After attending Reuters Event’s virtual Supply Chain Europe, I had the amazing opportunity to have a chat with my latest interview partner Knut Alicke.
Knut is a Partner at McKinsey & Company based in Stuttgart, Germany. He advises and serves clients on a variety of topics including Supply Chain Management, Digital Supply Chain / Advanced Analytics and Supply Chain Transformations. He has recently co-authored the report – Risk, Resilience and Rebalancing Global Value Chains.
Emilia Ashton (EA): One of your latest research papers is titled Risk, Resilience and Rebalancing in Global Value Chains, which is a really interesting read. From this research paper what would you say your key findings are?
Knut Alicke (KA): COVID-19 has catapulted supply-chain resilience to the top of the corporate agenda, but we could already see when we began this research that supply-chain shocks were becoming more frequent and severe because of changes in both the environment and the economy. Most important, we found that on average, companies can expect to lose 40 percent of one year’s EBITDA each decade due to supply-chain shocks—and in some industries, a single severe shock causing a 100-day disruption could wipe out an entire year’s earnings. The research adds new facts to a complex discussion on how much disruption and shocks cost, which can help guide the conversation on how much CEOs should spend on resilience to prevent shocks from happening or to make them more bearable. We also quantified how much production could actually shift–something that hasn’t been done to date and has been a source of debate and speculation.
Companies can mitigate these risks, and doing so will pay off: A company with a resilient supply chain can reduce the EBITDA impact of a disruption by 23 percentage points, and an average large company could invest up to 40 percent of one year’s EBITDA in resilience measures and still have a positive return on investment when viewed over a decade.
EA: Since the start of the pandemic, supply chain resilience has become a buzzword and a key trend in the industry. How can supply chains become more resilient?
KA: It’s important to recognize that we don’t have to make a tradeoff between resilience and efficiency to help supply chains become more resilient. Not all resiliency levers may be suited for all industries, but every industry can benefit from implementing a suite of resiliency measures best suited to its unique characteristics. For example, holding extra inventory may be a low-cost option for a chemical or medical-device company while being completely infeasible for non-shelf-stable food and beverage products. Other measures, like increased supply-chain transparency, can benefit all industries by enabling them to be more agile in anticipating and responding to supply-chain disruptions. By optimizing the distribution of inventory as well, improved transparency can not only reduce the impact of disruptions but also raise production efficiency during normal operations.
Opportunities for improvements lie in three areas:
- Strengthen supply chain risk management and improve end-to-end transparency, using the full potential of digital to connect and monitor the supply chain.
- Minimize exposure to shocks by strengthening critical suppliers, diversifying supplier networks, strengthening transportation and logistics systems, moving toward modular product design with standardized inputs, and hardening physical plant and infrastructure.
- Expand financial and operational capacity, with options including increasing inventory/safety stock; flexing production across suppliers, sites, and customer channels; and creating cash-flow and balance-sheet buffers.
EA: At the beginning of the pandemic, many supply chains were thrown into chaos because, so few firms had developed robust plans for a pandemic. While another pandemic may be somewhat less likely in the immediate future, there are many other risks which supply chains face every day. Risk mitigation is a key to ensuring supply chains stay on track. What advice would you give supply chain professionals to help mitigate everyday supply chain risks?
KA: Unanticipated risks that companies face doesn’t have to be the result of a force majeure. The most common risks include events such as supplier bankruptcy, cyberattack, counterfeiting, and theft, and can generally be resolved in a matter of weeks. While it is not possible to mitigate all risks, it is possible to build flexibility and resilience into supply chains—including improving cyber security, developing supply chain transparency, and improving physical assets—so companies can adapt quickly and minimize the disruption and potential loss.
EA: It was suggested in the research paper that you anticipate that $2.9 and $4.6 trillion in annual trade may shift to new locations. Where do you believe this will shift from and to? And what do you think may have caused this?
KA: These figures represent around one quarter of exports. Reverting to domestic production, near shoring, or a shift to different offshore locations in a ‘flight to safety’ could see production cross borders in the medium term. However, the highly interconnected nature of value chains with hundreds of companies and multiple tiers limits the economic case for moving, as do the opportunities for access to consumer markets around the world, long-standing relationships, and economies of scale.
EA: Do you believe that supply chains will shift away from China due to the pandemic and the US-China trade war?
KA: Macropolitical events can certainly be a source of disruption to supply chains. Some political shocks have some meaningful lead time, enabling organizations to prepare; but others can be quite sudden. While we acknowledge this type of shock and interesting developments, such as prediction markets, that are helping heighten the ability to quantify their likelihood, these shocks manifest in highly variable forms. Therefore, we did not select political events as a type of shock for assessing value-chain exposure in detail.
EA: What advice would you give for anyone who would like to make a career in supply chain management consulting?
KA: Supply chain management is the topic to be in these days—the COVID-19 crisis did clearly show the importance to manage complex global flows—consulting is as well a great place to be as you will experience many different companies and topics within supply chain. According to recent research we see a huge need for talent to support operations and the push for digital will further increase the need.
EA: Thank you so much for your time, Knut. You have provided some great insights into how we can build risk adverse and resilient supply chains.
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