Introduction

If supply chain resilience was not on the minds of Boards, Executives and Supply Chain professionals before the coronavirus outbreak it is certainly front and centre today as they grapple with the immediate disruption to supply chains. We believe that organisations should not view the current disruption to supply chains as a one-off event but as an expected occurrence in a world where political disruptions, health issues, technology advances, and climate change are all happening at the same time. Hence as the coronavirus pandemic subsides, the focus should move to improve and strengthen supply-chain capabilities to prepare for the inevitable next shock. By acting intentionally today organisations can become better prepared, building the resilience that will see them through the next crisis.

2020 Coronavirus Pandemic

How the coronavirus progressed and disrupted supply chains provides an interesting insight into the complex networked system that makes up many of the supply chains in industry today. For this analysis, we can take a simplistic view of an organisations competitive supply chain strategy based on four primary internal components each of which has multiple connections into the marketplace.

At the start of the coronavirus crisis, the initial impact was primarily located around Wuhan in China which resulted in an infrastructure network impact with reduced manufacturing capacity, which was widened as further Chinese cities went into lockdown. As the flow of goods from China dried up with a fall of over 13% in Chinese manufacturing in q1 2020 cargo flows were disrupted with a knock on impacts such as the global movement of containers being only eastwards resulting in container shortages in the west. As travel restrictions came into place the number of flights globally decreased not only curtailing the movement of people but the freight that would have also been transported on these flights causing another erosion of the infrastructure network capacity and capability. As people started to self-isolate and enforced lockdowns were introduced our own and supplier organisations were impacted by the loss of people and capacity. As there is an increasing number of people working remotely the strain on information systems starts to materialise. We could continue but even from this short analysis the interconnectivity of a system chain strategy becomes visible and the inherent.

Industry trends have made supply chains more vulnerable!

If we consider external risks to be an ever present and potentially growing danger to supply chains where political disruptions, health issues, technology advances, and climate change are all happening at the same time, there are further risks that are internal to the supply chain that have increased vulnerability to these disruptive events. In the past similar disruptions to supply chains may have caused minor local disruptions but may now affect entire businesses, industries or economies. This can in part be attributed to trends such as the rapid growth in global sourcing and offshoring manufacturing, continued moves to reduce supplier base, industry consolidation and outsourcing of goods and services, that have potentially made supply chains more vulnerable. We would not suggest that these trends are wrong, in fact when working effectively and efficiently modern supply chains are key to delivering a competitive business and improving operational performance. However they do require a new approach to managing supply chain risks and their threat to business continuity.

What organisations can do

Supply chains are increasingly at risk of disruption and it can be argued that the greatest risks to business continuity lie in the wider supply chain of key suppliers rather than within the company itself.  Yet for the vast majority of organisations, supply chain monitoring and business continuity planning remains an internally focussed activity or at best only concerned with immediate customers or first-tier suppliers. Therefore many mitigation plans and actions are ill-suited to cope with supply chain related threats to business continuity. Organisations need to evaluate and design a resilient supply chain for the future.

There are a number of key steps to take in order to understand your organisations supply chain strategy, landscape and network then to analyse the vulnerabilities and build resilience strategies and approaches.

• Understand your own supply chain strategy components, your processes, information systems and organisation. How are these connected outside your organisation and what do they rely upon.
• Build a ‘real’ understanding of your organisations supply chain landscape and the network behind key suppliers recognising that supply chains are not simply linear chains or processes, they are complex networks.
• Carry-out a structured and informed risk assessment for each supply chain identifying key risks and vulnerabilities.
• Identify mitigation and control actions for the risks, determine if these can be built into the supply chain strategy and be an inherent way in which the organisation functions and operates.

This approach needs to be continually updated and is not only going to lead to a more resilient supply chain strategy but identify opportunities to generate operational savings.

Characteristic of resilient supply chains

A dictionary definition of resilience is ‘the capacity to recover quickly from difficulties’. In terms of a supply chain, it mean the ability of a system to return to its original [or desired] state after being disturbed. This will require agility to be able to react to unpredictable events. This is particularly relevant in a world where we are seeing that traditionally stable, lean supply chains are now being disrupted.

An important part of supply chain agility is the speed of reaction to disturbances which is why obtaining an in-depth understanding of an organisations supply chain network is vital and then the visibility of the network will rely upon close collaboration with suppliers.

In times of shortage the biggest volume/value customer will traditionally receive priority treatment. But there are approaches other than purely volume, if your organisation is not of a scale to exert leverage, that can make you a valued customer. These include active supplier relationship management, true partnering arrangements, and shared risk and reward contractual mechanisms.

A well-structured Supply Chain Strategy will be built off a risk assessment taking into account the potential business impact of disruption to the principal supply elements together with the probability of risk events occurring.  For oil and gas companies this has rarely been done in a structured fashion and as a result these companies have been forced to adopt emergency re-active measures to manage major disruptions.

By incorporating an impact assessment of supply chains those with the largest potential to disrupt can be identified. These may not be the most obvious; it may not be the Far Eastern topsides fabrication but instead the local valve maintenance contractor who will be relied upon when the field is shut-in due to ESD valve issues.  Understanding the classes of risk and their potential range of impact will enable stress testing the current strategies for each critical supply chain against the family of external risks to enable prioritisation of vulnerabilities to business disruption. From this analysis there are a number of tools that can be applied based upon the particular circumstances to reduce the risk of business disruption to as low as reasonably practical.

These include, for the strategically important supply chains:

• Moving from the traditional master/slave relationship to a partnership with the supplier(s), including sharing risks and benefits equitably such that the whole supply chain is motivated to plan for and mitigate disruption. Consider consolidating related suppliers into consortia.
• Incorporating specific practical provisions within supply contracts to address the risk profile. Examples include; priority access to people/assets/capacity, stock sufficiency obligations, obligations under Force majeure,
• Build natural hedges by diversifying across geographies, sectors, currencies, technologies, etc. Weigh the internal costs against the benefits.
• Review the current balance of outsourced to insourced services and its effect on the company’s ability to mitigate risks. Consider automating repetitive services to avoid dependence upon outsource contractors.

To ensure a step change in the approach it will be necessary to apply expertise with deep knowledge of the nature of today’s risks, especially in fast moving sectors (e.g. information technology).

How Acrometis can help

Acrometis brings together a strong core team with a range of oil and gas industry leadership, operations, technical and organisational effectiveness skills. We have extensive knowledge of supply chain strategies with global experience managing complex supply chains. We have helped many clients build an improved understanding of their supply chain networks, improve their supply chain strategies and build capability and resilience.