All companies face significant changes as a result of Covid-19’s impact on the world economy. Old ways of doing business need to be reviewed, renewed or fundamentally changed for a ’new norm.’ The interdependency and impact of working across ‘partners’ is truly under the spotlight. From supply chain assessment, selection, assembly, procurement and management, companies need to build greater business resilience in order regain and achieve competitive advantage.
The impact of Covid-19 has been felt across the world and in virtually every industry. With the ongoing precarious balance between business as usual and pandemic control measures, the stress on business and therefore its supplier base has likely never been greater. For those involved in the delivery of complex infrastructure, real estate, and construction projects sectors the adoption of universally accepted just-in-time (JIT) models have been overturned because of wholescale disruption to international trading and logistics across the globe.
What are the impacts of these ongoing pressures and how will they fundamentally challenge the current reliance on supply chains? What’s next?
2020 – A Year of Unprecedented Change and Challenge.
The Covid-19 (CV-19) crisis has exposed the fragility in the sourcing and supply of goods, that prior to the Pandemic saw an ever-increasing migration to JIT, mega-efficient chains, sourcing constituent parts and products from across the world. Those with little room to manoeuvre saw their JIT model crumble in 2020 with the closing of manufacturing facilities, national borders and global shipping routes. Faced with no supply and ultra-lean supply chains, organizations have confronted difficultly sourcing alternatives from different suppliers, locations and countries. Even when alternative sources have been identified, companies face a dizzying array of challenges and hurdles trying to re-integrate differing international standards and codes inevitably meaning goods approved in country ‘A’ are not approved in country ‘B’. Throughout the pandemic, there have been numerous high-profile cases illustrating the complexity of when supply chains go wrong. To cite one example, the UK Government purchased Personal Protective Equipment (PPE) from foreign jurisdictions, and this PPE was subsequently deemed not fit for use in the UK due to differing UK standards. This same situation occurred throughout the world.
The difficulties to secure equal or approved goods at a time of supply chain collapse has been felt across every country and every sector.
Faced with such scenarios how do capital project owners address these failings for now (in the interim) and more importantly build resilience to meet the needs of whatever the new normal becomes?
Can We Look to the Past for the Future?
Natural disasters such as hurricanes, floods or even wars expose some of the same fragilities we are uncovering in this article. Yet, despite the negative impact these situations cause, there is an enduring human desire to ‘get back to normal’ as soon as possible. This tends to suppress innovation and instead of looking to new ways, ideas and approaches, many rush to rely on returning to the normal position, invariably to past models, trusted suppliers, old contacts, familiar codes and standards.
In construction, we often bemoan the slow pace of change and the lack of innovation resulting in construction lagging behind many other industries. Driven by old, set habits and often a lowest price commodity culture in the industry it is no wonder many contractors are facing uncertain futures, as supply chains break and liquidity dries up. Where is the safety net? How do we ensure projects get delivered?
Many companies have dedicated professionals who have been focused over the last decade or so slimming and optimizing the size and reliance on ‘core or key suppliers’ and in doing so pushing for the best terms and conditions. The effect is an increasing corporate reliance on the individual supplier whether it be for goods or services.
Whilst this was seen (pre-CV-19) as a best practice, entrusting the fate of the buyer into the hands of a few key ‘Level 1’ vendors, there is little evidence to confirm enough rigour was paid in the multiple levels below, e.g. the sub-suppliers. Take for instance a piece of equipment, say an electricity generator for a new hi-rise building, to be supplied by a L1 vendor. In selecting the vendor’s suitability to deliver, how many company procurement teams assess and investigate the ‘health and resilience ‘ of the Level 2 and 3 sub chains forming essential parts of the final generator? Not many!
Too lean supply chains buckle under pressure.
This false reliance of the buyer thinking their risk is covered off by engaging predominantly with the Level 1 company can therefore be fatally flawed. Accordingly, there are far too many examples of small, unchecked sub-chain supplier’s going out of business and having a major impact upstream and vice versa.
Therefore, the key issue and focus looking forward must be greater resilience by ‘more eggs in more baskets’ so to speak, which seems at odds with previous wisdom. It is increasingly important to broaden not restrict supply chain partners.
