How recent crises highlight the limits of overly segmented supply chain organizations

What levers to implement to address the challenges of the current crisis context

1. The consequences of successive crises on the supply chain

In an international context that impacts organizations at all levels of the supply chain, starting with the COVID-19 pandemic and the conflict in Ukraine, businesses have faced challenges exacerbated by an unprecedented transportation crisis:

• Shortage of truck drivers affecting France, Europe, and major import partners of France.
• Rising diesel prices impacting the cost of road transport.
• Shortage of maritime containers and increased maritime freight costs.

In this environment, companies have faced difficulties in sourcing numerous raw materials (metals, plastics, wood, etc.) and semi-finished goods (electronic components, etc.), impacting all industrial sectors and resulting in price hikes, extended delivery times, and increasingly frequent shortages.

For example, plastic resins experienced shortages throughout 2021, driving prices up by as much as 50%, as did wood (prices tripled between 2021 and 2022), and aluminum. Similarly, lead times for bicycle components (frames, forks, brakes, etc.) increased by over 150% in two years.

To cope with this situation, some companies had to increase their stock levels to overcome supply challenges and prevent shortages (61% of companies increased critical product stocks following the COVID-19 pandemic), creating a financially strained situation with a significant increase in working capital requirements (WCR) and the need to identify and implement additional storage capacity.

This crisis underscores the limitations of overly segmented supply chains, the need for flexible and well-equipped S&OP processes, a revision of inventory policies, and procurement sources.

However, this crisis also presents the opportunity (or necessity) for companies to focus their efforts on energy management, decarbonizing their entire supply chains, and accelerating projects to reshore their industrial assets, logistics, and potentially sourcing to Europe.

2. The limits of overly segmented supply chain organizations

All these events have strained global supply chains: many companies found their tier 1/2/3 suppliers facing shortages, unable to meet demands, putting stress on and depleting customer companies’ stocks.

These disruptions were even more amplified within companies due to a lack of supplier integration in decision-making processes:

• Limited knowledge of supplier constraints (availability of raw materials, production capacity, etc.),
  • further exacerbated by a strategy of involving tier 2 and higher suppliers that resulted in low or even no visibility into their constraints, hindering optimization across the entire value chain.
• Extended or even nonexistent information feedback cycles, preventing quick decision-making in a context that required acceleration.
• Siloed decision-making processes combined with poorly shared decisions, often amplifying disruptions or overstocking phenomena at suppliers or customers (the famous Bullwhip Effect).

Simplified supply chains with clear lines of responsibility/communication between customers and suppliers can offer numerous advantages in a stable and predictable environment: simplified relationships, simplified procurement, simplified organizations. However, in a global environment facing a succession of crises and where economic actors must deal with constant uncertainty, these overly segmented supply chain organizations with insufficiently integrated suppliers (in planning processes, decision-making, inventory control) cannot remain unchanged and require enhanced multi-level relationships.

3. Areas for Development

Several areas of work can be identified by actors facing such situations.

We have focused on three key areas centered around a flexible and agile S&OP process, optimization of inventory management processes and WCR, and strengthening inventory control across the entire chain.

1. Developing an end-to-end s&op process based on flexible decision criteria to adapt to the context

• The capacities of critical suppliers, as well as the availability of certain raw materials, cannot be ignored when making effective decisions. S&OP should focus on bottlenecks throughout the chain and not assume that upstream suppliers will “figure it out.” This 360-degree view allows the integration of comprehensive supplier constraints (critical raw materials, single or monopolistic procurement, suppliers in geopolitically risky areas, globally scarce products) into the decision-making process, resulting from a partnership strategy and built for the long term.
• Multiple decision criteria that need to be weighted according to the situation. Controlling the WCR and inventory levels is an important decision criterion in the S&OP decision-making process, as is the service level and responsiveness to customer needs. In a crisis context, decision drivers must be able to evolve: securing production, availability of certain critical/strategic products, etc.
• While conventional supply chain management tools (APS, OMS, etc.) can structure processes and enable comprehensive analysis, their “rigidity” can hinder flexibility. New tools in the Collaborative Planning market (such as Anaplan) have significant advantages in enabling this flexibility and adaptability to contexts.
• An S&OP process must become truly cross-functional and better integrate finance into its decisions. The surge in Integrated Business Planning (IBP) implementation projects in S&OP processes reflects this desire, even though success is not always guaranteed, mainly due to the often poorly addressed Change Management dimension.
• Finally, there should be technological and human capacity to scenario-test across the entire chain and qualify each scenario. This approach should allow for monitoring the strategy’s implementation and the realization of the assumptions considered. In the opposite case, the S&OP process should be robust enough to alert to deviations between these assumptions and economic reality and flexible enough to allow for reaction and adaptation of the company’s flows.

2. Adapting inventory policies and reorganizing the upstream supply chain by creating strategic inventories for raw materials, critical components, semi-finished goods, etc.:

• Operations Directors have access to multiple tools/methods for defining and managing inventory levels: DDMRP, standard MRP calculation, integration of AI into target stock definition, etc. Faced with this proliferation, the supply chain must adapt the chosen method to its flows and strategic challenges: the need for responsiveness, the need to reserve capacity, the need to reduce inventory levels, etc.
• In reorganization, for example, flows from suppliers to gain flexibility and responsiveness. This can involve consolidating raw material stocks for multiple suppliers/production units, building component stocks at the supplier’s, financed or not by the customer, to gain responsiveness, through a review and redesign of procurement routes to gain more flexibility.

3. While the outsourcing of production has grown significantly in France and Europe over the past 10 years to focus on a company’s core business, some actors, on the contrary, are internalizing these activities to better control product availability. Activities/productions that were previously considered secondary to the company’s strategy have become strategic again in the current crisis context:

• More and more companies are securing the availability of certain critical raw materials by strengthening control over purchases/supplies and making them available to suppliers or subcontractors to better control costs and availability. This is what some luxury houses do to secure purchases of precious metals, or some bicycle assemblers in Europe for aluminum supplies.

4. New opportunities for reshoring and decarbonizing procurement:

The constraints raised by the current crises also reinforce the need for reshoring for French and European industrial companies. In a context marked by a shortage of maritime containers and rising maritime freight costs, illustrated by tariffs tripling between 2021 and 2020 (source: Bloomberg), and increasingly frequent and significant delays (transport reliability between 75% and 85% in 2019 vs. 30% to 40% in 2021), closer sourcing allows cost control on logistics costs to date and reduces dependence on cyclical variations in these costs, along with accelerated lead times and responsiveness.

In the current (and future) societal context where environmental impact becomes a fundamental concern for consumers, these reshoring efforts demonstrate the contributions made by companies. The impacts of reshoring industrial tools are evident (reduction in transport, adaptation to stricter regulations) and can be reinforced by an approach to decarbonize industrial sites and all flows up to the final consumer.

In conclusion, the unique current context facing companies ultimately represents a unique opportunity for Operations Directors to strengthen the cross-functionality of their processes, rely on new technologies that have reached a high level of maturity, and contribute to reducing and controlling the environmental impacts of their assets and flows.