With good reason, the unprecedented pressure put on our supply chains has made resiliency and efficiency a key feature of CEO agendas this past year. Over the last 12 months, many companies have made changes to their supply networks to navigate and address the turbulence of these last two years. Now, companies need to both figure out the demand of the future and just how much resilience to build into their supply chains.
Here's some of what we saw in 2022, and will continue to see in 2023.
Companies grapple with demand planning. One of the biggest drivers of supply chain challenges since 2020 has been the unpredictable demand shocks. After snarled supply chains left retailers and consumers contending with empty shelves in 2021, 2022 found organizations working with suppliers to shorten distances and lead times in the supply chain. Companies also began offering peak season deals to entice consumers to purchase product earlier. But with moderation in overall demand due to inflation, and post-pandemic spending shifting from goods back to services, many found themselves flush with too much inventory. Companies are now looking for smarter ways to ensure resilience while keeping inventory costs under control.
Supply chain congestion greatly reduced. This can be seen both on graphs — the Global Supply Chain Pressure Index, compiled by the Federal Reserve Bank of New York, was close to its lowest level in nearly two years in October — and in our ports. According to the Marine Exchange of Southern California, in November 2022, the queue of container ships in the ports of Los Angeles and Long Beach dropped to zero for the first time since October 2020. This is compared to a high of 109 container vessels in January 2022.
Continued labor mismatches. The past two years have also seen a marked shift in companies’ approach to talent acquisition. In 2020, 70% of companies were building talent by re-skilling their existing labor force. In 2022, the primary approach, used by 68% of companies, was outside hiring. This shift likely reflects the dramatic increase in labor mobility that has occurred worldwide following the lifting of COVID-19 restrictions.
“Friendshoring” enters the conversation. “Friendshoring” is, in the words of Janet Yellen, a commitment to work with countries that have a “strong adherence to a set of norms and values about how to operate in the global economy.” If any economic model is to succeed —sustainably — it must succeed locally as well as globally. Therefore, many emerging markets are building capabilities to produce local goods through networks that rely less on global trade.
How Did Companies Respond?
Each year we survey supply chain leaders about what they’re doing to plan for disruptions and risks and build resilience in their operations. Our most recent survey found that many companies successfully restructured their supply networks by implementing dual or multiple sourcing strategies for critical materials, and moving from global to regional networks. And as companies shift their focus from visibility to improvements in demand and supply planning, supply chain digitization efforts are also entering a new phase.
More than 70% of supply chain leaders said they expected to revise their inventory policies in 2022 and beyond. A notable 74% said investment in digital services around demand planning is a top priority, while 69% said investment in digital services around supply planning is a top priority. And 58% said they would prioritize inventory optimization.
Supply chain digitization efforts entered a new phase, with more than 90% of respondents reporting investments in digital supply chain technologies last year. Some 80% of companies are now diversifying their suppliers, and 69% believe further dual sourcing will be relevant in 2022 and beyond.
All told, these efforts are starting to help improve the resilience of the supply chain amid the continued scrutiny caused by the increasing challenges across the board, including labor shortages, equipment availability, and climate and weather disruptions, to name a few.
With volatility and disruptions likely to continue, we expect resilience to remain a key topic for the foreseeable future. For leaders, upcoming priorities include more sophisticated approaches to planning, further adaptation of supply networks, and smarter inventory management strategies.
Sustainability across all business practices has become much more prevalent, and many initiatives either directly impact the supply chain or have significant implications in setups. Supply chains play a central role in sustainability transformations: a recent industry survey noted that of the nine most common environmental, social, and governance initiatives, all but two involved supply chain components.
Traditional supply chains sought to achieve stability and minimize costs with a focus on service, cost, capital and quality. However, today’s fast-moving, consumer-centric world requires a supply chain that’s significantly more complex, now accounting for sustainability and resilience as well.
It’s imperative that supply chains move at the same speed as consumers, presenting leaders with a once-in-a-generation opportunity to future-proof their supply chains. The companies with the most agile, resilient and sustainable supply chains will be the ones to succeed in 2023 and the years ahead.
Daniel Swan co-leads McKinsey’s operations practice globally.
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