Re-thinking supply chains – beyond Covid and Brexit

By Calum Lewis, Founder and Principal Consultant, OP2MA.

We continue to experience the impact of the Covid pandemic on supply chains, with supply constraints fuelling price pressures and extended lead times creating planning headaches. A common response to build inventories is compounding the situation and could well risk an inventory overshoot in the coming months in some markets.   

There will likely be further turbulence to come with the end of the transition period for implementing the UK-EU Trade and Cooperation Agreement (TCA). From 1st January 2022, imports from the EU require customs declarations and duty tariffs to be paid at point of import with exports to the EU needing to be supported by supplier declarations that confirm origin and allow the use of the tariff preferences set out in the TCA. 

Many market sectors currently reflect the interlinked nature of UK-EU trade flows. In the short term, businesses are likely to absorb the administration costs and, where relevant, tariffs as far as possible. This adds to pricing pressure, and we are seeing some businesses either cease cross-border trading or establish some form of operation in the respective customs jurisdiction.

The requirement to furnish declarations of origin in support of tariff exemptions highlights the need to fully understand the supply chain. For many businesses, particularly SMEs, this is a challenge; the Federation of Small Businesses recently reported that only 1 in 4 of the businesses in a survey were ready for the customs procedures now coming fully into place. 

Covid and Brexit are posing serious questions about the prevalence of extended supply networks in many supply chain strategies. Whilst costs and short-term disruptions are rightly foremost in many minds, there are significant strategic issues to also consider for businesses of all sizes, presenting both risks and opportunities: 

• visibility across supply networks; not just knowing where a latest shipment is, but also the extended network and where components and materials originate 
• regulatory requirements and operating standards; understanding operating conditions and ways of working across the supply network to ensuring compliance
• trade agreements and disputes; assessing the implications for trade flows as geopolitical dynamics play out
• sustainability; managing the use of resources and building more sustainable supply chains.

Compliance to labour and environmental standards is very much in focus as businesses seek to deliver on environmental, social and governance (ESG) commitments. Not knowing what is happening across the network and accepting false assurances diminishes credibility and may impact revenues. Not being able to substantiate origin will be a liability under the TCA regime.  

What should a supply chain re-think consider? 

Design 

The supply chain for any business is not a simple, linear chain of activities; it is a dynamic network of integrated processes that determine what happens, where and when. Decisions about sourcing, sub-assembly and final configuration may need to be revisited considering new trade barriers, lengthy lead times that inhibit flexibility and a growing need for local customisation. There may be, for example, opportunities to move ‘de-coupling’ points (strategic locations in the supply chain where inventory is held to buffer downstream demand) closer to markets to build resilience, flexibility and more sustainable operating models. 

Taking a systematic, structured approach that aligns key operational performance measures to return on investment (ROI) is fundamental to aligning supply chain design to business strategy. There are critical issues to resolve, not least: 

• Balancing between service, cost, and capital; are the fundamental trade-offs that are inherent in supply chain design clearly identified? How will these core dimensions be affected by changes in sourcing and manufacturing locations? 
• Understanding customer demand patterns and trends; are they similar enough for only one approach to serving customers? How are channels to market being reshaped by digitalisation and the growth of ecommerce?
• Ensuring information flows through the entire supply network; are there information ‘dams’ that simply hold back demand flow until an avalanche is released, the so-called ‘bullwhip’ effect? How can distortions of demand signals be overcome by digitalisation and collaboration?

Building platforms that foster growing sustainability; are organisational designs geared to support adaptation? How is innovation to be nurtured? 

It is unlikely that an optimal supply chain design will emerge that will hold for decades; there are simply too many factors in play. Supply chain strategies that perhaps lay untouched for years will now need regular oversight. An iterative journey will be required to recover and then develop sustainable supply chain performance.  

Digitalisation 

‘Forewarned is forearmed’. The benefits of sharing data and information across supply networks is well-documented in supply chain management. The technical means have been around for some time. Perhaps what is striking is the extent that more traditional, transactional relationships still prevail. Both Covid and more locally, Brexit, are giving additional impetus to move forward with digital transformations and for solutions that enhance visibility of stock and order movements across supply chains. 

Understanding both the opportunities offered by improved data capture and sharing, and the risks of service fractures, can help to prioritise digital transformation efforts. Thinking in terms of a network instead of a simple chain is a fundamental starting point. It means moving beyond the immediate next tier and qualifying the extended network. A view of the immediate tier of suppliers should be expanded, ideally in collaboration with these businesses, to qualify points in the network (nodes) and assess their criticality. Assessing the data that is captured at critical nodes and if and how it is subsequently used and communicated can qualify the key connections between nodes that require, and will benefit from, digital connectivity. 

Qualifying risk across a supply network can be time consuming and difficult. That said, using artificial intelligence (AI) based analytics can provide a step change in capability. Capturing publicly available data and working in collaboration with immediate tier suppliers can quickly help understanding of network connectivity and vulnerabilities. 

People 

Supply chain management is not a departmental function; it is fundamentally about the co-ordination of processes across internal activities and other organisations in a network. Organisational designs along with roles and responsibilities need to be shaped such that they support collaboration and focus teams across the business on common priorities. Incentives and key performance measures are critical in shaping behaviours and resulting actions and should drive alignment. ‘Creative tension’ in performance indicators for commercial and operational teams is a myth that creates unnecessary conflict and often leads to perverse decisions. 

Combining targeted skills training, process oriented organisational structures, and coherent incentives provides a powerful foundation for supply chain excellence. If people are an afterthought, then no technical masterpiece of supply chain design will save the business from struggle and potential failure. 

At the onset of a crisis, immediate actions to try and gain some semblance of control and stability are necessary and understandable. As we start to plot a path forward and resilience plays an increased role in decision making, we have the opportunity to take a more sophisticated, data-driven approach, to reshape supply networks. Prior assumptions and processes that held under relatively benign conditions have been challenged; those businesses that adapt are more unlikely to succeed in a complex, uncertain, and volatile world.