What are the practical concerns and considerations when building supply chain resiliency in an evolving operational and regulatory landscape?

Wolfgang Lehmacher

In these difficult times, companies can increase supply chain resiliency by driving three strategies. The first is to mitigate risk and manage disruptions with continuous design and monitoring. Second, model visions of future networks and the impact of new technologies. Third, develop strong relationships along the supply chain. In 2020, the semiconductor shortage emerged as the perfect storm, a classic example of the “bullwhip effect”, causing high variability, volatility, and a challenge for the automotive industry. It began with US-China tech tensions and subsequent stockpiling. The situation was aggravated by Covid-19, which drove demand for electronics, as well as a winter storm in Texas that impacted a major fab and a fire that caused damage to a Renesas factory in Japan. Renesas commands nearly a third of global market share for car microcontroller chips. AlixPartners estimated that the chip shortage could cut USD 60.6b in revenue from the automotive industry this year. GM warned that the chip shortage could cost them USD 1.5-2B in revenue for 2021 and Ford reported a 25.9% drop in June 2021 U.S. year-on-year sales.

Resilient companies should be in a different place. In February 2021, Toyota said it had a four-month stockpile of microcontroller chips and was not immediately expecting the global shortage to impact production. In May, Toyota’s CFO said the automaker does not expect to suffer a major impact from the semiconductor shortage and reported profit more than doubled to USD 7B from January-March 2021, over the same period last year. Toyota has strong relations with suppliers and a structured planning and information exchange process. It informs suppliers of production plans up to three years in advance and updates its three-month schedule monthly. Of note, the company is considering a departure from its legendary planning-based, just-in-time approach to a visibility-based management of inventory through a digital and centralized inventory management framework. The vision is to convert physical stock into information. The goal is to build resiliency by taking this vision and grounding it in strong supplier relationships and utilizing technology as a critical enabler. Toyota’s success notwithstanding, the global economy’s Covid-19 contingency measures are stretching supply chain networks to their limit and international collaboration is required to build resiliency across the economy as a whole and put an end to the continuous shocks.

Wolfgang Lehmacher is a global supply chain strategist. He has over 25 years of industry experience and advises corporates, asset owners, international organizations and governments worldwide. Wolfgang was Director, Supply Chain and Transport Industries at the World Economic Forum and President and CEO of Geopost Intercontinental.

Chris Pockette

Political risk can be broadly defined as a political agenda, decision, or event that has the potential to negatively impact the value of an economic asset. For multinationals, political risks constantly influence returns on direct foreign investments and so are on the radar of senior management. What may not be as apparent; however, is that political risks also impact intangible assets, such as critical relationships, channels and partnerships that define a company’s supply chains. Companies will manage credit markets and operational risks inherent within supply chains, but few devote sufficient resources assessing relevant political risks. Yet, in many countries, politics often eclipses economic logic when making commercial policy and regulating businesses. Risks that have political underpinnings often carry the most potential for causing the sort of negative impact that both imperils or destroys the value of key supply chain nodes. Therefore, companies with substantial foreign supply chain exposure should strive to understand the relevant political risks inherent in these locations.

Meaningful risk analysis must review both broad based and more narrowly focused issues that can negatively impact supply chain relationships. An effective assessment needs to consider a country’s internal and geopolitical situations, focusing on how these may impact foreign-based investments and commercial relationships. In addition, consideration must be given to locational risks, including security, civil-political stability, and critical governmental and oversight issues. These should start with a thorough understanding of regulatory risks with an eye towards the possibility of intrusive actions such as direct government intervention, resource nationalism, privatization of public assets, or other forms of state capture. The cumulative risks that arise from political permissiveness or a weak legal framework should not be underestimated. For example, the corrosive effect of large-scale corruption undermines political authority, which in turn weakens essential elements of supply chain partnerships including contract law. Political risk assessments should be conducted by an objective third-party who has the necessary firsthand experience of the country being assessed. Moreover, the initial assessment is merely a snapshot in time and true protection requires ongoing monitoring. Supply chain resilience is acutely dependent upon a deep understanding of current geopolitical and internal risks, and the foresight to mitigate challenges born from these risks, in real time and with a view beyond the horizon.

