The COVID-19 pandemic shook global supply chains to their core. In many instances, the flow of raw material, industrial supplies, and essential ingredients simply stopped, leading to global and localized shortages the world has yet to fully recover from. Today, these short-term shock waves have supply chain and logistics professionals intensely working to stabilize supply chains end-to-end -from sourcing through delivery.
We have all felt the pain of over-extended and fragile supply chains that are clearly outdated and unreliable. And although they’ve served us well for the past several decades, these strategic models simply cannot be expected to meet the increasing pressures of today’s environment. One benefit of this disruption: if not for the supply chain deficiencies that were pushed harshly into view with the pandemic, we wouldn’t have promptly identified and embraced essential new demands like sustainability. Sustainability is now a “must-have” and has become a significant part of virtually every supply chain discussion, sharing an equal spotlight with the more traditional key considerations like technical quality, cost effectiveness, speed of delivery, and reliability.
What we’ve realized is we must do better. We must take what we know, what we’ve learned, and look for new and more appropriate possibilities that encompass a broader view. With that challenge in mind, we wanted to share five ways Bechtel is leveraging our legacy and learnings to ensure more resilient and sustainable supply chains going forward.
1. Increase supply chain diversity.
The idea of supply chain diversification isn’t new; it’s considered a strong tactic to achieving supply chain resiliency. Of course, knowing and doing are quite different approaches with greatly varying results. Maintaining redundant or alternate suppliers can add to upfront supply chain costs, and in past decades when cost cutting peaked as a strategic goal, many companies cut redundant relationships, pushing production to become centralized around a single supplier or region. This strategy, exacerbated through multiple tiers in the supply chain, leaves us blind to the fundamental dependency problems created. So, our mantra at Bechtel is ‘know more’. We need more visibility, more communication, and more knowledge related to all our sourcing partners, including those deep-tier suppliers. This visibility lends itself to opening up the source of supply, increasing regional diversity and alternate sources of supply. Assembling detailed knowledge on where and how things are made is often difficult, but it’s necessary as we rethink resiliency.
2. Strengthen supplier relationships.
Multiple studies have shown that strong rapport between buyers and suppliers adds value and increases supply chain resiliency. According to a 2020 McKinsey Article, “while many companies can point to individual examples of successful collaborations with suppliers, executives often tell us that they have struggled to integrate the approach into their overall procurement and supply-chain strategies.” So, what are some ways to build those stronger, more meaningful relationships?
- Start by being humble. Acknowledge what you know and don’t know related to the required work, processes, and reasonable expectations. Asking questions and recognizing knowledge gaps not only shows a sincere desire to understand what suppliers do and how they do it, but also allows the relationship to form as a team with both parties able to contribute ideas and solutions if problems arise.
- Nurture collaboration. A study by McKinsey and Michigan State University found companies that regularly collaborated with suppliers demonstrated higher growth, lower operating costs, and greater profitability than their industry peers. Nurturing collaboration between buyers and suppliers frequently involves mindset modification; intentionally moving from a primarily transactional (sometimes adversarial) relationship to a relationship built upon shared aims. At Bechtel, we strive to ensure our suppliers are seen as “partners” and are appreciated for their integral role in building our successful projects.
3. Put schedule-certainty before just-in-time
For decades, holding inventory equated to inefficiency and financial liability. Today, we understand that approach has its pitfalls, especially when a supply chain is hit with multiple significant disruptions. With renewed understanding of the potential risk associated with a hardline just-in-time strategy, we recommend reviewing inventory policies and processes to determine if a more agile approach to holding inventory makes sense. The questions we are asking of our suppliers include: how protected is your critical path? Where along the value chain is just-in-time inventory a risk for schedule? Yes, holding inventory brings with it cost considerations, but what are the costs of supply chain disruption and not making a project schedule? For many organizations, all-to-recent circumstances brought significant loss of revenues due to higher prices required to secure materials in short supply and schedule delays. Suppliers need to be strategic in optimizing inventory levels, ensuring the pendulum doesn’t swing too far in either direction.
In addition to reviewing current just-in-time policies, manufacturers and supply partners need to consider additional investments in education and technology. We’re asking people to think and act differently than they have throughout their careers. Offering a means to understand the influences and impact of supply chain disruption allows organizations to better build processes for determining what inventory strategy meets their specific organizational and project needs.
4. Create a strategic sourcing plan.
We believe strategic sourcing provides a means for optimizing efficiency and resiliency while protecting cost and quality. When approached with this goal in mind, the process goes well beyond developing diverse bidders lists (still important) and looks at supplier fit, and the broader offering including things like proven innovation experience, organizational agility, and delivery success. A good strategic sourcing plan includes not only full analysis of the market, but an evaluation of where and how to source, taking in all the variables of the individual project.
Having the right process only takes an organization so far; you need to hire and train people to understand, craft, and deploy the overall plan and its critical elements. Talent is a critical factor in every area of supply chain planning and management. Hiring people who have experience in accessing and interpreting data, managing compliance, monitoring, and mitigating risk, assessing suppliers, and implementing agile protocols should be one of an organization’s highest priorities. Training and experience-based learning programs are also incredibly important to ensure your people can carry the strategic and executional load required to envision and deliver more secure and efficient strategic sourcing.
5. Invest in vertical integration to protect the critical path.
With the incredible stress placed upon global supply chains over the past 24 months, there is a renewed movement (sometimes referred to as Vertical Integration 2.0), capturing the attention of supply chain professionals. In fact, with companies like Amazon and Tesla unapologetically encouraging vertical integration, it’s not surprising to see others following suit. While vertical integration shouldn’t be used in all cases, COVID-19 highlighted pain points in the supply chain, where vertical integration could be of benefit. To remain on schedule in a project, the critical path must be protected; it is here that vertical integration may be of use. As part of reassessing supply chain resilience, organizations are expanding backward and forward in the supply chain. Companies are moving more to vertical integration for the apparent returns it offers, specifically greater supply chain control and the expansion of revenue streams. It can also offer a certain level of independence from suppliers, shorter turnaround times, closer data relationships, more economies of scale and increased transparency.
Designing and delivering more supply chain resilience certainly comes with a cost. But the costs of not investing in supply chain resilience could be far higher.
Recently, Jennifer Bisceglie of Interos, Catherine Hunt Ryan of Bechtel, Tom Giles of Bloomberg, and Jackie Sturm of Intel had an interesting discussion on supply chain resiliency and approaches to supply chain solutions at the 2022 Bloomberg Technology Summit: