A hefty 42% of procurement leaders say the biggest threat to their future success is supply disruptions—such as natural disasters and transportation issues—a Gartner survey shows.
The survey, conducted from June through July 2024 among 258 sourcing and procurement leaders, was designed to help chief procurement officers (CPOs) understand and prioritize the most significant risks that could impede procurement operations, and what actions can be taken to manage them effectively.
"CPOs’ concerns about supply disruptions reflect the often unpredictable nature and potentially existential impacts of these events," Andrea Greenwald, Senior Director Analyst in Gartner’s Supply Chain practice, said in a release. "They are coming to understand that the reactive measures they have employed to manage risks over the past four years will not be sufficient for the next four.”
Following supply disruptions at #1, the survey showed that the second biggest threat to procurement is seen as macroeconomic factors, which include economic downturns, inflation, and other economic factors. While more predictable, those variables can substantially influence long-term procurement strategies.
And the third-most serious perceived risk was geopolitical issues, including tariffs and regulatory changes, and compliance issues, including regulatory and contractual risks.
In addition, the survey also revealed that “leading organizations” are 2.2 times more likely to view energy availability and cost as a top risk; indicating a focus on future emerging risks. As electrification drives demand for power, brittle grid infrastructure raises concern about whether the energy supply can keep pace. Therefore, leading organizations recognize that access to energy will become a significant future risk.
In today's economic environment, companies are continuously pressured to reduce costs to combat slower growth; to offset increases in material prices, energy, and transportation; and to counterbalance various other pressures, such as inflation. Despite these issues and the economic instability worldwide, companies must continue to differentiate themselves and find growth opportunities to compete in the global marketplace. For example, in order to boost revenues and fuel growth, many companies are now under as much pressure to reduce product life cycles and speed-to-market as they are to find savings and reduce operational costs.
After steering through the challenges of the COVID-19 pandemic, procurement continues to face new disruptions driven by geopolitics. For example, many procurement teams are continuing to deal with issues related to the ongoing Russia-Ukraine war that began in early 2022. More recently, the Israel-Palestine conflict and disruptions in the Red Sea and Suez Canal have forced global freight providers to reroute shipping containers around Africa, which has intensified costs and increased lead times.
The ever-expanding volatilities of global supply have caused many companies to revisit their procurement strategies and put more focus into multisourcing, nearshoring, and regionalizing their supply chains to improve resilience against such disruptions. In a recent Gartner survey, 63% of respondents said they were investing in multisourcing to “achieve greater resilience and/or agility.” Similarly, according to McKinsey’s “2023 Supply Chain Pulse Survey,” “almost two-thirds (64%) of respondents say that they are currently regionalizing their supply chains, up from 44% last year [in 2022].”
Multisourcing is a great strategy for responding to risks and threats by having alternative sources of supply or backup supply. Essentially, it is about diluting the risk over multiple suppliers. Sourcing diversification across distinct geographies and/or nearshoring can also mitigate the risk from sudden changes in import tariffs due to trade wars.
While this trend is pointed at enhancing the resilience of global trade in the face of disruptions, it is a colossal undertaking for procurement teams to reorganize complex global supply chains. Procurement now needs cope with new challenges, such as finding and qualifying new providers, cutting supply lead times, and reducing logistics complexities.
Most groups of companies or large multinational organizations which operate several establishments adopt some compromise between purchasing globally and buying locally, aiming to balance the advantages of centralization with the flexibility of decentralization. This transformation will require a strong focus on supplier relationship management to develop these reimagined supply bases and ensure that new suppliers meet the company’s standards when it comes to service levels, cost improvement initiatives, environmental key performance indicators (KPIs), and quality control.