Christopher S. Tang

Since 1980, outsourcing supply chain related operations to lower cost countries such as China has created value for shareholders and corporate leaders, but it has not “trickled down” to the working class as promised. In 2020, the COVID-19 pandemic, social unrest, hate crimes, and an economic downturn caused business leaders to rethink business models and reform how supply chains function. Ironically, between 1980 and 2019, CEO compensation increased by 1,167% while a typical worker’s compensation grew by a meager 13.7%. In 2020, the total market capitalization of the top 50 global companies reached $4.5 trillion. This market cap is equivalent to 28% of global GDP. These facts have broader implications. First, the shareholder value paradigm incentivized firms to focus on profit rather than the well-being of the planet and people. Second, top global companies have amassed greater economic power than many governments around the world. Third, global supply chain operations of many top global companies have a significant impact on environmental sustainability and social responsibility in many countries. Consequently, these three issues nudged corporate leaders to pledge to shift their interests from shareholders to stakeholders, but this pledge has yet to be realized.

The ESG movement, unlike the lack luster CSR initiative, is motivating company’s actions so that investors and the public can make informed decisions and judgements. The ESG movement is creating a new incentive for companies to collect and disclose information about financial, environmental sustainability, and social responsibility performance. It’s forcing CEOs to construct measurable means to describe and present their businesses. Adding to the ESG movement, as pressure from regulators and the public builds, global firms are increasingly motivated to disclose their supply chain activities. These activities range from employee related matters to compliance to fair and ethical standards and practices. This is a positive first step but major challenges still remain. Most corporations do not have visibility into the operations of the entire supply chain so how can they develop a plan to improve ESG performance associated with all upstream suppliers? Most corporations do not have a physical presence in locations where upstream suppliers are located so how can they monitor and enforce regulatory compliance effectively? Perhaps partnerships with NGOs and the utilization of Blockchain technological solutions can help, but only time will tell.

Christopher Tang is a distinguished professor at the University of California, Los Angeles, and Edward W. Carter chair in business administration at its Anderson School of Management. He is known for his research in global supply chain management. 

Shannon Argetsinger

Supply chains, and the multitude of factors that impact supply chain resilience, are far too significant to deploy a “wait and see” approach as a solution for managing such complex systems. Proactive prevention and monitoring are the most responsible and practical ways to deter supply chain deficiencies and potential disasters. In today’s environment, supply chain health and integrity is more important than ever. Regulatory changes and geo-political pressures complicate existing supplier/sourcing relationships, and the COVID-19 pandemic created, and exposed, substantive deficiencies. Corporate resources for preserving, and ensuring, supply chain health and resilience are being mobilized to mitigate the ever-morphing impact of supply chain related problems. Governments are awakening to the importance of better understanding, monitoring, and resourcing critical supply chains.

As early as 2017, France, under the “Duty of Vigilance Act” mandated French companies, meeting specific thresholds, to conduct due diligence of all the companies within their control as well as their network of contractors and suppliers. Clearly establishing a framework for corporate responsibility related to the health and safety of all associated with a supply chain. Similarly, the U.S. in June 2021, under Executive Order 14017, issued a 100 Day report that focused on the importance of supply chain development and resilience. The report addressed the need to assess, modify, construct, and strengthen supply chains and their components. The report clearly outlined supply chain nomenclature and processes related to resilient supply chains, and perhaps more importantly, it showcased the critical importance of supply chains. The evolving regulatory landscape for supply chains will continue to expand hence the 2021 EU proposed legislation to expand the remit to include specific human rights and environmental related concerns. Also included was a provision for corporations to not just diligence holdings and affiliates but to monitor their supply chains. Additionally, corporations are advised to conduct risk assessments and create a methodology to minimize the impact of potential supply chain related violations. Supply chains, once viewed as secondary to the end product or service provided, are now in the spotlight. Resilience is defined as “an ability to recover from or adjust easily to misfortune or change.” Building resilient and sound supply chains depend largely on how they are built and maintained. Monitor and act should be the moniker rather than wait and see.

Takeaways:

• In your company’s key markets, continually monitor political and regulatory developments to understand which sectors will potentially face enhanced scrutiny or oversight.
• Supply chain risks come from many origins and impact different departments within a company. Management teams across functions needs to monitor and share information about these risks and build a culture that identifies and escalates issues before they materially impact the organization.
• An inability to travel and meet supply chain partners has allowed bad habits and potential malfeasance to develop in the absence of direct oversight. Business travel will continue to be impacted for the foreseeable future, so companies may want to consider utilizing technology and external resources to assist with monitoring and oversight activities.
• The data component of supply chains is increasingly vulnerable to new rules and regulations around privacy and national security. It is important for companies to understand what sensitive data they hold and what could be subject to data privacy and other regulations.