cycle time for bringing new equipment to service are reviewing what they can do if demand was to ramp up crazily again; like it did during the pandemic.
Clearly the reliability of the supply chain is in everyone’s mind. Mutual trust and transparency into the issues are paramount. There is a push to being collaborative in finding solutions that will be mutually beneficial to the customers and their suppliers. Clearly, establishment of trust implies the ability for both sides to say no when expectations are unreal. It is better to have honest discussions than accept something unrealistic and fail afterwards. Lots of options are being considered based on industry and circumstance from increasing handling capacities to reconfiguring the entire supply chain. A big learning from the semiconductor availability crisis is the urgency to reconfigure the supply chain. Near shoring is being investigated to build regional and local supply bases so companies can heighten responsiveness if the situation were to reoccur. Anecdotally, it was mentioned that consulting research indicated that near shoring has not really happened after the pandemic in the US, but companies have increased their reserve inventories. Zara, the clothing retailer is a pioneer in near shoring. They did this originally to respond quickly to changes in fashion trends. They near shored their clothing manufacturing to North Africa from Asia so their cycle time to respond to fashion changes would be quicker. Perhaps the recent shock will force many companies to think through similar options. The Chinese export control on solar panels would induce a shortage and US, EU and India will need to create local sources of solar panels if they want to achieve their solar power generation goals.
It was clear that the leaders don’t make decisions in vacuum but would have to completely understand the revenue impact of their decisions. Several other strategies have been deployed such as working with competitors to source scarce material. This strategy has been in use in the oil and gas industry, for e.g., in sourcing casing and tubing when in a bind. Material procured for one company’s cancelled well, which is usually carried as project inventory before being sold for pennies as scrap, is being redeployed at a fair price on a competitor’s well. The decarbonization effort in oil and gas is driving companies to look at whole new supply chains that use gas or electric power to operate the rigs and pumps used in fracking. Conveyors are being deployed to transport sand thereby eliminating truck miles and pipelines are being built to transport wastewater for disposal.
When the conversation turned to people, there was tacit agreement that cultures of companies must change. Supply chain organizations need to become global process owners of the source to pay process, so they have the influence and authority to make things happen. In some industries, especially the ones manufacturing mass market consumer merchandise this is already true as the strength in their supply chain drives increased revenue. But in industries like oil and gas, the supply chain team is often engaged only when there is scarcity. A culture change in technical goods procurement is needed for that’s where there is maximum friction. The procurement folks lack the technical knowledge of the product or service they are asked to source, while the engineers at times are naïve in how they negotiate and reveal too much information. In my view, codifying boundaries on what someone can do may not be the answer. But reinventing the roles of engineers and procurement professionals and in some sense merging them for technical procurement should be investigated. In my experience what has worked is getting both teams together and empowering them to come up with a solution. This would be much better than forcing a solution on the teams.
With regards to talent, companies are really experiencing a big challenge. Elimination of mundane activities and making the work more strategic would be essential to make the jobs attractive for young supply chain professionals. This is further complicated with the college campuses not educating the students on the status of the supply chain jobs in industries. When high expectations collide with boring operational work, dreams are shattered and people lose their mojos. The role of a supply chain professional is desperately in need of reinvention and companies are not there yet as they are still transforming their supply chains, not necessarily reinventing them. When something is complex to procure it becomes more interesting to procure. Having the right person at the helm to drive the decision making would make a whole lot of difference. In my experience having someone that is curious and who has a growth mindset driving the conversation makes a whale of difference in the outcome.
Companies are upgrading systems without process improvements or redefining their processes making a bad system worse. Systems are not to blame but budget, timing and resource constraints force companies to implement when they are not ready. Moving to the cloud does not fix the process. Implementing a bad process in a new system makes things even worse. Taking shortcuts due to constraints causes even more problems. This is one area in my opinion where a new startup can overtake established companies as they have the liberty to be radically different. Procuring services are clearly not as simple as procuring a widget. However, if sufficient time is invested even services can be commoditized. But that requires resources not just with a supply chain degree but folks that are willing to think out of the box, are curious and have a growth mindset. Companies that don’t radically change how they operate are likely to lose employees and lose profitability. Not thinking strategically now could lead more companies to have their Southwest and Intel moments sooner than later.
In conclusion, it was refreshing to see that the supply chain teams are energized about monumental change. Companies are relooking at their value chains to identify alternate options they could pursue. Clearly companies are looking ahead and developing multi-year strategic plans. But change for many is not radical but more incremental. They are building their plans and beginning to execute their plans, measuring progress and when their strategic choices are unpopular they are sticking to their plans and seeing it through. There is a renewed focus on diversity and finding local and regional suppliers that are qualified. In my view this is one area where the oil and gas industry in general has failed miserably due to lack of commitment. The automotive industry approached supplier development in a whole different way and invested heavily in developing the capabilities of suppliers. It would be refreshing to see if companies leading this movement in oil and gas take that approach. There are a lot of challenges ahead. ESG requirements are changing by the day, and it will be interesting to see how companies prepare themselves to respond to changes in this space. How do they track and report data on emissions, how will they meet their diversity goals, how will the culture change to reform the workplace so Millennial’s and Gen Z’rs will want to be part of their workforce? Not everyone is going to get it right and there will be winners and losers. But clearly it’s an exciting time to be a supply chain professional.
1. The Black Swan: The Impact of the Highly Improbable, by Nassim Nicholas Taleb
