It’s more important than ever that companies, as well as individual countries, boost the resilience of their value chains.
Complex, multitiered, and interconnected supplier networks—more like complicated webs than chains—span the globe and are, in various ways, vulnerable to shocks. While the COVID-19 pandemic delivered the biggest and broadest value-chain shock in recent memory, it is only one of a series of disruptions, ranging from cybersecurity attacks and financial crises to tsunamis and volcanos, that expose value chains, companies, and countries to financial losses. Shocks, often unpredicted, are becoming more frequent, severe, and costly. Every decade, companies lose half a year of revenue, on average, due to value-chain disruptions. The COVID-19 pandemic alone could wipe out a year of company earnings or shut it down altogether.
Executive attention to value-chain risk was already on the rise, but now it’s in the spotlight. During a McKinsey Live webinar, partner Edward Barriball and McKinsey Global Institute partner Susan Lund discussed the importance of resilience to a company’s ability to withstand value-chain shocks and recover from them more quickly. Greater value-chain resilience—the ability to resist, withstand, and recover from shocks—is a priority for 93 percent of the supply-chain executives who responded to a McKinsey Global Institute survey in May. And 44 percent said they would be willing to increase resilience at the expense of short-term efficiency.
The elements of resilient value chains
Strong value-chain resilience comprises these four elements:
- Company executives with the ability to see the risks across the entire value chain, including multiple tiers below the top supplier
- Regular stress-testing and assessments by the company
- Targeted actions to reduce vulnerabilities and exposure to shocks
- Presence of value-chain resilience on the CEO’s agenda
Even before the pandemic, global value chains were undergoing structural changes—including an increase in cross-border services, a growing demand for high-skills labor, and more regional concentration of goods production. Now surging customer demand, investor questions about companies’ long-term vulnerability, and industry competitors are increasing the pressure on companies to make changes to their value chains.
Each company needs to examine its structure and the vulnerabilities related to its locations, factors of production, operational and organizational choices, and other variables and then invest in the areas of greatest risk—as well as those most likely to result in long-term benefits. By broadening the range of risks a company considers, executives can identify some potential shocks and choose which levers to use in response. Among the many levers that might be available to reduce value-chain risk are finding additional suppliers, building redundancy in transportation networks, holding a larger inventory of products, and relocating production.
Digital is a game changer
Few companies have digitized their value chains, but doing will have a bigger effect than taking any other action would. Disruptions are unpredictable, but digitization enables companies to react in a fast and flexible way to unexpected situations and to recover more quickly. That agility can not only reduce a company’s value-chain risk but also increase its productivity. Resilience will become as important as efficiency.
Value-chain management is at a turning point. Companies and countries that can increase their resilience as well as their productivity earlier and more efficiently will be the winners over the coming decade.
The role of policy makers
Policy makers interested in value-chain resilience at the national level might think about five things:
- Policy choices can shape the severity of risks—for example, by providing incentives for companies to make changes to increase their resilience.
- Countries, as well as companies, should stress-test their value chains—for example, doing so can avert future scrambling for medical supplies and PPE.
- Consider the entire supply ecosystem and which levers are available.
- Invest in the next generation of manufacturing technology, which includes AI, advanced robotics, and digital platforms.
- Don’t neglect the country’s full value-chain portfolio: go beyond goods to focus on digital and services as well.
For more on this topic, please watch the webinar recording and read the McKinsey Global Institute report “Risk, resilience, and rebalancing in global value chains” as well as the case study “Could climate become the weak link in your supply chain?”