The number and impact of supply chain disruptions are increasing every year. In 2021, 432 extreme weather events caused more than $252 billion in economic damages in the United States alone, and the blockage of the Suez Canal held up $9 billion worth of cargo daily. As tensions between China and Taiwan continue to rise, many pundits and politicians have predicted a Chinese invasion within the next few years that could impact the supply chain of hundreds if not thousands of companies worldwide, affecting billions of dollars in global trade.
It is impossible to predict the outcome of supply chain disruptions with certainty and, beyond the scope of this blog, to tell you what may happen in the South China Sea. However, it’s not impossible to offer guidance on how to build resiliency into your supply chain to mitigate the effects of various supply chain disruptions.
In this white paper, “Escalating Tensions in the Taiwan Strait”, we discuss in detail the history and economy of Taiwan, the concentration of semiconductor manufacturing on the island nation (Taiwan manufacturers produce approximately 60% of all semiconductors and up to 80% of advanced semiconductors), and the potential impact on the global economy. We also dive into four strategies for building resilience, which we’ll highlight here in this blog.
Why you should prepare your supply chain to mitigate risk
Reacting quickly and effectively to a disruptive event, while desirable, is just a temporary fix. Companies should be building resiliency into their supply chain far before any event. Risk dashboards that alert supply chain professionals to disruptive events are helpful, but leaders should build risk mitigation into all their supply chain processes. Boston Consulting Group, for example, has created a supply chain resilience framework that includes network design, modeling, product design, sourcing, planning, and basic monitoring and crisis response.
In its May 2021 supply chain executive report, “Shaping Supply Chain Disruption in a Volatile Risk Environment,” Gartner introduces the concept of disruption shaping. Companies that only react to events and don’t effectively build resilience into everyday supply chain operations are called disruption responders. Disruption shapers, however, take active steps to reduce the overall surface area of their supply chains, thus reducing the number of risk events to which the company is subject. Risk shapers simplify processes, reduce the number of movements for any particular type of good, and optimize the number of suppliers and manufacturing locations to balance risk against cost and performance.
Four strategies to build resiliency and mitigate risk and disruption
Resilient supply chains matter. A resilient supply chain is one that recovers quickly from unexpected events and requires visibility, impact assessment capabilities, quick problem solving, a diverse and healthy ecosystem of suppliers, strong relationships with supply chain partners, and enabling technology. Resilient supply chain professionals don’t wait for disruptions to happen and then decide what to do about it. Resilient supply chain professionals plan ahead. Here are four strategies your company can follow to build resiliency:
1. Diversify your supply base
Having multiple suppliers in multiple countries can make a supply chain more resilient by reducing the exposure to any one risk event. However, due to limited selection or concentration, not every company or industry has the luxury of spreading orders amongst multiple suppliers or geographies. Take the semiconductor industry, for example, supply is concentrated amongst a few companies, and the production of a new fabrication facility can cost as much as $12 billion.
2. Collaborate with supply chain partners
If supplier diversification and the use of a multi-supplier strategy are not practical, you will need to employ other strategies to ensure a steady supply in the face of risk and disruption. To address the semiconductor shortage caused by the Covid-19 pandemic, many chip customers created longer-term contracts for higher volumes with their suppliers.
In other industries, customers adopted buy-back contracts to entice new suppliers, and some engaged in risk-sharing and revenue-sharing contracts to position themselves as customers of choice. Other proven strategies include vendor-managed inventory (VMI) and collaborative forecasting and replenishment planning (CFRP).
3. Shape demand through price and options
When faced with supply constraints, companies often use various demand management strategies and tactics to spread out uncertain demand against fixed supply. Some customers are willing to pay less for later delivery even if it means the risk of having some of their orders go unfulfilled. Other customers are willing to pay less but commit their payment in advance which is often referred to as an advanced commitment discount. Another way to ensure profitability and shift demand across time is through price postponement. This strategy involves setting prices after the orders have been placed and then setting the price based on demand. If demand is too high, the price can be set higher to drive down demand.
4. Design and build products with flexibility in mind
Several flexible design principles can help build resiliency and mitigate risk in the supply chain. Using a platform design and postponing differentiation can offer product variety while reducing complexity as varying products share certain parts or components. This can be a powerful tool to respond to supply constraints, especially when combined with such other strategies as dynamic pricing.
Conclusion
Major events such as the Russo-Ukrainian War, the continued struggle against Covid-19, and the potential invasion of Taiwan have exposed how interconnected modern supply chains have become. Disruptions have also exposed supply and logistics bottlenecks and the tendency to rely too much on a limited number of providers. You can’t predict every disruptive event, but you can handle the unexpected with agility and resilience by building robust supply, demand, and product management strategies to anticipate disruptions, mitigate them, and recover quickly.
How can e2open help your business?
E2open’s vast multi-enterprise network and unified applications bring you the real-time data you need to execute your risk mitigation strategies for a more connected and resilient supply chain.
If you’d like to learn more about this topic, we encourage you to read the white paper “Escalating Tensions in the Taiwan Strait.”
About the Author
William McNeill joined e2open’s product marketing group after 17 years as an industry analyst covering supply chain processes and technologies, including risk, procurement, and global trade. Will is now part of the e2open product strategy team, helping the company align and communicate a market-driven product strategy across supply chain processes and industries. Will loves reading, movies, playing guitar, and snowboarding.