For a real-world example, let’s consider Toyota. Famous for its “just in time” (JIT) production system, Toyota relies on long-term, strong relationships with its suppliers. By developing local suppliers and investing in their capabilities and capacities for years, Toyota has built trust and loyalty among its suppliers while achieving substantial stability in its supply chain. Local suppliers are more responsive and can deliver products faster than those located farther away. This approach has increased efficiency in production processes, enabling lower shipping and warehouse storage expenses. Thanks to this deeply integrated system with suppliers, Toyota has shown resilience against supply volatilities and maintained its leadership position in the global automotive marketplace. By incorporating local suppliers into its plans and managing inventory just in time, Toyota has gained a financial inventory benefit and cost advantage over its competitors. Furthermore, partnering with local producers is good for the environment, because it reduces global shipping and the company’s carbon footprint. “Glocalization” combines the global sourcing with the proximity of local availability of critical supplies. Think global, act local!
A more collaborative approach
This is why in more recent years much more attention has been paid to the development of “mutual” supplier-buyer relationships, where the benefits of doing business together arise from sharing and exchanging ideas. Effective and regular communication is the cornerstone of a strong supplier-buyer relationship; it aids in understanding each other's capabilities and expectations, and it fosters a sense of partnership. This is in complete contrast to short-sighted and adversarial relationships, where the focus is only on performing a financial transaction.
In the collaborative approach, the buyer organization seeks to develop a long-term relationship with the supplier. Establishing strong, enduring, and mutually beneficial relationships with a strategic supplier is a critical step in improving performance and ensuring consistent quality across the supply network. This is particularly important when adopting a glocalization strategy to build reliable supply chains that in turn benefit the customer experience.
The strategic view is that the buyer organization and the supplier should share a common interest, and both should seek ways of adding value in the supply chain that build a satisfactory outcome together. Both parties must invest in trusting and supporting the relationship with the intention of identifying and implementing improvements and innovations. Embedded in this approach is the commitment that any benefits that are achieved will be shared, a process not possible with a simple transaction. The organizations concerned will seek to come together and jointly set targets for overlapping interests.
This shift requires the role of sourcing to move away from a transactional one focused on materials and services management and toward a more strategic role, aligned to long-term business requirements. To be successful, supplier relationship management must play a pivotal role.
Strikes and potential strikes have plagued the supply chain over the last few years. An analysis of data from the Bureau of Labor Statistics by the Economics Policy Institute concluded that the number of workers involved in major strike activity increased by 280% in 2023 from 2022. Currently, the U.S. East Coast and Gulf Coast ports are facing the threat of another dockworker strike after they return to the negotiating table in January to attempt to resolve the remaining wage and automation issues. Similarly, Boeing is continuing to contend with a machinists strike.
Strikes, or even the threat of a strike, can cause significant disruptions across the global supply chain and have a massive economic impact. For example, when U.S. railroads were facing the threat of a strike in 2022, many companies redirected their cargo to avoid work stoppages and unhappy customers. If the strike had occurred, it would have had a massive economic impact. The Association of American Railroads (AAR), estimated that the economic impact of a railroad strike could be $2 billion per day.
Similarly, although the U.S. West Coast ports avoided a strike in 2023, the labor negotiations caused companies to reroute freight. For example, companies with locations on the East Coast went through the Panama Canal instead of having their cargo land at West Coast ports. As a result, West Coast ports’ market share dipped during this timeframe. Now as the East Coast and Gulf Coast ports try to finalize negotiations to seal the deal with the International Longshoremen’s Association (ILA), companies are searching for alternative routes and transferring their shipments back to West Coast ports. The economic impact of the strike is estimated at $3.8 to $4.5 billion per day by J.P Morgan.
Labor negotiations also threaten to further exacerbate inflationary trends, which have been a key concern across the supply chain. The ILA and port operators reportedly reached a tentative agreement to increase wages by 62% over the next six years. Similarly, the Boeing machinist strike is mainly related to a request for a 40% pay raise, with machinists recently rejecting a proposed 35% increase. These demands come as companies and consumers across the spectrum are resisting increased costs.
Nor are these strikes completely focused on pay increases. The ILA is also demanding a total ban on the further automation of cranes, gates, and container movements that are used in the loading or loading of freight. This issue still remains unresolved. Such a ban would not only increase costs, it would also threaten the competitiveness as the U.S. ports, which are already some of the least competitive in the world. According to the Wall Street Journal, L.A. and Long Beach ports are about half as productive as China’s best port in terms of average container moves per hour.