In the search for optimal supply chains, they need to be multi-nodal, allowing the client to have 5 or 6 supplier options for each key activity. For example, if a bolt factory in Italy unexpectedly can’t deliver, an alternative French factory can. This scenario planning (common only in the Oil & Gas sectors) allows ‘resilience’ for the project to complete as planned.
As CV-19 lingers this agility and resilience becomes a strong competitive advantage.
A well-publicized example of overcoming such issues is Apple, Inc. (Apple), a company with notoriously complex global supply chains. In mid-2020 it had a short-lived issue with its aftermarket iPhone battery manufacturing plant in China when lock down occurred. Unable to complete and export batteries from China due to CV-19, Apple faced significant shortages and it quickly reacted and changed its production to a facility in the US. It was able to do this by actively scanning events, developing possible alternative solutions, enabling it to have sufficient agility and resilience to compensate.
Research is showing that as a consequence of all of the above, companies are increasingly trying to secure ‘closer’ suppliers (localization). This also aligns to the growing environmental and sustainability agenda, reducing carbon emissions in unnecessary packaging and transportation. Therefore, the opportunity for project owners to seize this trend, and to differentiate themselves as a result, is now.
The ‘P’ Word
Politics! Added to the above backdrop, recent events have exposed significant differences and disputes in the world trade economies. Growing trade disputes between the US and China and the recent exit of the EU by the UK are 2 examples of growing tension and uncertainty in the flow of goods, standards, availability, taxes and tariffs. The best advice is to be alert and to be prepared. Whilst business has expanded almost uninterrupted through nearly 40-years of globalization, many are increasingly concerned that these recent stand-offs are the beginnings of a fractured relationship between the US and China.
Data, Data, Data…
Using data effectively has to be at the heart of everything companies do if they are to embrace the ‘4thIndustrial Revolution’ and prosper, faster and better than their competitors.
By far the most important aspect of this commitment is to rapidly establish at the outset what data is important to the effective operation and success of the project. Next, how will data be gathered, validated and assessed? It is important to stress here that in a world of data overload, clients need to be crystal clear if they are not to be subsequently overwhelmed. By knowing what you want to achieve, i.e. the improved outcomes, data capture needs can be established and reversed into whatever systems are in operation.
Having a robust and effective evaluation system throughout the supply chain process is critical to ensure that only the best supply chain vendors are retained. New vendors should be vetted and onboarded as poor performers are offloaded. To do this an organization must be able to rely on the accuracy and completeness of the data its systems gathers. If parts are missing, decisions made could be ineffective, wrong or detrimental.
As an example, let’s take a subcontractor, say a façade installer, who whilst consistently scores high on track record and competitive tender rates is regularly used by a main contractor. What happens if in ‘delivery reality’ the installer’s time schedule regularly slips, adversely impacting the main contractor’s progress? What happens if this installer also has an on-site reputation for cutting corners and leaving the job with defects that the main contractor has to put right at its own cost? Would it not be beneficial if the latter issues were captured in the data for reporting and evaluation? In light, would the decision to continue to use this installer in the future change?
What’s clear is in the absence of intelligent data capture, review, and inadequate supply chain processes, an unacceptable number of clients are proceeding ‘blind,’ awarding business to potentially poor and ineffective vendors. Not only might this be eroding the performance of their business it is denying themselves the opportunity cost of deselecting them and using better vendors – vendors who would add more value. Yet despite this, too often the cry is ‘we always use X…’ But why?
How confident are you that you are getting the best service from the right vendors?
Natural disasters in all forms, including CV-19, undoubtedly provide distress and disruption but also offer some opportunities. With supply chain performance central to all project delivery across the globe, be bold, look to the future, plan your new approaches with resiliency in mind and resist the temptation of ‘falling back in the old ways’ – that have let us down in 2020, if not before.
© Copyright 2021. The views expressed herein are those of the author(s) and not necessarily the views of Ankura Consulting Group, LLC., its management, its subsidiaries, its affiliates, or its other professionals. Ankura is not a law firm and cannot provide legal advice.