Preparing for disruptions and building a more resilient supply chain
Per Hong is a partner at Kearney focused on Strategic Operations, and the lead partner for the company’s relationship with the World Economic Forum relationship. He has a 25-year career working with clients across a range of industries to mitigate disruption in their global supply chains and help them build long-term strategic advantage. In July, Kearney and the World Economic Forum released a report titled “The Resiliency Compass, Navigating Global Value Chain Disruption in an Age of Uncertainty”, and he spoke with Editor in Chief Thomas Wilk about some of the key findings.
PS: You are a Partner at Kearney focused on Strategic Operations, and the lead partner for your company’s relationship with the World Economic Forum relationship. We're talking with you today thanks to a report that Kearney just released in partnership with the World Economic Forum called, "The Resiliency Compass, Navigating Global Value Chain Disruption in an Age of Uncertainty" that you helped co-author. And let me tell you, our listeners have been experiencing this like crazy. No one anymore knows what lead times will be for spare parts, and it's getting tough to plan work in general. So tell us about the report, how did it come about and what are some of the findings that you find most compelling?
PH: Absolutely. And thanks again for giving me the opportunity to share some of our findings. As you intimated in your introduction, I am a Partner at Kearney with a 25-year career working with clients across a range of industries to mitigate disruption in their global supply chains and help them build long-term strategic advantage. Over the last 18 months, we have experienced, and in many ways may still be experiencing, what is the largest single global supply chain disruption we've seen in our lifetimes with the COVID-19 pandemic.
But more that Covid, we're also experiencing a confluence of other disruptive forces, from climate change that is causing severe dislocations of supply and resources, to new technologies emerging, to global trade wars and barriers, to cyber threats, to geo-political tensions, to the now new surging demand from a fragmented and uneven reopening of the global economy post-Covid. All of these forces are now intersecting in new, different and challenging ways that are radically reshaping global production, manufacturing, and supply chains, and forcing companies to step back, reassess and redesign their strategies in order to build resilience at the core.
The underlying premise for some of the research we initiated at the center of this report is that the pandemic is but a dress rehearsal for how we all must learn to adapt in the face of larger and more frequent, levels of disruption that will continue to accelerate going forward. The next generation of supply chain, manufacturing and operations leaders, will be defined by their ability to withstand and adapt to these ever-increasing disruptive headwinds.
Whereas the last 10, 15, 20 years was a supply chain environment which really was defined by the notion of cost competitiveness – by that I mean a push to areas of lowest labor and input costs in order to optimize supply chains at the core, the next 10-15 years of supply chain excellence will be defined by finding that balance of risk competitiveness in order to be able to ensure the reliability, the adaptability, and the resilience of our supply chains in our manufacturing systems going forward.
PS: That's fascinating because for our readers, their key goal in means of reliability is to reduce the risk to their immediate facilities by maintaining the assets in operating condition, whether that means predicting imminent failure, whether that means letting certain parts run to failures since it won't cause a catastrophic failure. I can see where the interests that you have in global resilience and the interest of reliability and maintenance in risk management are going to converge here pretty quickly.
PH: Indeed, resilience is a big topic. We are still dealing with the implications and ramifications of the pandemic itself - ranging everywhere from the availability of spare parts inventory, raw materials, commodities and finished goods. The root causes for these shortages and disruptions are varied. Labor availability is major issue right now - where we're trying to get operators on the lines, socially distancing maintenance worker, to securing drivers in order to be able to make sure that we can get product to the last mile. So being able to navigate through that, we recognize we need to be able to take a more holistic view to what it means to be resilient in our supply chains.
At the beginning part of this year, we engaged and surveyed senior Operations executives from over 400 different companies to try and understand (1) how they think about resilience; and (2) to start to get under the skin of what are some of the strategies that have been deployed. How can we think about a future-range view in order to be able to manage the unexpected?
We collected insights from these interviews and observations from these discussions to help us really think through and codify what distinguished the “leaders” in managing disruption and their leading practices. What are the action-oriented strategies that leading companies are employing to manage the disruption and build resilience in their global manufacturing systems going forward? What challenges have you been facing, how well prepared you feel in anticipating future disruptions? What are some of the novel and new strategies that you're looking at?
In our report, we identify eight different dimensions of what we call Resilience Excellence. As we think about resilience as finding that balance between demand and supply, we looked at this both from a demand set of drivers as well as a supply set of drivers, and how those pieces need to start to meet.
