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Tuesday, April 16, 2024

Rethinking the supply chain

Sustainable supply chain challenges present enormous opportunity for growth, writes OP2MA Founder Callum Lewis

Many businesses have made environmental, social and governance (ESG) policy statements; the real challenge is to turn words into action whilst delivering to profit and growth expectations. For any business designing, making, or selling goods, the supply chain is by far the biggest opportunity for change. However, despite re-configured operating models, the outsourcing of some operations does not translate to outsourcing responsibilities or risks.

Images of the floods, fires, and hurricanes that disrupt global supply networks, media reports that expose poor labour standards or limited to non-existent environmental controls; the list seems to keep growing of the issues that question resilience and sustainability. With an estimated 80 percent of global trade passing through supply chains, the design and management of these supply networks is one of the most critical areas for businesses to make a positive impact.

In this context, we are now starting to recognise that many supply chains are:

  • long, often involving extended lead times and great distances
  • multi-layered, with complex networks of suppliers
  • opaque, despite ever greater data capture, with provenance uncertain and stock consignments difficult to track without benign conditions.

The decades-long pursuit of cost efficiencies has seen the development of supply chains that stretch across geographic, industrial, cultural and regulatory boundaries. Whilst it is not always clear that the true trade-offs between service, cost, and capital have been quantified, in many instances the scale of cost savings has contributed handsomely to profits.

Re-thinking the supply chain

Many of the resources we rely on are either finite or are constrained by the speed of renewal. Actions taken to reduce consumption of raw materials and the resources used in production and distribution activities are fundamental.

Concepts such as design for manufacturing and logistics have focussed on cost efficiencies. Applying an adapted mindset of design for sustainability can, for example:

  • introduce and develop the use of recycled materials
  • enhance operating efficiencies in production and logistics processes
  • convert waste to by-products
  • support end of life recovery of components and materials to drive circular flows.

Product stewardship, either driven by government regulation or voluntary codes, is extending the frame of reference for designers, and the development of effective and efficient networks for the recovery and processing of products and materials can turn an obligation into an opportunity. We are seeing business models adapt from ownership to access in sectors such as automotive and medical equipment as well as established examples in music and entertainment.

Assessing the footprint of products or services, using techniques such as Lifecycle Assessments, can help to build understanding and trigger more diverse thinking. At the very least, this approach will highlight knowledge gaps about the supply chains running through your business. There are several respected certification schemes that can provide frameworks for action, for example, B Corp and sector specific schemes such as the Higg Index for apparel.

Certification could infer an audit approach to suppliers. In many instances, seeking out opportunities to collaborate in new ways can yield significant mutual benefits. Improved asset utilisation, including through shared use, and improved information flow, allowing inventory reductions, are common tangible benefits.

A supply chain re-design could take collaboration a stage further with symbiotic relationships. This could be an important dimension when considering the location of operations and when looking for potential clusters of resources and capabilities in new geographies.

We are already experiencing some defining trends:

  • growing demand and competition for key materials, leading to scarcity that drives innovation
  • businesses (and countries) needing to innovate at pace
  • human capital as the critical resource.

There are many compelling reasons to address the social and environmental impact from supply chains, not least that it is simply the right thing to do and can further invigorate the purpose of the business. Building a strong business case can drive commitment and define priorities.

Making the business case

Taking a systematic, structured approach that aligns key operational performance measures to return on investment (ROI) is fundamental. It can show how the day-to-day operations of your business determine financial results, help identify the best opportunities to improve, and support targeted development efforts.

Revenue growth

Building a supply chain that balances efficiency with resilience is founded on a clear understanding of demand and the expectations and values of customers. ‘One size does not fit all’; high volume, stable demand lends itself to a lean operating model whilst more volatile demand is best served by agile operations and a responsive supply chain. Options for adapting supply chains include postponing final product configuration until actual demand is better known and locating these activities close to the customer.

Re-configuring operating models in this manner supports the inclusion and progressive development of circular flows and the integration of re-cycled materials. Provenance and taking responsibility for end-to-end product lifecycles are increasingly shaping customer buying preferences.

Costs

Product costs are vulnerable when finite or constrained supply materials are part of the mix. Actions that reduce such dependencies, using recycled materials or recovering materials at end of life, can help to mitigate cost developments. Product designs and specifications that improve the management of waste can have significant impact, not least from reducing disposal costs.

The process related costs of planning, sourcing and logistics operations are often overlooked. In many instances, simply identifying and analysing these ‘indirect’ costs will reveal significant opportunities for improvement. Creating greater end-to-end supply chain visibility and the application of integrated planning software can support reducing energy consumption, emissions, and waste, and can be an important approach to improving cost performance.

A clearly defined strategy and programme to improve sustainability can also play a key role in attracting and retaining talent. Reducing staff turnover and the associated costs should not be an underestimated benefit.

Capital employed

How inventories are planned and managed plays a critical role in determining working capital requirements. Re-thinking supply chain configurations impacts inventory across several forms: finished product ready for sale, sub-assemblies requiring final configuration or components requiring processing to end state and assembly. A shift to more distributed, local operations may on the one hand reduce lead times whilst increasing the number of stockholding locations. Combined with managing stocks of recycled materials, a detailed evaluation is needed to fully assess the impact on inventory of operating on a more sustainable footing.

Forecasts by their nature are wrong and safety stocks must be held to account for this and to maintain service to customers; any steps that reduce reliance on forecasts provides a route to reducing inventories, particularly when a reasonable proportion of components can be shared across a range of possible finished items.

Perhaps a less tangible, but nonetheless pivotal, benefit of pursuing sustainability in supply chains is the mindset change this can release in the business. In evermore demanding markets, combining creativity, design thinking, and data analysis can drive innovation and set in play a culture of constructive challenge and continuous improvement.

 

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