Risk and resilience in consumer-goods supply chains

Consumer-goods makers’ supply chains are weathering enormous strain. Here’s a quick look at how to strengthen them for the future.

COVID-19 has brought major shifts in how products are consumed, forcing consumer-goods companies to adapt in absorbing the variations in demand that resulted. Yet even though the pandemic’s specific dislocations were unprecedented, disruption is becoming all too familiar. Our colleagues’ research estimates that disruptions lasting a month or longer now occur every 3.7 years, on average, with a cumulative cost to consumer-goods companies of one-third a year’s earnings every decade.

While many companies found they could handle short surges in demand for a specific product, on the whole, consumer-goods supply chains have proved vulnerable to shocks. Several factors have contributed to their vulnerability during the pandemic.

Geographically concentrated production in some consumer subsectors has enabled companies to enjoy economies of scale and hone their expertise—but it has also led to bottlenecks when shocks occur. Health emergencies, natural disasters, and localized conflicts can cause shortages that snarl an entire production network. When COVID-19 struck, many consumer-goods companies came to the abrupt realization that some of their critical inputs were single-sourced, further amplifying risk.

COVID-19 has also increased costs for consumer-goods companies. From guaranteeing the safety of their operations and employees to reacting to increased pressure from retailers on service levels, the pandemic has necessitated often costly adjustments.

Although supply chains for consumer-related sectors tend to be more regionalized than those in other industries, the dynamics of commodities relied on by some industry segments, such as cosmetics, and global value chains, such as apparel, can expose them to a wide range of shocks (exhibit). Even sectors such as food and beverage, with more-localized value chains, have faced their own challenges. The relatively short shelf life of certain products means that even minor delays can cause spoilage.

The consumer-goods industry differs from other sectors in the factors driving supply-chain vulnerability.
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Consumer behaviors have also shifted, with many changes likely to last well beyond the pandemic. For example, our colleagues’ research has shown that economic insecurity has led to increased price sensitivity. This has led to new shopping habits, including increased deal seeking, trading down to cheaper brands or private labels, and increasing use of value retailers.

We’ve also seen a rise in attention to wellness, leading to long-lasting changes in product selection and consumption. Healthy eating and investments in home exercise have endured through the pandemic, while heightened awareness of health risks has boosted the importance of hygiene in consumers’ daily lives.

Meanwhile, physical distancing has also led to increased consumption of online media and accelerated the evolution of e-commerce. Recent research shows how this has played out in the fashion industry, with companies vaulting five years forward in consumer and business adoption of digital since the onset of the pandemic in March 2020.

Five imperatives for ramping up resilience

In this environment, what actions can consumer-goods companies take to build resilience in their supply chains? In our experience, five steps stand out: creating end-to-end transparency, investing in digitization, improving communication and collaboration, embracing e-commerce, and building talent.

1. Creating end-to-end transparency: Enabling a comprehensive view of the supply chain through detailed subtier mapping is critical to identifying relationships that invite vulnerability. Without full transparency, companies may not recognize their reliance on suppliers in shock-prone regions.

2. Investing in digitization: Companies that invest in digitizing their supply chains can realize significant benefits in transparency, traceability, and agility. The up-front costs can prove worthwhile by increasing margins over the longer term.

3. Improving communication and collaboration: Strong communication and collaboration with both suppliers and customers have helped many businesses weather the storm. With retailers under increased pressure to keep shelves stocked and meet their customers’ demands, consistent, two-way communication has been critical for maintaining strong relationships and quelling any tensions early on.

4. Embracing e-commerce: For consumer-goods companies accustomed to working with a relatively small number of customers and distributors, the rapid shift to e-commerce has posed a challenge. The need to ship single units and introduce more-shippable product design has increased economic risk and reduced margins. Fully embracing e-commerce and thinking creatively about how to adapt product-design and distribution approaches are key to thriving in this context.

5. Building talent: The talent base within the consumer-goods supply chain is not designed to operate in this new environment. Whether creating teams of data scientists and engineers or leveraging skills internally, building new capabilities is an urgent imperative.

The essential ingredients for success

Over the past several months, some companies have successfully overcome the challenges posed by COVID-19 and built critical supply-chain resilience for the future. There are several drivers of success that have differentiated these companies from their peers.

They have focused on safety first, not only protecting their workforce from the spread of COVID-19 but also providing support to employees facing increased responsibilities at home. In times of crisis, a bit of empathy and flexibility can go a long way. Leaders who have been conscious of the challenges their teams face and accommodating of their personal needs have been able to maintain cohesion and high performance during a turbulent time.

They have cut portfolio complexity. Before the pandemic, consumer-goods companies were rapidly expanding their portfolios to capture shelf space and niche markets. This complexity has now become a vulnerability, demanding a return to basics. Some companies have worked closely with their customers and suppliers to simplify their portfolios and increase availability of high-volume items.

They introduced flexibility into their supply chains to allow them to cope with different demand and supply scenarios. For example, some food and beverage companies are developing alternative recipes should key ingredients become unavailable.

Finally, companies that have thrived during this challenging time have seized new opportunities caused by shifts in consumer behavior. They have reacted quickly and nimbly to changes in preferences and are continuing to look ahead to identify future trends.

The pandemic has tested many companies to the limit. And while COVID-19 has commanded the world’s attention, supply-chain shocks are becoming increasingly common. By investing in supply-chain resilience now, organizations have an opportunity to build critical agility into their supply chains, which will help them withstand not only the current crisis but also those to come.

This article originally appeared on LinkedIn.

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