Last year was a busy one for supply chain resiliency. That's unfortunate, because that meant a string of major disasters forced too many supply chains into costly reactive mode. Worldwide, total economic losses in 2017 due to natural and man-made disasters soared 63 percent to $306 billion, according to reinsurance firm Swiss Re. The U.S. was the hardest-hit region, posting $93 billion in losses mostly from a trio of devastating hurricanes during the late summer and fall.
For the supply chain, disasters are a fact of life, and will become a more expensive fact should incidents increase in frequency and severity, as many experts expect. However, as Aaron Parrott, specialist leader in Deloitte Consulting's supply chain and manufacturing operations practice, explains in a recent conversation with Mark B. Solomon, DC Velocity's executive editor-news, there are ways to mitigate the consequences, though not eliminate them.
Q: There were several high-profile disasters during 2017. Did last year's events move the needle in terms of getting businesses to be proactive about hardening their supply chains? Or are businesses still in a reactive mode and view this as a cost of doing business?
A: While 2017 was certainly a notable year for high-profile disasters, we're not seeing business leaders write big checks to overhaul their supply chains. For some companies in highly impacted regions, these disasters may have caused sudden ruptures in their supply chains and revealed unforeseen vulnerabilities. However, when it comes to building supply chain resiliency, we see most companies taking a piecemeal approach over a longer period.
Q: You stress the importance of pushing disaster planning and execution up the supply chain. Given that most large manufacturers have hundreds of suppliers around the world, can such resiliency be consistently achieved without prohibitive cost?
A: For many large manufacturers, 70 to 80 percent of their product value comes from the supply base. An unforeseen issue with just one critical supplier can jeopardize a manufacturer's entire operation and bring production to a standstill. For companies with complex and expansive supply chains, I recommend starting by focusing on the 15 to 20 percent of components and parts that are critical to continuing operations. This more limited focus will avoid incurring high costs while still ensuring continued production through challenging periods.
Securing resiliency can be achieved without prohibitive cost. In the past five years, the cost of implementation has decreased and ease-of-use for digital tools has increased significantly. This allows businesses to integrate cost-effective sensors and software packages to better collaborate with suppliers as well as enable blockchain solutions and data analytics software that can pinpoint and anticipate potential areas of concern.
Q: Beyond the obvious priority of ensuring the safety of employees, what should a company's to-do list be as it is developing a disaster-response plan?
A: A first step is to increase visibility into the supply chain. If your eyes are closed when disaster strikes, you'll end up fumbling in the dark and grasping for solutions.
This visibility requires mapping the supply chain—developing a multi-tier perspective to better understand the overall network. Next, manufacturers must strategically locate any areas where potential supply chain failures might occur. For example, a manufacturer might learn that all its suppliers for one specific component are located in a hurricane-prone area. Can production survive without these suppliers? Are there alternative suppliers that can diversify the components' availability and reduce risk? By answering these questions, manufacturers can more effectively pre-empt disaster-related challenges.
Finally, complex supply networks require advanced digital solutions, including the ability to track material movement, collaborate in real time, and integrate data across multiple systems and locations, along with data analytics to predict supply disruptions and identify current issues. These tools allow for multinodal communication, enabling instantaneous synchronization across the supply chain and providing manufacturers with complete end-to-end transparency. This real-time information, coupled with unfurled supply chain maps, can allow manufacturers to quickly recognize problems, identify solutions, and pursue preventive actions.
Q: What are the challenges in trying to build disaster plans across very long distances and many different cultures?
A: In today's business world, distance and cultural differences no longer tend to pose significant barriers. In fact, the global nature of business often provides significant value for companies that efficiently source through the most cost-effective supply chain networks. As previously mentioned, digital solutions are vital to securing supply chains, enabling manufacturers to maintain always-on agility. These capabilities are essential—not only for global supply chains, but also for national and regional supply chains.
However, companies that fail to maintain clear visibility into their supply chains may be unaware of supply chain issues occurring on the other side of the globe. End manufacturers may not learn of an issue for three or four weeks after a disaster takes place. Without up-to-the-minute information, companies lose the ability to respond effectively to real-time situations. By translating the physical world into the digital world, manufacturers can more accurately capture and analyze data, building resiliency against otherwise unpredictable situations.
Q: All the planning in the world may not help in the event of a sudden disaster and emergency, or if a storm changes its original course. Is there any way for companies to plan for the unforeseen, and if they can't cover all bases, what should they focus on?
A: Securing the 15 to 20 percent of your supply chain containing the most critical components to your products should be the first priority. But planning for the unforeseen requires building a comprehensive infrastructure around your supply chain. Digital technologies are crucial to gaining real-time insights. If components suddenly stop in transit, sensors and trackers can signal a manufacturer immediately and trigger an appropriate response.
Gaining visibility should also be a priority—not only for disaster planning, but also to maintain a competitive edge. Know where your components come from; learn who supplies your suppliers and establish a deep understanding of how your products come together. Building this bank of knowledge and enhancing it with digital insights enables a manufacturer to become more agile and proactive. This agility will not only prove invaluable in terms of disaster response, but also in allowing manufacturers to efficiently source components and boost revenues. Disasters and supply chain interruptions are going to happen, and they are impossible to avoid. Enabling these capabilities will allow companies to respond more quickly, make better decisions, and get their supply chain back up and running faster.
Q: How much traction has the control tower concept received as a proactive strategy?
A: As digital technologies continue driving supply chain resiliency, the most advanced control tower concepts allow for end-to-end transparency and enable a fully integrated network. This degree of visibility and connected information within the supply chain allows for proactive event management in disaster situations and even automated decision-making.
Establishing an advanced control tower to monitor the entire supply chain is the most holistic solution for building resiliency, but it's not necessary for every company. This concept is scalable and can be shaped to meet a range of companies' needs. Again, the control tower concept should not be understood as a one-time solution, but rather a foundation to build on. Start with the basics—increasing supply chain visibility—and scale up capabilities as needed to secure supply chain value.
Q: Can you briefly provide an example of a company that, in your view, does disaster planning right?
A: When the topic of supply chains enters mainstream conversation, it's usually because a company has failed to foresee potential vulnerabilities in the event of a disaster. Some companies were devastated by the previous natural disasters, like the 2011 earthquake in Japan, but have since become models of building progressive supply chain resiliency. Some have effectively navigated multiple earthquake tremors—relying on real-time data, predeveloped contingency plans, and strategic relationships with alternative suppliers.
In extreme disasters, it's virtually impossible to keep operations running at 100 percent, but with proper planning, business leaders can protect supply chain value as well as ensure the safety of their employees.
Q: What role does your organization play in supporting businesses in this area?
A: The tasks of mapping supply chains, identifying the proper digital tools, and developing strategic know-how can be daunting—especially for the world's biggest and most complex businesses. As a leader in building supply chain resiliency, Deloitte quickly bridges the gap between concept and implementation. From developing a strategy to initiating execution, Deloitte's capabilities can help businesses adopt scalable solutions that best meet their needs.
Building awareness of possible disruptions is half the battle. If one supplier is hit with disaster, do you have a backup supplier to fill the void? Do you maintain enough buffer inventory to cushion production during a supply shortage? How can you synchronize your internal and external data to derive real-time solutions? These are just a handful of the many questions companies must ask when building supply chain resiliency.