CFO best practices for improving resilience.;
Significant supply chain disruptions can reduce your revenue, cut your market share, inflate your costs, and threaten production and distribution. You can’t sell goods if you can’t manufacture or deliver them. Supply chain disruptions also can damage your credibility with investors and other stakeholders, often driving up the cost of capital.
In the transition to globalization, corporations have created ever-more-lean supply chains. A single event at a supplier’s location—a fire, a storm, a bankruptcy—can threaten a supply chain and leave an otherwise high-performing company in dire straits. The wounded firm becomes prey to competitors who have made their supply chains resilient. But how much will resilience cost?
It turns out that small, focused investments in resilience can make a big impact on business continuity and, in turn, performance. The best place to start is by considering four factors of resilience: flexibility, transparency, ethics, and robustness.
In his book, The Resilient Enterprise, MIT’s Yossi Sheffi writes about the power of flexibility. “An organization’s ability to recover from disruption quickly can be improved by building redundancy and flexibility into its supply chain. While investing in redundancy represents a pure cost increase, investing in flexibility yields many additional benefits for day-to-day operations.”
Standardization is an important strategy for flexibility. Adhering to standards in processes and product development dramatically simplifies switching suppliers, if necessary, or moving employees to new locations or roles. Cross-training also fosters flexibility, enabling employees to fill in where they’re needed.
When the supply chain is interrupted, everybody needs to know what happened and why. The more available the intelligence, the better the organization can respond as it switches supply routes, reschedules deliveries, and minimizes disruption. Transparency also means having full day-to-day visibility into the entire supply chain.
An ethical culture is essential to a resilient supply chain, in part because it infuses the other three factors of resilience. Without a strong ethical culture, it’s hard to operate with transparency, flexibility, and robustness. Unethical compromises in the interest of short-term cost reduction, for example, can lead to underinvestment in protecting facilities from natural disasters. Successful organizations have strengthened their ethical foundations with cultural narratives and actions that ensure that business goals don’t incent unethical behavior, and that any misconduct is exposed quickly.
A robust supply chain is a resilient supply chain. Robustness comes from a multitude of factors, including the use of a well-maintained transportation infrastructure, siting your suppliers in economies resistant to shocks, and taking prudent precautions to mitigate the damage of natural disasters. As business leaders make decisions about where to locate offices, plants, and distribution hubs, they need to evaluate all of these factors, as well as others that affect the quality of supply chains in individual countries.
For more information on how best to prepare for supply chain disruption, read Just Make It Happen on the FM Global Reason website.