Four ways to turn supply chain disruptions of 2023 into a competitive advantage
by Pushpendra Mehta, Executive Writer, CTMfile
Corporations were impacted by three significant supply chain disruptions during the past year, with US$182 million being the average annual cost of supply chain disruptions to each organization, according to the Interos Resilience 2022 Global Supply Chain Survey Report.
Supply chain disruptions are expected to continue in 2023. In fact, a recent CNBC survey found that more than half of logistics managers at major companies and trade groups say they do not expect the supply chain to return to normal until 2024 or after.
Sixty-one percent of the survey respondents said their current supply chain is not operating normally, compared with 32% that said it is functioning normally. When questioned when they see a return to normalcy, 22% were unsure, 19% said 2023, and 30% said 2024. Another 29% said in or after 2025, or never.
A problem that’s lingered for corporate treasurers and finance leaders since the early days of the COVID-19 pandemic, the fragility of supply chains, has been prolonged by a global semiconductor shortage, geopolitical conflict, weather woes, cyber attacks, trade wars, inflationary pressures, mounting ESG regulatory requirements, labour availability and protection and a looming recessionary environment.
For corporate treasurers, managing their organization’s response to frequent and consistent supply chain disruptions can actually be a significant opportunity in 2023 and beyond. To help corporate treasurers deal with these disruptions and turn the supply chain challenges of 2023 into a competitive advantage, here are our key suggestions:
Reshoring, nearshoring and friendshoring: China’s loss is its Asian neighbours’ gain
The China-US trade war, China’s COVID shutdowns, and escalating tensions between China and Taiwan have resulted in more companies and countries seeking alternatives to the world’s factory, China, and relocating their manufacturing supply chains.
“More than half of US businesses in China say that their first choice for relocation would be other countries in Asia; less than a quarter say back home; less than a fifth say Mexico or Canada. These decisions are guided by all manner of risks and costs, but a central advantage of Asia outside China is wages”, observed Ruchir Sharma, Contributing Editor at the Financial Times (FT) and Chair of Rockefeller International, in his recently published article in FT.
“In the US, there is talk of manufacturing coming ‘back home’, or moving next door to Mexico, but the big winners so far are next door to China: Vietnam, Taiwan, India and South Korea”, Sharma explained.
As per a news story published on CTMfile earlier this month, multinational corporations are redrawing their supply chains to hedge against risk and uncertainty by diversifying their supply chains away from China.
“India, Vietnam, Thailand, Malaysia, and Bangladesh are stepping up to replace the world’s factory”, as reported in a recent article in the Business Insider South Africa website, which means that China may be losing its manufacturing and export market share in key sectors to its Asian neighbours.
Geographical diversification of supply chains to reduce dependency on China – as a market and as a supplier – is recommended, and this will mean that more business leaders, corporate treasurers and finance chiefs would need to build reshoring (bringing manufacturing back home), nearshoring (moving production closer to home) and friendshoring (shifting manufacturing and sourcing toward allies or friendly countries) relationships to create a more efficient and secure supply network.
Corporations and their treasury departments that will implement dual or multiple sourcing strategies for critical materials and move towards an amalgam of reshoring, nearshoring and friendshoring in their pursuit of self-sufficiency may boost supply chain resilience and become more likely to avoid supply chain snarls and challenges in 2023 and beyond.
Mitigate cybersecurity risks in supply chain
Supply chain cyberattacks (also known as third-party or value-chain attacks) surged in 2022 and became the centre of conversations with finance, treasury and information security professionals. The Okta breach, the GitHub OAuth tokens attack, the Magento vendor Fishpig malware hack, and the compromised AccessPress plugins and themes were some of the most noteworthy supply chain attacks last year.
In 2023, cybercriminals are likely to adopt more sophisticated techniques to exploit vulnerabilities in an organization’s supply chain network. Cybercriminals know that attacks on an organization’s supply chain network have ripple effects.
The inherent global nature of a supplier network that connects software, employees, customers, suppliers, vendors and other third parties increases the possibility that one business and digital supply chain cyber attack can leave countless organizations vulnerable to fraud. In essence, a single compromised supplier or third-party vendor (a single hack) can result in attacks on hundreds of thousands of companies around the world.
