How to run a supply chain war room that's ready for anything part 1: Why you need to war game and the risks we are all facing
The current environment has revealed how high the stakes can be and why you need to be prepping and planning, not just for this current environment, but the next crisis that could be just around the corner
With supply chains frequently complex and globalised, the sudden shocks of 2020 have shown the need for strong command and control functions that can take charge and guide an organisation out of a period of crisis. Supply chain leaders need to be able to have vision across their supply chains and be empowered to act in order to manoeuvre goods around blockages and to meet demand when these events arise.
So, when it’s a war zone out there, you need to create your own war room to plan and prepare, not just for this crisis, but the next.
We spoke to experts from DHL and McKinsey to get the framework for creating a world-class planning and execution process.
Ignore the risks at your own peril
It’s easy to get comfortable with business as usual and indeed the current structure has incentivised efficiencies and leanness in most companies rather than resilience or risk planning. Whilst the COVID-19 crisis may appear as a once-in-a-generation issue, Ed Barriball, Partner at McKinsey, warns that this kind of thinking is a trap many are in danger of falling into again and again.
Given the frequency of disruptions that occur, the average company can expect to lose about 40-45% of one year's EBITDA
According to research conducted by Barriball and his McKinsey colleagues, “Companies will experience a disruption lasting one month or longer, about every three and a half years - 3.7 is the exact number - and given the frequency of disruptions that occur, the average company can expect to lose about 40-45% of one year's EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortisation) over the next decade.”
Furthermore, their research suggests that disruptive incidents are increasing in frequency, making these potential losses more and more important to account for and to try to mitigate.
The key point from 2020 is to look away from the pandemic and to see it as a learning tool that has awakened us to the wide variety of crises we may have been underestimating. “There's not one kind of shock that everyone needs to worry about,” says Barriball. Instead they have identified “four categories of shocks or disruptions … based on an axis of how much lead time would you typically have to predict them and how extreme can they be?” Firstly are “the company level disruptions that will happen. They might be quite sudden and the cost is not huge, such as a surprise supplier bankruptcy [or a] cyber attack.”
Then there are disruptions that “aren't as costly, but you can predict them over a long term - something like a set of suppliers who are just becoming more and more financially weak and at some point probably there's going to be a problem, so there needs to be a restructuring.”
Demand-side disruptions might be driven by promotions, or any uptick in demand, and require full visibility of as many layers of a customer base as possible
More problematic are events that “could happen very suddenly and be extraordinarily costly like a cyber attack that would disrupt the global financial system… and then on the other side is actually pandemics.”
In the view of Phil Roe, Chief Customer Officer and Strategy Director UKI at DHL Supply Chain, they feel that “The disruptions typically faced by an organisation can be split broadly into three areas:
“The first of these are the demand-side effects and cover anything to do with customers. Demand-side disruptions might be driven by promotions, or any uptick in demand, and require full visibility of as many layers of a customer base as possible. It’s good to know what your customer is thinking, but even better to make sure you’re aware of what your customer’s customer is thinking too.
Supply-side disruptions are much harder to control, and it can be much trickier to manage, particularly for businesses at the end of a supply chain
“Supply-side disruptions are much harder to control, and it can be much trickier to manage, particularly for businesses at the end of a supply chain with many other parties involved. In this case, proper mapping and supply chain visibility gives a business the ability to understand how to coordinate the activity of their suppliers.
“Finally, environmental disruptions cover things like regulatory change, customs delays, lockdowns, and any other event in any part of the country or world that may have an effect on the supply chain. These are almost entirely out of the control of a business, but need to be properly monitored and their impacts understood in order to manage their effects.”
Beyond crisis mode
Emphasising how important recognising these risks are, we have seen all of the above risks mentioned by both Barriball and Roe in 2020, ranging from the obvious pandemic, to changes in trade conditions, cyber attacks and rapid demand shifts.
It’s important not to see a ‘war room’ as somewhere you only visit in times of crisis. A strong central function with effective oversight and control is essential all the time
With the pandemic hardly under control globally and Brexit expected to really take its greatest effect on global trade at the start of 2021, there are plenty of issues on the horizon and no doubt a host of unknown risks that will emerge.
This is why Roe says “It’s important not to see a ‘war room’ as somewhere you only visit in times of crisis. A strong central function with effective oversight and control is essential all the time, and it’s only by being alive to the potential obstacles that a business can truly work towards minimising their impact.”
Our encouragement for companies would be, know where your vulnerabilities are
Barriball echoes this “our encouragement for companies would be, know where your vulnerabilities are. And then think about these different types of shocks what the potential losses are, and which ones you really need to mitigate against.”