Summary. After the big Covid-19 whipsaw, the most obvious forms of supply chain distress started to fade away. But the relative peace and quiet that executives are perceiving is actually ominous. Under the surface, supply chain risk has become severe, systemic, and strategic. Addressing the risk cannot be left to procurement and operations teams alone, however smart and skillful they are. Boards and CEOs need to put supply chains back at the top of their agendas. A leadership team that provides financial, operational, and organizational flexibility and understands that today's supply chains require new thinking — not just tinkering — can reduce the odds that they'll have to respond to crisis in this era of disruption.
There may be no more dangerous phrase in business than "the new normal." It implies some kind of equilibrium, the notion that we can find and stay in a place where things are safe and balanced, where the earth won't suddenly shift beneath us and send our premises and plans tumbling down. That's what's people think is happening with supply chains — and it's a mistake.
After the big Covid-19 whipsaw, the most obvious forms of supply chain distress started to fade away. The New York Fed's index of supply chain pressure, which spiked to never-before-seen highs in 2020–23, has reverted to previous levels. Last summer, 52% of North American executives surveyed as part of AlixPartners' Disruption Index reported that they expected supply chain challenges to diminish over the coming year, while only 24% said they would worsen. CEOs in particular seem to have relaxed: We found that they were less likely than other executives to worry that disruption would hit their supply chains in the coming months.
The relative peace and quiet that executives are perceiving is actually ominous. Under the surface, supply chain risk has become severe, systemic, and strategic. Addressing the risk cannot be left to procurement and operations teams alone, however smart and skillful they are. Boards and CEOs need to put supply chains back at the top of their agendas. Here's what the current landscape looks like — and how leaders can address today's supply chain challenges.
Today's Supply Chain Risks
Three trends have made supply chains fundamentally less stable than they had been for two decades pre-Covid. These aren't simply short shocks (think dock strikes, for example), but deep changes that imperil operations, sales, margins, and ultimately enterprise value.
Constant conflict
"It's all happening again," one logistics chief told The New York Times as the Suez Canal was shut in June this year. CEOs and boards should get used to it. Instability persists in the Middle East; the relationship between the U.S. and Russia is more strained than it has been since the Cold War; there's hot war on the EU's doorstep; and amid rising U.S.-China tensions, we see increasingly bellicose behavior in East Asia.
Many of those geopolitical flash points are near shipping choke points: the Suez Canal and Strait of Hormuz, the Straits of Taiwan and Malacca. The lack of a U.S. foreign policy consensus, coupled with the increasingly nationalistic policies of China, Russia, and India, means that there is no structure in place to defuse or dismantle these conflicts.
Deglobalization and trade restrictions
World trade has become less open. According to the World Bank, nearly 3,000 new trade restrictions were imposed in 2023, a fivefold increase since 2015. The number of regional trade agreements has fallen by half since the first decade of the century. Many tariffs and restrictions — and, on the flip side, government subsidies for favored domestic industries — are directed at emerging, high-growth industries, such as those associated with the energy transition and digitalization, which makes their strategic importance greater.
For multinational companies, as IMF economists have warned, trade restrictions mean higher costs or reduced market access; they're also driving a slow but substantial redesign of supply chains in the form of nearshoring, "friendshoring," and deemphasizing China and moving into India, Mexico, and Southeast Asia. Earlier this year a Citigroup study found that more than a third of suppliers are focusing on regional strategies including nearshoring and onshoring. Footprint changes are among the largest capital expenses for many companies, and they carry enterprise-wide implications for production, product design, and even value proposition. If that's not a CEO and board issue, what is?
Sustainability
Cutting the environmental and social cost of supply chains has become a priority pushed by investors, employees, regulators, customers, and of course companies themselves. Problems related to sustainability — for example, when abusive labor practices are discovered at a supplier — can disrupt supply chains, and sustainability is an issue that extends across an organization's functions and business units, not to mention its impact on corporate reputation and government relations. That means it must be framed and addressed at the enterprise level.