Creating a Resilient Supply Chain
Labor unrest and strikes have caused executives to open their eyes to the volatility, uncertainty, complexity, and ambiguity (VUCA) in their supply chains. Many are responding to the volatility and disruptions by working to create more resilient supply chains.
No company can thrive in a supply chain disruption-ridden environment if it is not prepared to pivot as conditions change. However, preparation alone will not suffice. To thrive in a VUCA world, companies should be ahead of changing conditions or perhaps flip the situation on its head to become the disruptor instead of the disrupted. As the competition struggles to maintain customer service levels, profitability, and working capital requirements in the face of disruptions, companies with a more resilient supply chain will gain market share.
There are several strategies to create a resilient and proactive supply chain. The most successful approaches include rethinking strategies, upgrading business processes, and automating and utilizing advanced technologies. The bottom line is to create resiliency/flexibility, quick responsiveness, and upgraded performance.
Rethinking Strategies
Old strategies will no longer suffice in this more volatile world. For example, producing in China to reduce labor costs provides no resiliency when chokepoints arise in the global supply chain and/or as geopolitical risks surge. For example, the Red Sea crisis has created a supply chain chokepoint, delaying goods transiting from northeast Asia to the East Coast of the U.S. and Europe. Container ships have re-routed around the southern tip of Africa, adding cost, time, and other risks to the trip. As labor disputes and/or strikes arise, the risk increases that the product will get stuck or delayed in transit. If there are strikes on the East Coast and Gulf Coast ports, ships will have to divert to the West Coast and be shipped across the country, adding time and cost. By moving manufacturing closer to customers and consumers through reshoring, nearshoring, and vertical integration efforts, these risks are mitigated. If local disruptions do occur, companies can recover quicker due to the shorter distances, quicker lead times, and greater control.
Thus, proactive executives are rethinking their manufacturing and supply chain network. For example, Ascential Medical & Life Sciences last year expanded its domestic manufacturing footprint, opening a 100,000-square-foot facility in Minnesota that will specialize in developing custom manufacturing machinery and solutions for medical and life science companies. The facility is part of a broader reshoring effort by the company.
In a similar vein, many companies, such as GM, Samsung, and Dell, have followed a nearshoring (also called friendshoring) strategy to Mexico. By moving closer to customers, they not only are more resilient but also can take advantage of trade agreements, such as the United States-Mexico-Canada Agreement (USMCA), as well as lower regulations and costs.
In addition to moving manufacturing, companies are also diversifying their supply base. They are pursuing strategies such as adding backup sources of supply, establishing strategic partnerships and joint ventures, and vertically integrating their supply chain.
Upgrade Business Processes
The most successful companies are aggressively upgrading strategic processes to support resiliency, customer success, and profitability. For example, rolling out an SIOP (Sales, Inventory, Operations Planning) process can help companies respond more quickly and proactively to changing customer demand and/or supply chain disruptions. Similarly, companies that have upgraded their demand, production, and replenishment planning processes are able to provide customers with higher service levels while also freeing up cash by reducing unnecessary inventory. These upgraded planning processes also improve margins by increasing efficiencies and productivity while reducing waste.
For example, a manufacturer of health care products utilized a SIOP process to better predict revenue and to create a better operational rhythm. The company’s demand plan was translated into machine capacity and critical raw material requirements. By taking this step, the company became aware that it needed to get a backup supplier to avoid a potential critical chokepoint in the supply chain. At the time, the manufacturer was purchasing all of its most important material from Brazil. Due to geopolitical risk in the region, there was the potential for supply chain disruption. To mitigate this risk and ensure reliability, the manufacturer began sourcing 20% of its material requirements from a backup supplier in the United States. Fast-forward a few years, and there was a port strike that made it difficult to receive the materials from Brazil. The manufacturer’s SIOP process provided a forecast of what was required to bridge the supply gap during the disruption. Because of the already existing relationship, the backup supplier was willing to ramp up volume to cover the manufacturer’s supply gap, even though the supplier was receiving an overload of requests from other companies. As a result, the manufacturer was able to maintain supply of this critical material and continue to meet its customer service levels. While its competition struggled, the health care manufacture was able to grow its revenue by 15%.