In uncertain economic and political times, we advocate for corporate treasury to perform cybersecurity due diligence of all tiers of a company’s supplier network to minimize the risk of supply chain cyberattacks. Many corporations focus primarily on tier 1 suppliers. However, given that supply chain cyber crimes are an enduring threat for enterprises, it is becoming increasingly important for companies to assess the cybersecurity hygiene of their tier 2 vendors and beyond to mitigate the impact of supply chain attacks.
In this connection, conducting a cyber risk assessment prior to onboarding a new vendor or giving a third party access to business-critical systems is of critical importance. In addition, it is equally important to foster greater collaboration and relationship cooperation among all stakeholders in the supply chain when safeguarding devices, networks, people and programmes.
Supply chains are at the heart of global trade, and enhancing employee training and leveraging emerging technologies to identify and monitor supply chain vulnerabilities on a continuous basis is necessary, as is the ability to react promptly and effectively when a major disruption happens.
As the supply chain cybersecurity risk management space is still evolving, a preventative and recommended measure that corporations can embrace to mitigate supply chain attacks is to assume that no user or third party can be trusted. That means adopting a zero trust security approach into the supply chain security environment. As zero trust requires validation at every stage and restricts user access only to specific systems that are assigned to them, it prevents cyber hackers from moving laterally through the network and causing more damage. This can help reduce or eliminate supply chain attacks.
Shift from just-in-time to just-in-case
In 2022, supply chain bottlenecks affected corporations in all industries – most notably healthcare, automotive, consumer packaged goods, oil and gas.
In the wake of continual supply chain disruptions experienced over the past two years, nearly half (45%) of the respondents in the 2022 Global Finance Trends Survey Report by Protiviti said that “Their organizations are moving away from efficiency-based supply chain models (e.g., low-cost, just-in-time) to revenue assurance models that emphasize flexibility and resilience.” The survey found that organizations in health care, oil and gas, and retail industries are more likely to ditch efficient supply chain models for revenue assurance models.
For decades, companies relied on just-in-time manufacturing to keep the production process flowing because it emphasised keeping inventory to a minimum. It is time for many to shift from just-in-time to just-in-case inventory, stockpiling or increasing inventory for key parts or materials on hand, and engaging with multiple suppliers.
In essence, just-in-case stock management ensures that corporations have adequate inventory or a buffer for any unexpected demand or unforeseen circumstances so that they are not left in the lurch should global supply chains worsen again.
Given the possibility of commodity price and availability fluctuations, cracks in global economic interdependency, and the continual snags in global supply chains that may result in limited access to spare parts and maintenance items, or even shortages in critical raw materials or inputs for manufacturing, companies must consider shifting focus more to the importance of supply chain resilience, reliability and responsiveness over prioritising costs and maximising profits here and now.
Accelerate investment in big data analytics, automation and technology
This year, one focal area of corporate supply chain management will be prioritised investment in big data analytics, automation and technology. According to KPMG’s Supply Chain Trends Shaking Up 2023 insights, it is important to “Adopt real-time data analytics to enhance accuracy of predictions/forecasts of demand volatility and stream these insights into your Sales & Operations execution framework” to protect against material access issues and combat future disruptions.
In addition, given that more companies are incorporating ESG into more sourcing decisions, capturing “real-time operational data along your supply chain for measurement and reporting of ESG matters” will help you make informed decisions to reduce scope 3 emissions, as per KPMG’s supply chain trends insights.
Investing in automation that includes automated warehousing and drones can help corporations replace routine manual supply chain tasks and activities, improve safety for employees, boost productivity, and protect against margin squeezes.
Furthermore, corporate treasury should extend supply chain visibility by leaning toward sophisticated tools and technology that can provide better or enhanced end-to-end visibility among their thousands of interconnected suppliers worldwide.
Organizations that harness the power of big data analytics, automation and technology solutions will benefit from synchronised planning and execution, greater visibility and efficiency, and real-time business intelligence.
Diversifying supply chains to multiple sources and regions, building active relationships, and improving communication that helps suppliers across the value chain to partner together effectively enables businesses to deliver on a range of objectives – operational, financial, regulatory, ESG, and cyber or geopolitical risk mitigation.
While disruptions to global supply chains are likely to persist this year, corporations and their treasury departments that take the lead on the four critical areas noted in this article will not only be able to build a more agile, capable and flexible supply chain system, but will also benefit from a more sustainable, reliable, risk resilient and forward-thinking supply chain that will help them gain competitive advantage in an unpredictable and complex world.
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