Avoiding a Supply Chain Crisis
These three trends, separately and together, mean that any individual company faces intense — and often unpredictable — risk of serious structural disruption of its inbound and outbound logistics. However smoothly a supply chain might be operating at the moment, it's built on a less-stable foundation than CEOs are used to.
There are five ways that CEOs and boards can exercise supply chain leadership while not bogging themselves down in tactical issues:
Understand that there's no going back
The pre-pandemic, just-in-time supply chain model is a thing of the past. Covid didn't break that model — it revealed where and how it was broken. Companies can't respond to instability simply with buffer inventory or added time, which adds an extra burden of working capital on their backs. When the competitive race is this intense, companies shouldn't handicap themselves. By rejecting that option, executive leadership can create the space to allow operations and procurement experts to think big, and to be prepared to be bold in its response.
Improve financial flexibility
Top leadership can create a layer of insulation against disruption by improving financial flexibility. Measures like building up the balance sheet, examining lines of credit, and strengthening risk management and defensive capabilities like cybersecurity all reduce the risk or impact of supply or other shocks.
Financial flexibility can also be enhanced by a CEO-led initiative to reduce working capital and expand margins through efficiency, pricing, and sales force effectiveness, along with better sales and operations planning. My colleagues worked with one private equity-owned manufacturer of vitamins and nutritional supplements that achieved a 10% gain in EBITDA largely by improving the connection between its U.S-based manufacturing and its overseas sales and distribution.
Create operational flexibility
CEOs and boards can push for and monitor operational flexibility. They should insist that automation and smart factory solutions include factory flexibility as a goal so that it's possible to shift production quickly from one product or plant to another. They can push for less complexity and more modularity in product portfolios. They can ensure there are backup sources for costly or critical components. They can also ask that supplier development investments be targeted to improve supplier quality in the areas with the greatest potential for instability.
Enhance organizational flexibility
Organizational flexibility can be a powerful defense against disruptions in supply, operations, and distribution. Organizational flexibility is more than the set of tools and capabilities that come under the name "agile" (which is very project-oriented). Organizational flexibility is an outgrowth of culture. You need to be able to pivot in response to changes in supply or demand, so you need to cross-train your people. You need a learning organization as well as an HR team whose recruitment and development plans mesh with your growth strategy. You need an organizational design that readily deploys cross-functional teams and doesn't rely on rigid hierarchies. You need performance management and compensation that rewards "intrapreneurial" initiative.
Use transformational technology
Technology can give senior leaders much more visibility into — and more responsibility for — what's happening in their supply chains. For some years it has been possible to monitor and manage supply chains in real time. Several advisory firms (including my employer, AlixPartners) maintain capabilities that allow companies to track supplier risk, map supply chain data to their own sales and operations planning, and get real-time pricing information for tens of thousands of commodities and components.
Technology is now advancing to the point where it can transform supply chains, not just optimize them. Generative AI is having step-change impact on strategic elements of supply chain management, like identifying and evaluating potential partners and backups. It is also becoming able to predict risk, not just identify it (for example, by detecting early warnings of financial distress at a supplier), and to propose risk-mitigation strategies based on scenarios. These advanced capabilities go beyond optimization; they have the potential to disrupt the economics of companies at every link in the supply chain, from beginning to end.
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CEOs and boards cannot oversee operations from a distance, looking at dashboards and dropping in from time to time to tour a plant. They need to dig deeper to understand where vulnerabilities and opportunities are and discover what they can do to avoid the first and seize the second, and ensure that their companies take full advantage of newfound capabilities to visualize, analyze, and strengthen supply chains. A leadership team that provides financial, operational, and organizational flexibility and understands that today's supply chains require new thinking — not just tinkering — can reduce the odds that they'll have to respond to crisis in this era of disruption.
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