As organizations transition to a more proactive approach to optimizing their supply chains, it’s important to be more connected than ever.
Supply chain disruption is an all too familiar reality for many organizations. Just consider our recent history of natural disasters, large-scale cyberattacks and trade wars that impact everything from demand to lead time, back orders and resourcing. Now, COVID-19 is only emphasizing and expanding the challenges of traditional supply chains.
In a December 2020 webinar on the topic of supply chain resilience, 79% of participants shared how vendor and procurement issues, alongside global trade and international risk, continue to impact their day-to-day operations.
Traditional supply chain structures are fundamentally ill equipped to cope with increasing numbers of unplanned disruptions. And resilience isn’t inherent in their design. Today’s supply chain structures are lean and focused on reducing costs with geographic concentration, a just-in-time inventory and, in many cases, reduced safety stock. This approach won’t be ideal going forward.
With vaccines rolling out, there’s renewed hope that challenges will ease this year. While it doesn’t mean a return to normal, it does give way to a new normal of connected supply chains, new distribution channels and nearshoring of supply bases. But companies must put in the work to have the right structure, people and technology in place to face 2021 and beyond.
Where do we go from here? It’s time to take a hard look at end-to-end supply chain processes and build alignment between strategy, operations, tax and finance functions to build back stronger.
What can you do to build a more resilient supply chain?
In the EY webinar, 62% of respondents indicated they’re looking to build resilience into their supply chain by ensuring appropriate alignment across all areas of the business and supply chain. When building a resilient supply chain, this means taking a holistic approach and aligning your strategy, operations, tax and finance functions.
Strengthening supply chain resilience starts by understanding your organization’s end-to-end supply chain, identifying critical gaps in the short term and conducting a more comprehensive supply chain risk assessment.
- An assessment should include direct suppliers, intermediaries and raw material suppliers. In addition to suppliers, production and operations need to be assessed across all functional areas that manage people, process and technology.
- Once the gaps are understood, initiate a supply chain resilience capability build-out. This is typically for the areas identified as gaps, but could include areas such as visibility and monitoring, enhancing internal capabilities, building network flexibility or enhancing your planning capabilities to be more agile.
- Following this, implement effective supply chain risk intelligence monitoring. At this stage, you would develop a methodology for ongoing supply chain risk monitoring and reporting, including an early warning system.
- Finally, put in place supply chain risk response operating procedures and fully explore backup plans for major supply chain nodes - essentially developing a Plan B for disruptive events.
The shift towards digital ecosystems
While supply chains have traditionally been linear, they are fast evolving towards digital ecosystems based on extended supply networks. This means that all data across the natural or physical supply chain is held in the cloud and interdependence with entities in the supply chain — customers, suppliers, co-manufacturers — can be easily assessed, ascertained and actioned.
Digital ecosystems are shaping the markets and enabling hybrid forms of cooperation and competition. This model is raising new questions around tax considerations: How do you tax a digital enterprise? Have the company’s global value chain and its core value drivers changed and thus also the compensation for it? Is the company’s intellectual property (IP) the same? Has the value associated with IP shifted and have the IP and its associated value extended or changed?
When aligning your internal functional business areas around supply chain, it’s critical to incorporate the right processes around how you organize your people, transactions, vendors, technology, assets and IP to deliver on your business model. As you consider incorporating structural changes that can shift the allocation of profits, it’s equally important to review the relevant tax considerations. These can include alignment of network commercials and operating model, complexity of integration of partnerships or joint ventures for limited risk models, cash flow and indirect tax implications, as well as IP and transfer pricing implications.
By working with a larger set of suppliers, companies can gain agility to adapt to a constantly changing market. While speed to market is a critical component of your supply chain, it also allows you to engage with a range of suppliers that can provide you with an outside lens into your business and offer you access to new ideas and approaches from creative minds outside your organization. A diversified supplier base also means that your business is more likely to reflect the customers you serve. By broadening your geographical supplier base, you can offer more competitive prices at the local level.
As organizations transition to a more proactive approach to optimizing their supply chains, it’s important to remain connected to your internal teams and suppliers, and to stay on top of advances with your digital systems. This can help you prevent fragmentation in the supply chain and can help you to build long-term value.