Being prepared for the ‘new normal’ means placing resilience at the heart of your business agenda or running the risk of falling behind. Being stuck in constant firefighting is a sure route to losing efficiencies, significance and market share. Better for resilience to be a C-suite topic - rather than regular value chain disruptions. Kearney’s Markus Vejvar explains.
In the new era of continuous disruption and high business volatility, established principles like the supply chain triangle of ‘cost-cash-service’ need a rethink. Lean doesn’t reign supreme anymore, and instead of optimising within these three dimensions, firms need to balance short-term operational performance with flexibility, resilience and sustainability to ensure long-term growth (see Figure 1). However, with inflation at an all-time high, how can manufacturers pull off this balancing act? And how should they tackle the shift?
Value chains are not ‘going back to normal’
If anything is the norm these days, it’s disruption. With global value chains already on shaky ground, recent events like the further escalation of the Ukraine conflict, tensions in the Taiwan strait and extreme weather events have added to the strain, while surging energy costs and inflation are increasing the pressure for higher operational efficiency.
The ongoing turmoil is a symptom of developments that are fundamentally transforming the global economy (see Figure 2). As firms scramble to regain control of their supply and distribution channels, it’s become clear that many global value chains, having come together in a much more stable business environment, were not configured to withstand this level of disturbance.
Let’s think about it. When the economy, political landscape, logistics system and even the weather, were relatively stable, striving to optimise costs without jeopardising service levels was a perfectly feasible undertaking. Enabled by stable conditions, value chains were able to outsource and globalise supplies, achieving ever greater economies of scale. Lean and just-in-time reigned supreme; efficiency and effectiveness were the name of the game – to the extent that even major geopolitical events like the terrorist attacks of 9/11 and the financial crash of 2008-2009 were not enough to shake organisations’ belief in (or ability to deliver on) the optimisation on cost, cash and service only.
A new paradigm for value chains
However, fast-forward to today and these systems are struggling. While conventional business cases rest on the risk of disruption as a predictable, statistical variable, the so-called black swan events of recent years have blown this approach out of the water. Almost impossible to anticipate, black swans are also much more severe and systemic than ‘traditional’ disruptions, with ripple effects that impact entire industries or geographies. As a result, companies must now leave their retrospective strategies for risk and disruption behind and move instead toward a more holistic, proactive approach that is based on building resilience.
The challenge is finding a much more complex and delicate balance between efficiency, responsiveness and the ingrained ability to anticipate, adapt and pivot to whatever the world throws at you. As regulations tighten and customers become more aware of the externalities of a globalised economy, this has also placed a premium on sustainability, particularly as energy costs surge and inflation eats up margins.
How are operations executives to walk the line between being able to deliver and safeguarding their operational margins? Managing this trade-off has to be done in a much more systemic and holistic way. While many firms have opted to tack resilience and sustainability onto their strategies after optimising cost-cashservice, based on the old supply chain triangle model, manufacturing leaders have started to embed them in their core decision-making processes.
This makes for a more comprehensive and integrated approach. Added to which, the earlier resilience and sustainability are introduced, the easier it is to embed them within the organisation at target cost. Having resolved to do this, the next question for manufacturers is how to make the transition.
Global drivers of value chain disruption
Baby steps or a leap of faith?
No transformation comes without its challenges. However, when the shift you are trying to make hinges on an intricate web of variables, knowing where to start can feel like an impossible choice. To help firms on the journey to resilience, the World Economic Forum, in collaboration with Kearney, developed the Resiliency Compass (see Figure 3). This comprehensive framework measures resilience capabilities along eight core dimensions, enabling organisations to see how they shape up, identify priority areas and shape practical action plans to address these.
However, while the compass provides a view of what firms can do to make their global value chains more resilient, we also need to discuss how they should go about the task. Is it better to take a series of small steps in response to ad-hoc disruptions? Or does building back better rely on manufacturers taking a leap of faith and fundamentally transforming their global value chains by embracing product innovation, switching up their portfolios and redesigning production and distribution networks?
Both approaches have their merits and risks. On the one hand, the gradual nature of adaptation is a clear strength. In this scenario, resilience is built in continuously as the global value chain reacts to disruptions, usually emerging stronger from the challenge. Resilience is added exactly where it is required, reducing the risk of over-investment. What’s more, adaptation tends to come more naturally to many firms, as it addresses tangible threats and issues rather than potential eventualities.
However, focusing solely on adaptation runs significant risks. It means taking measures after disruption has occurred, requiring the organisation to suffer its negative impacts before identifying and addressing any associated vulnerability. In times like today, this places perpetual stress on the value chain, with firefighting rather than addressing root causes taking up executives’ time and headspace. Another risk is not being able to change quickly enough in a highly volatile environment and being wrong-footed when supply and demand markets turn upside down.
This is where full transformation comes into its own. Rather than small steps, it’s a big leap based on proactively building resilience and preparing for whatever might come down the line. For some firms, it means redesigning their entire product portfolio (‘resilience by design’) or reconfiguring the manufacturing network around smaller, geographically diverse hubs.
For others, it’s profoundly changing the way they make decisions and build their business. How is resilience accounted for in business cases? And what percentage of margin can (or should) be allocated to improve resilience of projects? This new philosophy can help pull off the balancing act needed between protecting margins and investing in resilience.
Equally, transformation brings its own challenges. First, there is obviously a high degree of uncertainty involved, meaning there is no blueprint or universal playbook to refer to. Instead, each organisation must identify, evaluate and implement solutions on a case-by-case basis. Added to this, transforming the value chain essentially means transforming the organisation as a whole, as remodelling a manufacturing network or product portfolio will leave an imprint on every other aspect of your business.
Finally, transformation costs will need to be accounted for. For example, building resilience into the manufacturing network through additional, smaller plants will inevitably affect economies of scale and put more pressure on margins. Identifying and managing the specific trade-offs that will have to be made, upfront, will make it much easier for manufacturers to take the correct decisions.
The resiliency compass
Real resilience requires a two-pronged approach
It becomes increasingly apparent that a two-pronged approach is required in today’s volatile environment. Firms need to bolster their ability to react to disruptions and adapt accordingly, which is a short- to medium-term endeavour. However, this is not enough on its own. Longterm survival rests on a more profound transformation that understands how geopolitics, climate change and technological advancement will shape the manufacturing industry and what manufacturers need to do to meet these sweeping changes.
To make this happen, organisations must decide what role resilience will play in their strategy and how it can be embedded at the right cost. However, transformation won’t be a one-off effort. Following the leap of faith and transforming to meet the changes head-on, firms will need to stay vigilant, continuing to adapt their value chains as needed to stay relevant in an evershifting climate of disruption.
There’s no doubt about it, resilience and sustainability are challenging concepts, and building them into your operations will be an ongoing and complex effort. Doing it well means investing, or even sacrificing margins, for benefits that, while tangible, are hard to quantify. However, being prepared for the ‘new normal’ means placing them at the heart of your business agenda or running the risk of falling behind.
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