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Supply chain disruptions force companies to rethink strategy

Supply chain disruptions from COVID-19 and other longstanding issues cost businesses trillions in revenue, leading to shifts in supply chain strategy, a new report said.

Supply chain disruptions cost businesses plenty in 2020 in both revenue and brand reputation.

While the COVID-19 pandemic was a major culprit, quarantines and orders to work from home were only partially responsible for bringing supply chains to a grinding halt, according to a new report from GEP Worldwide, a supply chain and procurement consulting and services firm based in Clark, N.J.

"The Cost of Supply Chain Disruption" included a survey of 400 directors and C-level executives from five industries -- agriculture and food, consumer goods and retail, energy and utilities, healthcare and pharmaceuticals, and industrials such as automotive, machinery and telecoms. Half of the survey respondents self-identified as working in supply chain and procurement, and half in strategy, finance and IT. 

COVID-19 just one of many disrupters

The COVID-19 pandemic exacerbated the supply chain disruptions of 2020, but it wasn't the root cause. Other shocks such as growing security threats and globalization were already in play before COVID-19 hit, forcing supply chain and procurement leaders to grapple with and change their strategy and perspective, said John Piatek, vice president of consulting for GEP Worldwide's consumer and retail division.

John PiatekJohn Piatek

"In many ways, we have this fog of COVID, but the survey showed that supply chains are under assault from a whole variety of other things -- cyber attacks, price fluctuations, changing regulation and the threat of more regulation," Piatek said. "It's absolutely been difficult for supply chain organizations, because supply chain strategies that they've operated with in the past are no longer fit for purpose or the future."

Almost half of the survey respondents listed COVID-19 as having a significant impact on supply chain operations. Other significant factors included cyber attacks, commodity price fluctuations, diverging standards and regulations, and issues related to trade relations with China.

"Some of these are trend-based, but cyber attacks, in particular, are something that really picked up last year," Piatek said. "There's always the risk of hacking, which has been a long-term thing, but now many corporations are frightened about what a cyber attack means for them."

Supply chain disruption
Supply chain disruption

Hits to bottom line and brand image

Supply chain disruptions in 2020 had a real impact on the bottom line, as companies lost trillions of dollars in revenue, according to the report, with 64% of respondents reporting revenue losses between 6% and 20%.

The survey also indicated that the disruptions caused a big hit in brand reputation, with 38% of respondents reporting that their brands had been impacted. Many respondents said that their struggles to maintain supplies of goods and services left customers frustrated.

For example, exercise equipment and services firm Peloton suffered customer unrest when it could not ship exercise machines just as demand spiked during the pandemic, Piatek said.

"Supply chain disruption can have significant long-term effects on brand reputation, and consumers have not been forgiving to COVID-related problems over the past year," he said. "These are real problems that are hurting brands and these executive teams are realizing that have not been given a free pass here. They are paying a high price for this."

Peloton suffered because its supply chain systems lacked the flexibility to deal with changing demand, according to Piatek.

"Peloton is a great example of a firm that understood the problem far too late, because by the time they realized how damaging it was for their brand, it limited the amount of options they had to rectify it," he said.  "The problem was, in the early days of the pandemic, they saw the change in consumer demand, but they had not historically invested in a production and supply chain model that gave them the appropriate level of redundancy and flexibility to ramp up that production as they needed."

Supply chain disruption can have significant long-term effects on brand reputation, and consumers have not been forgiving to COVID-related problems over the past year.
John PiatekVice president of consulting, GEP Worldwide

Need for more flexibility, visibility

Companies are recognizing the seriousness of supply chain disruptions and are beginning to implement technology and strategies to address the issues, according to the report.

A majority of respondents, 61%, indicated that redundancy and resiliency are more important in the supply chain than speed and efficiency. Just over half said that their companies need to make significant changes in the next five years to manage supply chain disruptions. Measures include getting more supply chain visibility and reducing the reliance on suppliers from any one country, but particularly from China.

While China will likely remain a large manufacturing base, the report said, a 100% China-centric supply chain going forward is unlikely. In fact, many companies are now moving manufacturing operations from China to India, Mexico, Vietnam and other Southeast Asian countries.

This represents a "huge shift" in a company's supply chain strategy, Piatek said, and has been spurred by the Biden Administration's executive order on supply chain resiliency. Companies are beginning to consider the possibilities of reshoring or bringing suppliers and manufacturing operations for critical industries closer to home.

"This doesn't mean that they have to rip out everything they've built in the past, and it doesn't mean China's going anywhere," he said. "But we'll see more 'China plus one' models, where you have a low-cost production location of choice blended with more manufacturing and supply chain assets closer to end consumption, allowing the firm to have more resiliency and redundancy in its approach."

Jim O'Donnell covers ERP and other enterprise applications for SearchSAP and SearchERP.

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