The Importance of Supply Chain in the Board Room
The relevance and importance of robust supply chain management have been highlighted over the last year to a degree I have not experienced in my 40-year career as a supply chain practitioner. Corporate supply chains are at a critical inflection point prompted initially by the pandemic and subsequently with the continued spate of cyber-attacks. The elements that comprise a robust supply chain: planning, sourcing, making, and delivering are at the foundation of every company’s ability to serve customers. As a director on two public company boards in two very different industries, I have seen how critical it is for the board to have an intimate knowledge and understanding of the companies’ supply chain. Board members should look to their supply chain to deliver performance and remain resilient in this changing business environment. A good supply chain will create an enduring competitive advantage for the company.
De-risking the supply chain, particularly global supply chains, will be a top boardroom issue from a post pandemic perspective. In a PWC survey from 2020, 34 percent of CFO’s indicated that “supply chain issues were among their top three concerns.” Additionally, 30 percent indicated that they were considering making changes to the existing supply chain due to the pandemic. The focus of executive leadership and the board must center around greater supply chain agility and resilience. Key questions that must be considered:
- How much should be outsourced vs. insourced?
- What are the risks associated with outsourcing to certain geographies?
- How do we create a supply chain that can sense and assess risks before they materialize?
- What are the down streams implications of supply chain issues, and how do we mitigate them?
- When supply chain disruption occurs what contingencies are in place?
There are significant financial implications associated with poor supply chain management. A recent study by McKinsey & Company estimates that a company could expect to lose up to half a year’s operating profit every decade due to supply chain disruption. This translates to hundreds of billions of dollars in lost value for shareholders. The board has a responsibility to be proactive in protecting shareholder value linked to the supply chain issues.
A recent white paper from the World Economic Forum in collaboration with the consulting firm Kearney points out five important areas for the future.
- Adopting the overall supply chain set-up by carefully managing interdependent levers such as dual sourcing, complexity reduction, and localizing.
- Doubling down on investments in advanced manufacturing technologies that were attributed to an essential role in ensuring a quick reaction to the crisis.
- Adjusting the operating model to allow for a more flexible and decentralized manufacturing organization with a consistent risk management system in place.
- Redefining external relationships and capturing new opportunities from cross-industry collaborations models
- Reviewing and challenging the product portfolio to reduce complexity and refocus on key strategic directions.
As the economy rebounds, global supply chains are stressed to the breaking point due to insufficient executive and board focus, among other factors. Demand is driving prices higher, and we see significant shortages, for example, with electronic components. These shortages are impacting everything from car manufacturing to iPhone production. Similarly, basic materials such as lumber, which is up more than 300 percent since April of 2020, are disrupting supply chains across several industries. Companies are exercising force majeure clauses in unprecedented numbers due to these issues. Not all of this could have been avoided, given the global pandemic, but better preparation for the future is essential and expected by shareholders.
Companies also realize that their supply chains are critical to achieving their ESG goals, and the board must ensure a comprehensive plan is in place. From the (E) environmental perspective, areas like raw material sourcing, pollution, waste, and toxic emissions coming from the supplier community will show up as a part of ESG metrics. The (S) Social contains supply chain labor standards and product safety and liability standards. In addition, this includes supplier diversity efforts. The (G) is all about governance and business ethics. The board helps set the standard for how the company interacts with suppliers with fairness and integrity. Larry Fink of BlackRock has also detailed his ESG expectations for companies that BlackRock invest in and a great deal of what he talks about lives in the supply chain. In his letter to shareholders, he asks companies to disclose their plans to incorporate long-term ESG strategies and makes clear that these commitments should be reviewed by the board of directors.
For example, Fink looks to a zero goal by 2050. Achieving this goal will require companies to cascade expectations and metrics down to their suppliers. For many years companies and boards looked for the supply chain to deliver cost savings and on-time delivery. Today, much more is expected of supply chain leaders and thus a more holistic approach, anchored in ESG, is required.
As we seek solutions to build a strong supply chain, I go back to World Economic Forum Kearny report and look at the key imperatives of long-term success of manufacturing and supply chains, that need to be in place coming out of the pandemic and moving into the future.
- Rapid tailoring of a manufacturing and supply systems.
- Agile manufacturing and supply system set-ups enabled by advance technology.
- Logistics coordinated across and within global supply chains.
- Adoption of new ways of working and governing to increase manufacturing resilience.
- Shared responsibility and collaboration among companies and authorities to address social and environment challenges.
There is some debate on how deeply a board should be involved in the specifics of supply chain management. In this environment, the board must understand the supply chain dynamics well enough to challenge and provide guidance to management. This includes understanding how the supply chain is performing overall and the key risks that could materialize. Transparency is paramount and the board must require it of the executive team.