Supply chains face the challenge of resilience

Logistics and Supply Chain News

Geraint John, Vice President, Supply Chain Research & Advisory, Gartner, spoke to The Logistics Point about supply chain resilience and what companies are finding the hardest to achieve. Cost and consumers’ attitudes are reshaping the industry and organisations are balancing carefully between expenses and social responsibility. Would that be a impossible?

What are supply chain leaders most worried about when they look at where to invest first?

Product and portfolio complexity is the number one barrier to more resilient supply chains, according to our research. Not all product supply chains need to be equally resilient, so it’s a question of figuring out which operations to invest in and which to leave as they are. That task is made more difficult when you have thousands of different SKUs to evaluate, and many parts and components on your bill of materials. Cost is another big concern for supply chain leaders: 60% acknowledge that their networks have been designed primarily for cost efficiency, rather than resilience or agility.

And more than half say that balancing these considerations and making the right trade-offs is a challenge. In many cases, they will struggle to justify the additional costs involved in qualifying alternate suppliers, adding idle manufacturing or warehouse capacity, or moving production to a different country or region. Calculating the return on investment when you are faced with significant extra tariff costs, as in the US-China trade war, is one thing; making a business case based on potential future and unspecified disruptions is quite another.

Do you believe supply chains might be forced to relocate due to political reasons despite the majority not willing to do so because of costs?

It’s possible that this could happen in some cases. We have already seen Chinese companies starting to reconfigure their supply chains for semiconductors, software and high-tech equipment as a result of American restrictions on what they can buy from US companies. We also see big western clothing brands under pressure to remove cotton sourced in the Xinjiang region of China after accusations of forced labor practices there. And earlier this week President Biden signed an executive order that could lead to US supply chains for pharmaceutical APIs, critical minerals, microchips and lithium-ion batteries becoming less reliant on China or other countries in the Asia-Pacific region, for example.

“We have already seen Chinese companies starting to reconfigure their supply chains for semiconductors, software and high-tech equipment as a result of American restrictions on what they can buy from US companies.”

Just over half of the supply chain executives we surveyed said they expected national interests and pressure to favor domestic operations to have a greater influence on their supply chain strategies in the future. And 36% expected their executive leadership to support such moves regardless of political pressure. Geopolitical tensions will continue to be a factor in determining where companies site their operations.

But relocations specifically for political reasons are likely to be limited. It’s just not in businesses’ or supply chains’ interests for global free trade to be curtailed in this way.

What is the role of consumers and customers in supply chain agility and resilience when most prefer low cost?

This is something that companies are just going to have to take care of, to be honest. Most customers and consumers are not going to think too much about resilience or agility – as long as their orders are delivered on time and in full. When we asked supply chain leaders about the most important indicators of resilience, the top answers were all about the customer experience and their ability to fulfil customer requirements in the event of disruptions – not what it takes to get there. This is very different from sustainability, where customers, consumers – and, increasingly, investors – are playing a public role in influencing companies’ supply chain strategies. But even here, most customers are unwilling to pay more for more socially and environmentally friendly products, despite what they might tell researchers.

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Would building up resilience mean higher prices for customers?

In some instances, the answer will be yes. But it will depend on the pricing power that companies have in the sectors in which they operate. In highly competitive markets, the ability of firms to pass on any additional costs of supply chain resilience to customers or consumers will be severely constrained. In our survey, 42% of supply chain professionals said they did expect that customers would pay higher prices. But that figure is dwarfed by the three-quarters who thought the extra costs would simply be absorbed in internal supply chain budgets. So, on balance, it’s more likely that companies will have to bear the burden themselves or find ways to share resilience-based costs with suppliers, logistics providers or other supply chain partners.✷

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