As the frequency and magnitude of supply chain disruptions continue to grow, it would be understandable if business leaders’ first instinct is to respond by trying to correct every single flaw or mistake, no matter what it takes, so each disruption never happens again. But it’s becoming increasingly clear that a 100% resilient supply chain is unattainable. Rather, pragmatism and adaptability are proving far more effective.
This is the approach that a number of automakers are embracing. Now, as businesses in every industry reorient their supply chains to boost resilience, the strategic ways the automotive sector has responded to recent supply chain shocks hold lessons for all companies.
Here are five actions for executives to consider as they craft the resilience strategy that’s right for their company.
1. Deliver the “good enough” product.
Some auto companies are avoiding shipping delays by adjusting or even eliminating non-essential features or components. Their calculus is that after all the supply issues of the past few years, customers are more willing to accept a product that doesn’t give them everything they want.
Automakers, including General Motors, have removed driver-assistance systems and other features that rely on unavailable computer chips. As the chip shortage eases, there’s an open question about when automakers will reverse these decisions. For example, if an analog control panel is cheaper than a digital one and customers don’t mind analog, does it make sense to switch back? Weighing customer preferences, the competitive landscape, and supply availability will guide companies to the right answer, both in the short and long term.
2. Develop better monitoring systems.
In an era of instability and uncertainty, executives may feel that if they invest enough money in the company’s prediction capabilities, they’ll know where to focus their efforts to increase the resilience of their supply chains and can make big, long-term bets with confidence. But if the past few years have taught us anything, it’s that even the most sophisticated model can’t predict everything.
Instead of overinvesting in prediction, some companies are creating better systems to monitor their most critical links in the supply chain and flag potential issues in real time. In addition, they’re looking for ways to accelerate their response to that new information. This entails an organizational mindset shift, so the company focuses less on transitory events and more on increasing its agility and adaptability.
One automaker responded to pandemic disruptions and the chip shortage with significant investments in bolstering its ability to monitor risks and respond. First, the company created a new tool that uses a scoring system to triage risks. Realizing that the thousands of things, from raw materials to finished goods, that go into its end products are too vast to feasibly invest in foolproof resilience for everything, it instead developed and codified risk assessments for a subset of hundreds of components that are most crucial for delivering a finished product that meets customer needs. The system assigns scores to each critical component and commodity based on types of risks, such as environmental, geopolitical, lead time for production capacity, and geographic concentration of suppliers.
As part of this, the company also evaluated thousands of metrics that would enable it to better predict risk to those most crucial supply inputs and quickly react. Metrics include monitoring commodity price exchanges (to better track supply-demand imbalances) and suppliers’ production capacity utilization (to better understand lead times and supplier health). It invested in digital tools and other information-gathering mechanisms to closely watch those disruption signals, so it could stay ahead of them as much as possible.
A key principle of the new strategy is ruthless prioritization. The organization now tries to act quickly when urgent risks to its most critical components arise; monitor leading indicators for less-urgent, longer-term risks; and consider investing in supply redundancy where it matters most. Meanwhile, the company has deprioritized lower-risk categories, with a plan to revisit them in the future.
This revamped risk-assessment approach has already uncovered potentially significant vulnerabilities that were difficult to spot — one was additive materials required to produce a resin used to bind the cathodes and anodes in lithium-ion vehicle batteries. The company found that this additive has a small number of suppliers concentrated in few regions and the suppliers are running at their maximum production capacity, meaning disruptions to any of these suppliers’ operations could limit the automaker’s access to this critical material. The company is currently planning potential countermeasures.
Lastly, the company designed a comprehensive operating model to support the new supply-chain-resilience strategy and cement it throughout the company. This included creating a new team to oversee the company’s resilience efforts and defining processes and a governance structure for addressing potential supply threats and responding to disruptions. New processes and responsibilities for this team include scenario planning, stress testing the supply chain, and facilitating risk-prioritization discussions across all supply chain functions. These investments are helping the company build a culture that emphasizes resilience. Now, instead of being reactive to supply crises, the company has clear plans in place for proactively mitigating risks when enough warning signs appear.
