Supply chain leaders have certainly faced turbulence before—think of the height of the COVID-19 pandemic. But this moment presents new challenges, such as rising interest rates and fluctuating energy prices, while we’re still facing hiring difficulties and companies that are trying to sell more units with a limited supply.
Historically, the threat of recession has driven companies to decrease costs through austerity measures and to free up working capital by depleting inventory. But today’s conditions bring more complexity to the supply chain officer role—perhaps even redefining it—as supply chain leaders face the looming threat of economic slowdown while trying to find opportunities for competitive advantage.
Three areas are vital to success: visibility, rapid response, and structuring for resilience.
One of the biggest challenges is gaining visibility into multiple levels of the supply chain. Companies often have a strong understanding of their direct suppliers but not of what the supply chain looks like several tiers down—for example, at a foundry for semiconductors—where the potential is high for single points of failure or capacity issues.
Firms need better upstream visibility into the sources of materials and shocks that could disrupt supply chains. Digital supply chain solutions and specialty resilience applications can support enhanced visibility, though digital engagement alone isn’t enough. It is also key to hire and retain people skilled at managing and analyzing the massive amount of data generated by the supply chain.
Leaders should also focus on rapid response. There can be a first-mover advantage in responding quickly to changing conditions that affect supply availability. Making sense of the wealth of internal and external data can help your company move confidently when shifts occur. For example, suppose data indicates that semiconductor supplies are going to be short in two months’ time. The business could move quickly to build semiconductor inventory from a network of suppliers in advance of any lag in availability.
This uncertain period requires leaders to think through different decisions and responses than they may have in recent periods of instability. At the height of the supply chain crisis in 2021, companies that were accustomed to outsourcing many of their supply chain operations took steps like chartering their own vessels and investing in their own manufacturing capacity. In many cases, these choices are not economical today with the current costs and the imbalance of supply and demand.
Today, resilience becomes even more valuable as supply chain functions prepare the organization for agile responses to traditional problems—like how to optimize the manufacturing network and diversify the supplier base—and to wildly shifting demand.
Resilience has been on the agenda for years. For seven of the past eight quarters, supply chain risk and resilience has been one of the top five issues CEOs have discussed on earnings calls. Yet only 10% of companies have strong capabilities to manage supply chain shocks, according to research by APQC and BCG, to be published later this year. The most resilient companies consistently invest in resilience-building capabilities—widening the gap and creating opportunity.
The steps to resilience are often straightforward, but they require tradeoffs. For instance, companies regularly concentrate volume with one supplier to drive operational efficiency and lower costs. A better option might be to diversify supply among two or more suppliers, but the firm may then face higher costs and greater supply chain complexity. Leaders must balance these considerations as they choose the best long-term, risk-adjusted course of action.
Leaders can increase resilience in several ways:
Slowing growth and rising inflation are forcing a cost-fighting mindset that aims to manage expenses, which is an essential priority in times of slower growth—but firms should not sacrifice resilience. Supply chain leaders who strive for visibility, rapid response, and resilience can guide a company through these trying conditions.
I would like to thank my BCG colleague Jeremy Kay for his contributions to this work.
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