‘A supply chain is as strong as its weakest link’

The shortages and disruption of the past two years have shown that a supply chain is only as strong as its weakest link. A lack of truck drivers, a missing spare part and a shortage of staff can bring the entire supply chain of a company, and often its suppliers, to a halt.

With supply constraints unlikely to ease in the near future, firms will have to start tailoring their products and services depending on the parts and labor available if they want to maximize profit and win market share.

“We used to live in a McDonald’s world,” said Cordon, IMD Professor of Strategy and Supply Chain Management, referring to the global fast-food chain that offers a standardized menu based on customer preferences the whole year round with optimized delivery and service. In the future, firms instead will have to start acting like the chef of a local restaurant who selects seasonal produce and designs his menu accordingly.

“We are going much more to a world where not everything is available,” said Cordon.

In February, McDonald’s stopped selling medium and large-sized portions of fries in Japan due to a shortage of potatoes, while the company was also forced to cut store hours because of the labor shortage amid the Omicron surge.

One industry that has adapted particularly well to the supply constraints is the automotive sector which managed to increase profits last year, despite sales of vehicles falling due to a lack of microchips. Carmakers achieved this by dedicating their stock of semiconductors to their more expensive, higher-end vehicles.

Another way to respond to the shortage is to pass the prices onto consumers. Long waiting times for your product may be a sign that you are charging the customer too little, said Cordon. A volatile supply chain will require much more agile pricing processes.

He gave the example of electric carmaker Tesla, which is able to increase prices more frequently than legacy automakers because it sells directly to consumers through company-owned showrooms and online channels. 

Other companies have used the crisis to gain greater control over their whole supply chain. Shipping giant Maersk saw its profit increase more than 50 times between 2018 and 2021. The Danish company is using the extra cash to snap up firms along its supply chain, including logistics and e-commerce firms, a freight forwarder specialized in air freight and warehouses in Asia.

What to do

With executives having to get used to an unstable and volatile world, Cordon detailed eight strategies to help increase the resilience of supply chains:

1. Higher stock levels but with surgical precision

After the Fukushima disaster disrupted Toyota’s supply chains in 2011, the carmaker implemented a business continuity plan that required it to stockpile between two- and six-months’ worth of chips. This inventory served the Japanese carmaker well at the start of the pandemic as it was able to keep production running despite a global shortage of semiconductors.

Companies should identify their essential parts and figure out where and how they can stockpile them.

2. Look for alternative suppliers

Over the years, many companies moved to sole suppliers to push down costs, but this strategy has come back to bite them. A shortage of semiconductors can cost a carmaker thousands of dollars in lost sales. With these supply trade-offs likely to increase, firms should look for alternative suppliers.

3. Regionalization versus globalization

The trend to offshore production was driven by lower costs, cheaper labor, more favourable regulation and willing local suppliers. With increasing scrutiny on the environmental and social impact of offshoring, companies are coming under pressure from politicians and consumers to localize supply and bring production closer to home.

4. Redesign the product and service

When Tesla couldn’t produce its vehicles due to a lack of semiconductors, it rewrote the software to reduce its reliance on chips. German carmaker BMW also chose to remove the touch screen from a few models to maintain production levels.

5. Simplify the offer to customers

In times of shortage, other firms have had to cut back on the products and services they provide. Airlines have suspended routes due to a lack of pilots while retailers and restaurants have cut store hours because of the labor shortage and Omicron surge.

6. Digitize to increase visibility and reaction capabilities

New AI-driven software can provide an overview of the weak links in your supply chain and help firms detect risks faster.

7. Increase agility

Philip Morris International has developed a digital agile supply chain to reduce the time to volume from four months to seven days. Increasing the agility of the supply chain enables firms to respond more quickly to spikes in demand and changing consumer preferences.

8. Collaborate across the ecosystem – even with competitors

The success of Operation Warp Speed, the public-private partnership initiated by the US government to accelerate the development, manufacturing and distribution of COVID-19 vaccines, relied on competitors, suppliers working closely together. In the future, we will see more need for coordination

What to avoid

Don’t sue your supplier

Another lesson from the COVID-19 pandemic is that filing damage claims against suppliers for failing to deliver on time is not a successful strategy. The European Union did not receive vaccines more quickly because it threatened to sue AstraZeneca for breach of contract. Instead, Israel was able to roll out vaccines more quickly because it struck a unique deal with Pfizer-BioNTech and provided data in return for shots.

In a world of constrained supply collaboration both within a company – across finance, supply chain, sales and marketing departments – and with external suppliers and competitors will be essential to eradicate weak links.