On the demand side: the four dimensions of resilience excellence include: First, Portfolio Excellence. In a maintenance context, this might include focusing on deploying strategies around simplification, modularization, and making sure the core product is available to be delivered and stocking parts accordly. Second, Customer Orientation and understanding the end-consumer and the orientation in the strategies that the companies were deploying in order to ensure proximity and focus on meeting their customer demand. Thirdly, Financial Viability, or the financial health of suppliers and customers across the end-to-end value chain. Not just within companies, but also tier one, tier two suppliers that are so dependent on what we're doing; and finally Channel Versatility to be able to meet demand in new in different ways, whether that be through the emergence of different e-commerce channels or through alternative routes to market.
Equally, we also identify four dimensions of supply driven resilience leadership as well that's require: First, Advanced Planning, for example, the ability to be able to really rapidly send supply and demand shifts and pivot accordingly by deploying advanced AI, AR, analytic based tools to anticipate made these changes, and develop scenarios, think through contingency planning. Secondly, Supply Diversification. Employing a diverse set of sourcing levers to deepen supplier relationship and managing alternative sources of supply, to be able to ensure that there's continuity.
Thirdly, Manufacturing Adaptability inside the four-walls levers. This includes strategies around how to design the production network potentially nearshoring production or balancing with the right level of cost availability and some of the resource pieces. Finally, Logistics Excellence, incorporating strategies around flexibility and the visibility across inventory planning and being able to think about last mile and those adaptive abilities.
Looking across practices that companies are employing across all eight of those dimensions, one of the key findings out of our Report is that only 12% of companies are prepared for the next disruption. That is, only 12% of companies are really positioned to be able to anticipate where future disruption can come from, have the strategies and the capabilities in place in order to be able to rapidly adapt to those disruptions to be able to pivot and meet those, and ensure the sustainability.
Now then, there's a lot that we can learn from these 12% of companies in terms of what they're doing, and we have sought to document the strategies that we can use, knowing full well that there is disruption that's going to continue to happen.
PS: That 12% number really caught my attention when reading the report. Then again, as you put it against the backdrop of saying that, in a way, the COVID pandemic was a dress rehearsal for the kind of things you're talking about – that's really attention getting. In a country, the size of the United States, again, most of our listeners are inside the U.S., we're geographically diverse enough that as you said, there any number of different catastrophes can happen at the same time in different regions. And only 12% of the companies are in a position of being leaders to adapt to those changes effectively.
PH: Absolutely. And even inside the U.S., we're not insulated from disruptions that are happening outside our own borders. The dislocation of supply and the resurgence of the demand that we're seeing everywhere on a global basis has direct impact for us here in our country that we need to be able to manage and be able to prepare for. Take for example the cyber-attack on the Colonial Pipeline on the East Coast of the US earlier this year, or the record heat that has plagued the West Coast this summer, or the resurgence of the Delta variant. All these factors are occurring and will continue to occur, and so it isn't a question of whether or if we will be disrupted, but when and by how big. And so, then it's incumbent on us as leaders in the industry that really think through, how are we going to make sure we're prepared?
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PS: Interesting. About 18 to 24 months ago, we did a couple of stories on resiliency in the context of cyber attacks or even with drone attacks. It seems almost quaint now that there was a physical drone attack in Saudi Aramco in the fall of 2019, where you actually had physical drones coming in and disrupting operations. Amazingly, that refinery was up within one month back to regular capacity, which astonishes me. There was a lot of talk in my industry here about how resilient that facility must have been to recover in a month and get production back up to normal.
So our readers are used to hearing this term, especially in terms of those kind of attacks and the cyber attacks where a lot of maintenance and reliability folks do have a certain authority over the servers and may have to get rebuilds, or even even if they can't be rebuilt, have influence over whether ransom gets paid. You've talked about resilience as something much larger than that, for sure. Do you see those cyber attacks as being particularly a point of focus going forward as less random than, say, a weather event or a pandemic, where this something which companies absolutely should be able to prepare for?
PH: Short answer is yes, We know there are disruptions that are happening at multiple levels. We are observing a cyber attacks on private business with increasing intensity - there was the attack on the East Coast pipeline, the Colonial pipeline that I referenced, the Solar Winds attack at the end of last year, which targeted nearly 80% of our Fortune 500 companies. The technology to attack is becoming more pervasive and available, and clearly bad actors are taking advantage by finding weaknesses in the systems and exploiting these vulnerabilities.
The threat from cyber is real, it's happening. But the threat to global supply is not isolated just to cyber. It's also occurring from climate. We do see the weather disruptions and while it is maybe less predictable where it's going to be happening, it is predictably unpredictable. While no one knows for sure what the future holds and there's lots of uncertainty, leaders and the companies that have really taken action in order to be able to put strategies in place are identifying opportunities in order to be able to prepare. In fact, nearly three quarters of senior executives that we've spoken to – the leaders that the companies that we've identified and started to work through as leaders – they emphasized the importance of scenario planning to be able to inform decisions, help develop and focus clear strategies, plan for these contingencies and maintain some of the flexibility to be able to account for these different twists and turns that might happen.
