Supply chain resilience has been a featured topic during this uncertain time. Famed economist Milton Friedman once wrote “The only corporate social responsibility a company has is to maximize its profits.” This sentiment has been the driving force of corporate business decisions for the last half a century and is still prevalent in many sectors of the global economy today. However, recent economic, societal, and geopolitical factors have shifted this paradigm from a myopic profit driven aspiration to one that’s expansive in value creation for all societal stakeholders (e.g., employees, suppliers, community) that are affected or influenced by a company’s decisions. This progressive model was brought to the forefront by the Business Roundtable in 2019 with the publication of the new Statement on the Purpose of a Corporation.
Profit and social responsibility are not mutually exclusive. They can co-exist and be leveraged to maximize the total value a company generates. Through this broad lens of value generation, organizations that are manufacturers of critical goods (e.g., medicines, medical supplies, food, natural resources) have an obligation to invest in their supply chain’s resilience to ensure continuous availability. An organization’s customers, now more than ever, need their products and services and it’s time for organizations to start viewing their supply chains as differentiators that can gain competitive advantages.
Investment in resilience is a strategic imperative to confront and absorb disruptions, and the consequences of inaction could have devastating consequences not only to a company’s financial statements but to the well-being of its diverse stakeholders. High-impact, low-probability disruptions are a common thread that weave through the global economy today. Supply chains are more vulnerable today than ever, driven primarily by globalization and its financial benefits. A company cannot predict every single risk that will impact their supply chain, but they need to have a game plan to confront it and return quickly to their normal operating model. For critical goods manufacturers, this trait is paramount to ensure negative consequences from supply disruptions are mitigated with a mean time to recovery (risk response) being as limited as possible.
Developing resilience in a supply chain is expensive, requiring ample financial and human capital to plan, develop, implement, and maintain the operation. The investment proposition can be viewed poorly when using historical and standard growth rate projections when generating the financial analysis (e.g., Net Present Value (NPV) or Return on Investment (ROI)) to justify the investment. The short-sighted approach considers actions or operations that can easily be monetized to understand the impact to a company’s financial statements, such as revenue, cash flow, and market share. Rarely, if ever, are the implications of a broader societal impact ever considered that, in theory, can have disastrous consequences not only for stakeholders impacted but for the company who failed to strategize, plan, and execute on the investment.
A critical good, such as medicine, can illustrate the severe consequences of not thinking strategically and broadly when investing in supply chain resilience. A high impact and lengthy disruption, such as a pandemic or natural disaster, could disrupt the standard expected delivery of a life-saving drug to a large population throughout the world. The chain reaction of events based on this scenario can be dramatic and long-lasting for direct impact stakeholders, including lost wages, higher healthcare costs, and limited or no discretionary income. In turn, indirect impact stakeholders, such as other businesses and government will be impacted by less consumer demand, less tax revenue, and less investment options for the general society. Lastly, the reputation of the company supplying the medicine could be tarnished, leading to impacts on their market capitalization, credit ratings, and future investment opportunities.
Supply Chain Resilience
Building supply chain resilience takes commitment and investment, adjusting the critical levers of the operation to accommodate planned and unplannable headwinds, and continuously improving resilience planning by experiencing and solving smaller, shorter-term disruptions. The three suggestions listed below can start a company’s journey to deliver this critical competence:
- Investment focus commensurate with total stakeholder risk:
The domino effect that a critical good’s shortage has on society in general needs to be the leading factor as to the amount of supply chain resilience investment that is required. Scenario analyses that monetize the broader economic impact of a product’s supply chain disruption are to be developed rather than one that focuses solely on the company’s financial statements impact
- Encourage risk-taking and motivate through failure:
To prepare for highly disruptive impacts to a supply chain, it requires a risk-taking culture to learn from failure and challenging the status quo. A company should look to motivate through small disruptive failures and continuously improve its resilience by identifying the failure modes and understand what actions are required to control or eliminate them for future instances.
- Inspire Active Leadership:
Supply chain resilience is not the responsibility of a single department but of the whole company. To shift the company’s mission focus to commit to all stakeholders requires inspirational leadership that communicates and incorporates this commitment throughout the daily interactions of the company with its employees, suppliers, partners, and customers.
Supply chain resilience investments are enablers to a company’s strategic commitment to deliver total value to all stakeholders, not just shareholders. It now seems evident that we should anticipate high impact disruptions to supply chains. This warrants companies to develop, adjust, and fortify their supply chains to reduce supply disruptions that will have societal economic and financial ramifications beyond short-to-medium term financial statement impact. This paradigm shift in investment purpose and action is not simple to accomplish with various constraining forces competing to retain the status quo. But as the prominent entrepreneur Robert Arnott once stated, “In investing, what is comfortable is rarely profitable.”