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Further work needed on supply chains, warns McKinsey

Companies have only partly addressed the weaknesses in global supply chains exposed by the coronavirus pandemic, according to an updated survey by McKinsey. In the face of new challenges, finishing the job is even more urgent.

The global management consulting group notes that in May 2020, when the first wave of Covid-19 was impacting on the world. lockdowns, shelter-in-place orders, and travel restrictions were disrupting activity across the economy. Demand evaporated in some categories and skyrocketed in others.

As companies struggled to keep their businesses running, they planned major strategic changes to the configuration and operation of their supply chains. McKinsey’s survey of senior supply chain executives conducted at that time found that 93% of respondents said that they intended to make their supply chains far more flexible, agile, and resilient.

Improved resilience

McKinsey repeated the survey 12 months later in Q2 2021. This time, respondents were asked to describe the steps they had taken to shore up their supply chains over the past year, how those changes compared with the plans they drew up earlier in the crisis, and how they expected their supply chains to further evolve in the coming months and years.

In the 2020 survey, just over three-quarters of respondents said that they planned to improve resilience through physical changes to their supply-chain footprints. By this year, the majority (92%) said that they had done so.

But the two surveys revealed significant shifts in footprint strategy. In 2020, McKinsey reported that most companies planned to pull multiple levers in their efforts to improve supply-chain resilience, combining increases in the inventory of critical products, components, and materials with efforts to diversify supply bases while localizing or regionalizing supply and production networks. In practice, companies were much more likely than expected to increase inventories, and much less likely either to diversify supply bases (with raw-material supply being a notable exception) or to implement nearshoring or regionalisation strategies

Different responses

The survey findings indicate that different industries have responded to the resilience challenge in markedly different ways. Healthcare players stand out as resilience leaders, by applying the broadest range of measures, with 60% of healthcare respondents saying they had regionalised their supply chains and 33% having moved production closer to end markets.

By contrast, only 22% of companies in the automotive, aerospace, and defence sectors had regionalized production, although more than three-quarters of them had prioritised this approach in their answers to the 2020 survey. Chemicals and commodity players made the smallest overall changes to their supply-chain footprints during the past year.

McKinsey suggests that some of the differences between sectors can be attributed to the structural characteristics of the industries involved: for example, chemicals and metals are asset-intensive sectors with large, expensive production sites. Investments in new capacity can take years to complete. Other respondents told the consultancy that they had struggled to find suitable suppliers to support their localisation or near-shoring plans.

Despite these challenges, regionalisation appears to be a priority for most companies. Almost 90% of respondents said that they expect to pursue some degree of regionalisation during the next three years, and 100% of respondents from both the healthcare and the engineering, construction, and infrastructure sectors said the approach was relevant to their sector.

Risk management tops the agenda

The pandemic has pushed risk to the top of nearly all corporate agendas. For the first time, in the 2021 survey most respondents (95%) say they have formal supply-chain risk-management processes. A further 59% of companies say they have adopted new supply-chain risk management-practices over the past 12 months. Only 4% have set up a new risk-management function from scratch, but most respondents say they have strengthened existing capabilities.

The actions taken by companies varied according to the pre-crisis maturity of their supply-chain risk-management capabilities. Companies with little or no risk-management experience tended to invest in new software tools, while higher-maturity organisations mainly focused on the implementation of new practices.

The proactive monitoring of supplier risks was the primary focus of these efforts, yet significant blind spots remain in most companies’ supply-chain risk-management setups McKinsey suggests. Just under half of the companies in the 2021 survey say they understand the location of their tier-one suppliers and the key risks those suppliers face. But only 2% can make the same claim about suppliers in the third tier and beyond, even though many of today’s most pressing supply shortages, such as semiconductors, happen in these deeper supply-chain tiers.

The above is taken from How COVID-19 is reshaping supply chains by McKinsey and Company

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