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Risk and resilience are the top topics in McKinsey supply chain survey

Four years on from start of pandemic, companies are accelerating efforts to diversify and localize their supply networks

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Companies around the globe are accelerating their efforts to diversify and localize their supply networks, as the topics of risk and resilience still dominate the supply chain agenda four years on from the start of the pandemic, according to a report from consulting firm McKinsey & Co.

Under those pressures, supply chains are seeing a profound revolution, with a dramatic increase in the adoption of advanced techniques for planning, execution, and risk management, McKinsey said in its “2023 Supply Chain Pulse Survey.” Data for this year’s survey were collected from 101 respondents, who represented a range of industry sectors on six continents. Collected from the middle of April to the middle of May 2023, the survey included questions on four major areas of supply chain management: network design, planning, digitization, and risk management.


The problems those organizations are trying to solve are clear: almost every supply chain manager in the survey said they had experienced significant issues over the previous 12 months. Some 44% reported major challenges arising from their supply chain footprint that required them to make changes during the year. And almost half (49%) said that supply chain disruptions had caused major planning challenges.

Two approaches have quickly emerged as the most common solutions in the past two years. Companies say they have improved resilience through physical changes to their supply chains by increasing their inventory buffers (78%) and by pursuing dual-sourcing strategies for critical raw materials (78%).

But this year’s adds a third option, with twice as many companies reporting using “nearshoring” strategies as last year, McKinsey found. In all, two-thirds of respondents said they were obtaining more inputs from suppliers located closer to their production sites over the past 12 months (led by the automotive and consumer goods industries). Likewise, almost two-thirds (64%) of respondents said they are transitioning from global to regional supply chains, up from 44% last year. Regionalization takes time, however. Once an organization commits to a new footprint strategy, it can be two years or longer before changes happen on the ground, especially if the strategy requires implementation of new manufacturing sites.

Looking into 2024, one major question will be what happens to the world’s bulging buffer stocks. Companies originally began to ramp up their inventories in response to pandemic-era supply chain disruptions, leading some observers to declare a transition from just-in-time supply chains to a just-in-case model. But that future is unclear, with survey results showing that inventories still remain high, and respondents are divided about their future direction. Roughly equal numbers of respondents believe that stocks will continue to rise, remain at today’s levels, or fall back to precrisis levels.

Answers to those questions could come from the digital-planning revolution that has been brewing in the supply chain field since well before 2020. The pandemic dramatically accelerated the adoption of those new technologies, including three main ingredients: end-to-end visibility, high-quality master data, and effective scenario planning. Companies are also continuing to use cross-functional integrated business planning (IBP) processes, and increasing their use of advanced planning and scheduling (APS) systems that match supply and demand in complex networks.

However, one hurdle that could slow supply chain technology adoption is the long-standing barrier of access to talent. Repeating the results of last year’s survey, only 8% of respondents say they have enough in-house talent to support their digitization ambitions. And yet to fill the gap, companies are backing away from running internal reskilling programs in the supply chain function and turning increasingly to external hiring instead.

All that turmoil has gotten the attention of executives in the board room. McKinsey said. After the large-scale disruptions of recent years, supply chain risk has moved from being a niche topic to a top three item on the senior-management agenda. With the ongoing war in Europe and heightened geopolitical tensions around the world, supply chain risks remain real in many industries. Yet structural and organizational issues may be hampering companies’ ability to make effective decisions based on their growing understanding of supply chain risks. Responsibility for risk management remains fragmented, with many companies operating multiple risk teams within the supply chain function or bundling risk management into the portfolios of teams that are already busy with other topics.

Facing all those challenges, a key task in the coming year for supply chain leaders will be maintaining their hard-won seat at the top table and continually educating the board on the importance of risk and resilience. That’s because in the absence of an immediate supply chain crisis, top-management focus tends to shift onto other issues. Yet supply chains remain vulnerable to a wide range of disruptions, from geopolitical tensions to natural disasters and climate change.

 

 

 

 

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