Automate & Digitize
Technology can also help companies respond better to disruptions and volatility. For example, advanced planning systems can help planners can quickly pivot with changing conditions, such as strikes. The most advanced of these systems will be equipped with artificial intelligence (AI) capabilities that will recommend changes on the fly to satisfy customer needs in the most profitable and least risky manner. For example, as strikes arise, the system will quickly assess changing conditions and recommend that the manufacturer move demand to plants and/or routes not impacted by the strike. The planning systems will also provide the planners with a better picture of requirements so that they can change production plans and ensure high service levels for customers.
In the same fashion, companies that automate their manufacturing processes, such as by using robotic welders, can more flexibly respond to changing customer requirements change while also mitigating costs. Similarly, companies that use additive manufacturing technologies can produce and customize on demand. By using robotics and automation equipment, manufacturers can run lights out, thereby increasing output and flexibility, while reducing cost. Therefore, if a strike occurs at the manufacturer, some level of production is likely to occur, as long as they can assign a resource to keep the robotics and automated equipment running.
In logistics, advanced technologies can seamlessly sort, package, and move products. These technologies can help companies quickly respond to changing conditions so that packages can be re-routed at any time. Similarly, transportation planning can use predictive models to optimize freight costs and rerouting shipments through the global supply chain in response to changing conditions, thus ensuring timely deliveries. For example, as strikes arise, the system will quickly assess a company’s transportation network, evaluate alternative routes, and recommend the optimal one. Changes will also be made to current routes for goods in transit so that they meet the customer due dates at the lowest cost.
Delivering Bottom Line Business Results
The bottom line is to create a resilient supply chain and craft tomorrow’s supply chain today. Companies that invest smartly in the future will be prepared to take market share as disruptions occur. There will be more opportunity than ever before for those that rethink strategies, upgrade business processes, and automate and digitize their end-to-end supply chain.
About the author: Lisa Anderson is founder and president of LMA Consulting Group Inc., a consulting firm that specializes in manufacturing strategy and end-to-end supply chain transformation that maximizes the customer experience and enables profitable, scalable, dramatic business growth. She recently released SIOP (Sales Inventory Operations Planning): Creating Predictable Revenue & EBITDA Growth that can be found at https://www.lma-consultinggroup.com/siop-book/.
A new survey finds a disconnect in organizations’ approach to maintenance, repair, and operations (MRO), as specialists call for greater focus than executives are providing, according to a report from Verusen, a provider of inventory optimization software.
Nearly three-quarters (71%) of the 250 procurement and operations leaders surveyed think MRO procurement/operations should be treated as a strategic initiative for continuous improvement and a potential innovation source. However, just over half (58%) of respondents note that MRO procurement/operations are treated as strategic organizational initiatives.
That result comes from “Future Strategies for MRO Inventory Optimization,” a survey produced by Atlanta-based Verusen along with WBR Insights and ProcureCon MRO.
Balancing MRO working capital and risk has become increasingly important as large asset-intensive industries such as oil and gas, mining, energy and utilities, resources, and heavy manufacturing seek solutions to optimize their MRO inventories, spend, and risk with deeper intelligence. Roughly half of organizations need to take a risk-based approach, as the survey found that 46% of organizations do not include asset criticality (spare parts deemed the most critical to continuous operations) in their materials planning process.
“Rather than merely seeing the MRO function as a necessary project or cost, businesses now see it as a mission-critical deliverable, and companies are more apt to explore new methods and technologies, including AI, to enhance this capability and drive innovation,” Scott Matthews, CEO of Verusen, said in a release. “This is because improving MRO, while addressing asset criticality, delivers tangible results by removing risk and expense from procurement initiatives.”