Although it’s difficult to project the impact of these resilience investments since every supply chain disruption is different, they could easily save the company hundreds of millions of dollars when the next major supply shock hits.
3. Resist the urge to centralize decision-making.
As companies develop more intelligent systems for monitoring their supply chain and responding to disruptions, there’s often a gravitational pull toward consolidating decision-making power within a single team overseeing resilience. But the reality is that centralization can create delays in responding to issues that the company can ill afford.
A better approach is to strike a balance between centralized and distributed decision-making. One automotive business adopted a hybrid model that put tactical or more straightforward decisions in the hands of employees working on the ground in day-to-day supply chain operations, while the central supply-chain-resilience team has control over larger decisions that might involve significant investments or affect the company’s full supply chain.
For example, the procurement team is empowered to make targeted changes to inventory policies, while the central team makes strategic decisions such as ranking the list of priority risks and responses across the company’s supply chain. The company expects this structure will help it react more nimbly to timely issues while ensuring proper diligence for changes with larger ramifications.
4. Identify pragmatic ways to ensure supplies of crucial resources.
Companies have a range of options to try and ensure uninterrupted access to their most critical materials and product components. Some of the most common solutions include paying premium prices to suppliers to secure access; sourcing parts or materials from multiple suppliers; redesigning the end product to rely on alternative inputs that are more widely available and less specialized; standardizing more components across the company’s suite of products; and co-investing with suppliers to increase manufacturing capacity.
However, for rarer parts and materials these options might not be possible or completely solve the issue. Executives might be tempted to bring production of the most precious resources in-house or, in the case of rare minerals, even get their company into mining them itself. But taking over direct production or sourcing is expensive and could drag down company performance as it siphons money away from the core business.
As an alternative, some companies have begun to explore circular business models to give them better control of scarce resources. For example, Toyota is leasing, instead of selling, its electric vehicles in Japan so the company can maintain ownership of the batteries in order to reuse them as appropriate or recycle key materials. This model is expected to reduce risks and costs, hedge the company against shortages of the metals required to produce electric vehicle batteries, and make its cars more environmentally sustainable.
5. Turn scarcity into a virtue.
When faced with supply uncertainty, the inclination is to simply order a surplus to provide a buffer. (Why not build up an extra 30 days’ worth of inventory than normal?) The problem is the situation can change overnight, as all executives are painfully aware after the supply ups and downs of the past couple years. Staying ahead of the “bullwhip effect” is becoming trickier. Some companies over-ordered inventory in the past two years, spent money on extra space to house it, and now those goods are sitting in storage, losing value or being sold at fire-sale prices.
Some companies are finding creative ways to turn the inventory problem into a business opportunity. Pandemic-induced manufacturing disruptions and parts shortages shrank one automotive company’s supply of its end products to less than half its usual inventory buffer. That, in turn, led to some customers accelerating their purchases so they could grab their desired model before it went out of stock; reduced supply (along with inflation) then pushed up prices. Unexpectedly, the scarcity didn’t turn customers off: If they were already intent on buying a particular model from the company, many were willing to wait to get the one they wanted, and in many cases higher prices didn’t change their calculus.
This revelation made the company rethink its go-to-market model for select premium models and vehicles with special features or colors. It’s early days, but for this subset of products, the company is less concerned now with accurately forecasting the right number of specific vehicle models it should deliver to the dealer locations where they’re most likely to sell. Instead, the company is experimenting with staging that inventory in strategically located warehouses where those particular products can quickly be delivered to dealer lots as orders arrive. Dealers can then turn scarcity into a premium experience for customers: If they don’t have the desired vehicle on the shop floor, they help customers search the company’s full inventory and place the order, and then it gets delivered rapidly.
One of the overarching lessons is the pandemic and other supply disruptions of the past few years have reset customer expectations in several key areas. This may not last forever, but there’s an opening for companies to use it to their advantage and find innovative ways to meet or even exceed customer expectations.