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Four years on from the start of the COVID-19 pandemic, risk and resilience still dominate the supply chain agenda. Our latest annual survey of supply chain leaders shows that companies are accelerating their efforts to diversify and localize their supply networks (see sidebar, “About the survey”). It also reveals a profound revolution in the way those supply chains are operated, with a dramatic increase in the adoption of advanced techniques for supply chain planning, execution, and risk management.
About the survey
Since 2020, our annual Supply Chain Pulse Survey has tracked the efforts of supply chain leaders to overcome disruptions, mitigate risks, and build resilience in their operations.
We ask companies how their supply chains have performed over the previous 12 months and how they have changed, and about their plans. Questions cover four major areas of supply chain management: network design, planning, digitization, and risk management.
Data for this year’s survey were collected from 101 respondents, who represented a wide range of industry sectors and locations on six continents. We ran the survey over a four-week period from the middle of April to the middle of May 2023. Comments from leaders included in this article were collected in interviews conducted later in the year with a subset of respondents.
Managing a complex global supply chain hasn’t become any easier. Almost every respondent in this year’s survey said they had experienced significant issues over the previous 12 months. Some 44 percent reported major challenges arising from their supply chain footprint that required them to make changes during the year. Almost half (49 percent) said that supply chain disruptions had caused major planning challenges.
The shape of things to come
In our previous surveys, two sets of actions dominated companies’ efforts to improve resilience through physical changes to their supply chains: they increased their inventory buffers and pursued dual-sourcing strategies for critical raw materials. Those actions are still the most popular strategies, with each adopted by 78 percent of respondents—a similar level to last year.
Yet this year’s survey reveals a dramatic increase in other footprint resilience actions. Two-thirds of respondents say they were obtaining more inputs from suppliers located closer to their production sites over the past 12 months. That’s double the share of companies who reported using such nearshoring strategies last year. The biggest reported increases came from the automotive and consumer goods industries, where use of the strategy rose by around 60 percent.
Related to the rise in nearshoring, the shift from global to regional supply networks continues to gain momentum. Almost two-thirds (64 percent) of respondents tell us that they are currently regionalizing their supply chains, up from 44 percent last year. Only half the companies in our survey say that their supply chains are dependent on inputs from another region, but 89 percent of those respondents want to reduce that dependency over time. The push for independent regional supply networks is most prominent in two regions: Europe and Southeast Asia. This regionalization will take time, however. Once an organization commits to a new footprint strategy, it can be two years or longer before changes happen on the ground, especially if the strategy requires implementation of new manufacturing sites.
Meanwhile, the future of the world’s bulging buffer stocks is uncertain. Companies began to ramp up their inventories in response to pandemic-era supply chain disruptions. That led some observers to declare the death of the just-in-time supply chain, while others believed that it was a temporary blip, likely to reverse once the crisis passed.
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Four years on, that question is still open. Our survey suggests that inventories remain high, but respondents are divided about their future direction, with roughly equal numbers believing that stocks will continue to rise, remain at today’s levels, or fall back to precrisis levels. Around a quarter of respondents have particularly aggressive inventory reduction goals, expecting stocks to drop even below those levels. That finding surprised us. It suggests either that these organizations historically held more inventory than they needed or that they do not expect significant supply disruptions soon.
“We built buffer stocks everywhere during COVID-19. Inventory was the only way we could build resilience at the time,” recalls the vice president of transformations at one global medtech company. “Now we are back to competing on cost and capital. Nobody remembers why we had those buffer stocks.” Companies in the advanced-electronics sector are the most likely to expect the continued use of large inventories and risk buffers, while more engineering and construction players plan to reduce their inventories in the coming months (Exhibit 1).
1
The digital-planning revolution
Our Supply Chain Pulse Survey has tracked a technological revolution in supply chain management. The application of advanced digital tools to plan and operate supply chains was underway well before 2020, but the pandemic was the catalyst for a dramatic acceleration in the adoption of new technologies. The pace of that change has surprised even the people responsible for their implementation.