Survey respondents expressed specific challenges with product data inconsistencies and inaccuracies from different systems and sources. A lack of standardized data formats and incomplete information hampers efficient inventory management. The problem is further compounded by the complexity of integrating legacy systems with modern data management, leading to fragmented/siloed data. Centralizing inventory management and optimizing procurement without standardized product data is especially challenging.
In fact, only 39% of survey respondents report full data uniformity across all materials, and many respondents do not regularly review asset criticality, which adds to the challenges.
Chief supply chain officers (CSCOs) must proactively embrace a geopolitically elastic supply chain strategy to support their organizations’ growth objectives, according to a report from analyst group Gartner Inc.
An elastic supply chain capability, which can expand or contract supply in response to geopolitical risks, provides supply chain organizations with greater flexibility and efficacy than operating from a single geopolitical bloc, the report said.
"The natural response to recent geopolitical tensions has been to operate within ‘trust boundaries,’ which are geographical areas deemed comfortable for business operations,” Pierfrancesco Manenti, VP analyst in Gartner’s Supply Chain practice, said in a release.
“However, there is a risk that these strategies are taken too far, as maintaining access to global markets and their growth opportunities cannot be fulfilled by operating within just one geopolitical bloc. Instead, CSCOs should embrace a more flexible approach that reflects the fluid nature of geopolitical risks and positions the supply chain for new opportunities to support growth,” Manenti said.
Accordingly, Gartner recommends that CSCOs consider a strategy that is flexible enough to pursue growth amid current and future geopolitical challenges, rather than attempting to permanently shield their supply chains from these risks.
To reach that goal, Gartner outlined three key categories of action that define an elastic supply chain capability: understand trust boundaries and define operational limits; assess the elastic supply chain opportunity; and use targeted, market-specific scenario planning.
ACTON, Massachusetts – September 3, 2024 – New Horizon Soft, LLC, a global leader in AI-powered supply chain planning software, announced today the release of a new version of its Buyers Workbench procurement planning software. The latest version includes the ability to optimally schedule inbound deliveries, taking into account distribution center (DC) receiving capacity, thus minimizing receiving bottlenecks and lowering inbound logistics costs. A research paper describing the innovative methodology and its deployment at an iconic $10B+ U.S. quick-service restaurant chain was recently published in the peer-reviewed academic journal, the International Journal of Operations Research and Information Systems.
Supply chain organizations typically plan purchase orders without regard to DC receiving capacity. This leads to bottlenecks on some days and underutilized staff on others. New Horizon’s methodology, called Master Purchasing Receipt Scheduling (MPRS), uses a novel algorithm to automatically and optimally schedule deliveries. The algorithm plans deliveries at the time of purchase order creation and results in a steady volume of deliveries and lower planning and logistics costs. While first deployed at a restaurant chain, the methodology is applicable to any manufacturer, wholesaler, retailer, or foodservice company operating high-velocity DCs.
“With the increasing prevalence of high-velocity DCs, scheduling inbound deliveries can no longer be an afterthought,” said Chao-Ming Ying, Co-founder and CTO of New Horizon. “We developed the new MPRS functionality to address what had been a blind spot in many supply chains. Our customers are now taking advantage of this capability to streamline inbound logistics, increase receiving capacity utilization, and lower distribution costs.”
Supporting Resources
• Research article with case study published in the International Journal of Operations Research and Information Systems
• PDF version of article on New Horizon’s website
• New Horizon blog providing overview of restaurant chain deployment
• New Horizon Buyers Workbench web page
About New Horizon Soft, LLC
New Horizon’s supply chain planning software harnesses the power of artificial intelligence to enable manufacturers, wholesalers, and retailers to improve forecast accuracy and service levels while minimizing inventory and costs. We help planners make better decisions with cloud-based applications that are easier to use, easier to configure, easier to implement, and lower cost to operate. New Horizon is headquartered outside of Boston and has customers in North America, Europe, and Asia.
New Horizon — The AI Planning Suite™. Learn more at NewHorizon.ai or follow us on LinkedIn.
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