Cost reduction focus exposed supply chains to greater pandemic disruption

Executives’ prioritization of lean management principles (higher productivity and cost efficiency) and a lack of strong resiliency planning left companies significantly vulnerable to pandemic-driven operational shocks, according to a recent report from DuPont Sustainable Solutions (DSS). The operations consultancy polled executives from 203 companies between February and April 2021.

“While placing a premium on achieving cost efficiencies by minimizing inventories, streamlining supply chains, sourcing from low-cost labor markets, and implementing just-in-time manufacturing looked great on many corporate ledgers, it left companies with little flexibility to absorb the supply, sourcing, operating, and commercial shocks caused by the pandemic,” said Davide Vassallo, CEO of DuPont Sustainable Solutions.

The lack of a balanced, holistic strategy that incorporates resilience and the flexibility to manage ESG (environment, social, governance) and operational risks became a key pain point for many companies when the supply chain disruptions of the Covid-10 pandemic began.

The majority of executives (81%) said they were preoccupied with cost efficiency and higher productivity, so it’s unsurprising that more than half (54%) had to shut down operations during the pandemic. The largest pandemic challenges faced by companies were related to ineffective operational risk management, with 64% saying their supply chain was negatively impacted and 61% saying health and safety were negatively affected.

The DSS report also found a degree of overconfidence in perceived supply chain resiliency. Eight-one percent of leaders surveyed in 2019 thought they had a plan capable of addressing an unexpected business disruption, but today only 43% claim to have a capable plan. Crisis planning, according to the report, fell short for many.

The unforeseen nature of pandemic shocks meant that three quarters (77%) of leaders said their company’s risk profile increased or significantly increased. Responses were broadly similar across industries, though manufacturers saw the greatest rise in risks at 84%.

Some of the unforeseen shocks included reduced worker availability due to travel restrictions and state orders shutting down operations.

With global pandemics now in the risk vocabulary of executives, it would also seem a prudent time to incorporate the accelerating effects of climate change in the calculus of supply chain planning.

According to the report, risk reduction responses have hewed to the short-term (2-5 years), though a longer term view may be preferable. Boards and management should be questioning whether to build a plant where there is increasing flood risk, for example.

“Many companies have fallen into a siloed approach to addressing workplace risk, ESG, and operational excellence without realizing it. Through better integration of risk reduction and optimization, and by making them an ongoing, long-term priority throughout the organization, companies will become more resilient and competitive,” said Vassallo.