“The real competition is between supply chains, not companies”- Martin Christopher
Words to live by for the global consumer products industry in their aim to build resilient and agile supply chains. Consumer product supply chains are complex beasts whose interdependence continues to be tested by concurrent disruptive forces including trading disputes, cyberattacks, commodity price fluctuations and the impacts of climate change. But a common thread runs through all of these challenges - a changing world where the power of relationships has been superseded by a more transactional approach.
Investing in Resilience: Why Supply Chain Disruptions Make it Vital
The Covid-19 pandemic underscored for consumer product businesses the importance of focusing on resilience versus efficiency to reduce disruption. McKinsey calculates that within 10 years, supply chain disruptions tally to close to half (45%) of a year’s worth of profits for companies.
For an enterprise consumer product enterprise with annual profits of up to $15 billion this represents close to $7 billion in losses. A separate survey of supply chain executives by the Economist Intelligence Unit validated this prediction, with over 54% expecting supply chain disruptions to increase over the coming years. Yet interestingly over 60% of these executives now rate resilience in their supply chain as being more important than efficiency.
This major shift in strategy from efficiency to resilience has come from a growing understanding of the need for supply chains to be more relationship-based as opposed to the traditional transactional approach, which fails in times of crisis. This strategy is playing out via three main approaches: inventory increases, dual sourcing and nearshoring.
Supply Chain Resilience: Ambition vs Action?
In response to the turbulence of the pandemic, over 85% of supply chain executives introduced resilience strategies that combined approaches including inventory increases, dual sourcing, and nearshoring. While the most sustainable ambition remains diversifying supplier bases and nearshoring, this has not played out in action as the cost of management is often a deal breaker. This is apparent as over 50% of consumer product companies today continue to invest in inventory increases as a form of resilience.
As investors and regulators begin to crack down on environmental footprints, the time of nearshoring is approaching but this will bring with it increased market complexity as companies offshore to not one but anywhere between three to five markets to maintain sourcing resilience. KPMG reports that “More than 7 out of 10 companies that announced a shift of their manufacturing locations between 2018-2023 moved operations into Asia mainly in an aim to secure source materials.”
Indeed 71% of consumer product companies have rated resilience in raw material sourcing as their number one supply chain threat - a key driver to inform the growing demand for sustainable sourcing. But all of this cannot be done at the status quo. Sustainability targets will require the best and brightest of technology to enable even the first glimpse of success.
Top 3 Digital Investment Areas for Achieving Supply Chain Resiliency
Enter digital platforms and the power of a single source of truth to underpin disparate departments in a common quest to achieve supply chain resiliency. In 2023 investing in a cloud-based digital transformation strategy was a key trend as organizations adopted technology to mitigate concerns around inflationary pressures and economic stagnation. What has changed is the areas of investment, as over 60% of organizations move their digital focus from reactive functions to predictive areas such as supply chain processes, data synthesis and analysis capabilities.
As sustainability requirements layer over risk-based approaches, three areas rise to the top as areas driving technology investment across the supply chain.
1: Track and Trend Value Chain Decarbonisation Objectives:
Environmental, Social, and Governance (ESG) risk reduction is becoming increasingly crucial for the consumer product industry, as investors demand more sustainable practices. Meat companies for instance, are facing potential decarbonization taxes reaching up to $11 billion. This financial pressure is intensified by new ingredient-based regulations, such as the EU Deforestation Regulation (EUDR) element of the EU Green Deal, which shifts focus from process-driven to ingredient-driven compliance. The European Commission's 2021 estimate indicated that compliance costs for food manufacturers under the EUDR could start from $300 million.
In response to these challenges, digital platforms are emerging as a vital tool for the consumer product industries. These platforms can provide robust supplier quality assurance and facilitate adaptability in compliance processes, potentially reducing the financial and operational burden of adhering to these stringent regulations. By leveraging technology, companies can streamline their compliance efforts, ensuring they meet investor demands and regulatory requirements while maintaining competitive advantage in the market.
2: Enable Wellbeing and Occupational Safety Initiatives:
Health and safety is now among the top three priorities for businesses to address in their sustainability efforts with 90% of sustainability certifications include HSE requirements. H&S management solutions such as Veeva’s ranging from incident management to learning management systems integrate into and inform proactive interventions along the supply chain.
A generational workforce is exiting the industry and being succeeded by a career mobile workforce resulting in knowledge management silos in the supply chain at a time when being joined up has never been more important thanks to regulatory and investor pressure. These challenges will drive unprecedented behavior change and we need to capitalize on it-for instance the chance to diversify product portfolios and reduce decarbonization taxes will drive new supplier onboarding and relationships across the supply chain requiring larger customers to educate and inform them. With annual cost of sustainability non-conformances in the food industry potentially reaching $2 trillion by 2050, it has never been more urgent therefore to engage and educate staff on sustainable practices.
3: Underpin Cultural Competence Across Diverse Supplier Networks:
As companies look to reshore, supplier diversification will be a key growth area. While newer, less mature suppliers will bring sustainability and decarbonization benefits they will also require a lot more interaction and enablement along the supply chain. In Europe alone the SME sector accounts for 99% of the food industry by volume - without bringing these SME’s on the journey, large supply chains and consumer product conglomerates will fail to meet any of their sustainability goals.
Proactive engagement, culturally competent with suppliers to strengthen SME quality programs sets a precedent for industry-wide collaboration to educate, enable and often evangelize. For instance, since 2009, the Danone Ecosystem has co-created +100 projects that respond to local challenges linked to sustainable sourcing and regenerative agriculture, thereby recognizing the mutual benefits of elevating industry standards across the board.
In Malaysia, this collaboration is apparent in the Halal sector where Nestlé leads by sharing knowledge on enhancing Hazard Analysis Critical Control Point (HACCP) programs and fostering a culture of quality with local SME’s (98% of the halal suppliers in Malaysia are SME’s).
This collaborative approach builds resilience against potential disruptions and underscores the importance of partnership along the supply chain. Digital technologies such as supplier quality management and learning management systems will be key to not only help suppliers track and trace but also identify areas of need to either educate or evangelise across the supply chain. This will go far towards enabling both supply chain diversification as well as decarbonization.
Digital Transformation for Fostering a Culture of Sustainability
Supply chain disruptions have become the norm. We are losing a generational workforce who due to a lack of technology adoption are custodians of relationships along the value chain. PwC analysis illustrates that a differentiated supply chain can deliver an estimated 43% increase in revenue over the long term. In addition, greater efficiency can lead to a 10% decrease in operating expenses at both the store and supply chain levels, yielding multibillion-dollar savings.
Digitization plays a crucial role in enhancing relationship management and streamlining the value chain. By predicting disruptions and facilitating organizational pivots, it fosters supply chain resilience, leading to increased efficiency in the connected supply network.
Over the next couple of months my Veeva strategy colleagues and I are embarking on a supply chain insight series that will focus on strategies to empower supply chain leaders to effectively navigate these fast-paced times.
This series will holistically explore agile supply chains and the multifaceted role digital can play in driving successful outcomes. Our insights will cover pressing issues from evaluating institutional knowledge gaps and informing interventions, to managing ever-changing supplier requirements in the wake of the growing demands of sustainability reporting.
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