PS: Well, and you're talking to an audience, which, interestingly, the maintenance techs and reliability engineers, one of their areas of core competence is that they'll figure out the solution given the resources at hand. It's a very agile audience. Did you see a pattern in your research, identifying where internal champions for resilience might come from to help drive this among those 12% of leaders or is it sort of all across the board throughout the company?
PH: The champions for resilience are the individuals inside the companies that are really feeling it on the front lines. The individuals who really had to adapt and change the ways of working are the ones that are the biggest champions and proponents for driving resilience strategies going forward. For example, the componentry and raw materials that I was depending on from one supplier are in short supply, so I have to go to the back of sources of supply in order to be able to get that.
Also too are the global heads of supply chains and chief operating officers. Those are the individuals that really both feel the core and observe and anticipate the risks associated to supply and demand in fundamentally different ways than other individuals within that within a corporate ecosystem. So our champions of resilience, definitely are that audience of focused individuals.
PS: Increasingly we see maintenance being either restructured or repositioned under operations, so there's a lot of contact with the COO in that regard.
PH: We've seen that too. There is a big shift towards kind of that operating holistic view of managing end to end in order to be able to secure resilience, because there's so many required. So maintenance being a part of a broader system, rather than being managed within a functional silo.
PS: We’re seeing more of a willingness than even five years ago for traditional maintenance teams, for reliability teams to look outside the four walls of the company and partner to get the work done. And that's a backdrop to the question about an organization you mentioned in your report, which is the Platform for Advanced Manufacturing and Production. It sounds like a group that's been either formed or is emerging from your research which can help plants in the same way that these teams are getting help from other third parties, that this organization can help plants with resiliency challenges, too. So maybe you can tell us a little bit about that group and their role.
PH: The leaders around resiliency, particularly inside the four walls, have identified an opportunity to really build a multi-skilled, adaptable workforce. Taking a workforce and avoiding some of the labor shortages by fully utilizing all of our employees from different functions to be able to cover absenteeism. This helps drive more flexibility in the labor pool, to adapt to the challenges that we've seen. The benefits of this not only optimize costs, but also the start to share capabilities and develop pools that expose employees to different situations and challenges.
There's also the notion of pooling resources and outsourcing – you were talking about sort of working with third parties – to be thinking about our labor pool more within the system that's required in order to be able to deliver the product rather than just the specific company in which I'm operating. So, being able to react to changing demand patterns, particularly labor intensive industries, driving some of the flexibility and meeting your peak demand has led to some of the strategies that we're referencing.
The group that you reference in our platform of advanced manufacturing and supply systems, is a collection of member companies with the World Economic Forum. This group of manufactures partnering, to share in a pre-competitive environment, some of the strategies, and issues that we're talking about today across the range of resiliency. By being able to partner with others who are going through similar challenges, companies are able to learn from one another, and to be able to more confidently manage through this disruptions going forward. There are in the neighborhood of 200 some odd companies that actively participate with our World Economic Forum platform. And if your readers are interested in more information about that and what that entails, certainly they're happy to reach out to us at our firm or to the World Economic Forum. We'd be more than happy to talk and share more information about how to get involved and get engaged with the advanced manufacturing platform.
PS: With what you're talking about, this outreach, I mean, on the side of maintenance, Plant Services as a brand is focusing tightly on how to have the kind of conversations you're talking about, where the maintenance teams don't have to be the traditional “rescue when something breaks” teams. We’re trying to encourage a shift into more proactive thinking, reaching out and building response plans.
PH: Traditionally maintenance teams inside the four walls have been depended on to be reactive when things go wrong. What is at the core of the leading practices we describe in our report are to be more proactive in identifying resilience risks. For example, taking a stance secure key inventory for areas of risk or thinking about the potential of future disruption. To the extent that from a maintenance services point of view that we can be more proactive in anticipating those challenges, putting the contingencies in place, anticipating where those potential shutdowns where labor shortages could be happening, so that we can ensure that there's more effective utilization of our assets.
The challenge is for us to be able to pivot to meet the need and to be able to ensure we've got the right resiliency as we've seen, that all can turn on a dime very quickly with the next crisis. So, how do we learn from what we've just experienced to make sure that we're best prepared, wherever that uncertainty may come from? We can't look at the crystal ball and predict it, but I can say with certainty that there will be uncertainty.