In 2022, we identified three ingredients that underpinned the most resilient supply chain systems: end-to-end visibility, high-quality master data, and effective scenario planning. A year ago, two-thirds of respondents said they had mastered the visibility challenge, just over half had good data, but only 37 percent were routinely using scenario planning in their supply chain operations.
This year, the share of respondents who have implemented dashboards for end-to-end visibility has jumped significantly to 79 percent, and attention has switched firmly to improving supply chain planning processes. That might be because improved visibility has revealed weaknesses in the underlying processes companies use to manage their supply chains: 71 percent of respondents say that they expect to revise their current planning processes and governance over the next three years.
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For some companies, the quest for better planning involves revisiting basics, such as cross-functional integrated business planning (IBP) processes. But many are also adopting better planning tools. This year’s survey shows an increase in the use of advanced planning and scheduling (APS) systems to match supply and demand in complex networks; 76 percent of respondents report having an APS system in place, which is a higher adoption rate than predicted in our 2022 survey. These systems seem to be delivering, too, at least for the majority; 59 percent of the companies using APS say that their planning processes require few manual work-arounds, while only 4 percent of companies without the technology make the same claim.
That nevertheless leaves considerable room for improvement, starting with the 41 percent of APS users who say that as implemented in their companies, the technology still requires too many manual interventions. Furthermore, 37 percent of respondents say that their APS systems are not being used widely enough across the organization (Exhibit 2). At these companies, significant planning decisions are likely still being made using spreadsheets and other time-consuming, error-prone approaches. And the fraction of respondents who believe their master data is good enough to support effective planning has dropped slightly since last year.
2
In interviews, supply chain leaders hinted at several reasons why APS systems were not achieving sufficient traction within their organizations. Those reasons include a lack of investment in time and resources to train staff in the use of these systems and difficulties obtaining the funding required for technical changes that would improve the quality and granularity of master data.
There has been no progress on another long-standing barrier to supply chain technology adoption: access to talent. Like last year, only 8 percent of respondents say they have enough in-house talent to support their digitization ambitions. And efforts to build the required capabilities appear to be foundering. Over the past three years, the share of companies running internal reskilling programs in the supply chain function has dropped by 27 percentage points, while reliance on external hiring has increased by 15 points (Exhibit 3). That might be good news for the job prospects of today’s digital supply chain professionals, but it isn’t clear how industry will nurture the next generation of talent that it so urgently needs. Talent scarcity is already making life difficult for supply chain leaders. “We aren’t finding the people we need in the usual spots, so we need to look in alternative areas,” says the senior vice president for supply chain at a global household products manufacturer. “We have hired demand analysts from the insurance sector, for example.”
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Supply chain risk: A game for the board
After the large-scale disruptions of recent years, supply chain risk has moved from being a niche topic to a top three item on the senior-management agenda. With the ongoing war in Europe and heightened geopolitical tensions around the world, supply chain risks remain real in many industries. But our survey paints a mixed picture of the effectiveness of companies’ supply chain risk management systems.
On the positive side, respondents report significant evolution in the development of their supply chain risk management capabilities: 71 percent say they now have such capabilities in-house, for example, and 93 percent are assessing the effect of supply chain risk in quantitative terms. “We now evaluate risks by looking at revenue, not costs,” the vice president for supply chain at a global provider of pharmaceutical solutions and services tells us. “If I don’t have this screw, it will have a revenue impact of X. Then the question is whether the impact is big enough to give you a headache.”
Yet structural and organizational issues may be hampering companies’ ability to make effective decisions based on their growing understanding of supply chain risks. Responsibility for risk management remains fragmented, for example, with many companies operating multiple risk teams within the supply chain function or bundling risk management into the portfolios of teams that are already busy with other topics. A notable exception here is the life sciences sector, where a focus on risk is well established and most companies have centralized, cross-functional risk management organizations that predate the COVID-19 crisis. As the same pharma supply chain executive puts it, “We don’t have a risk team anymore, but we know exactly who we need on board as soon as a crisis occurs. In these situations, decision making needs to be centralized to be fast enough.”
At most companies, the links between supply chain risk and board-level decision making are fragile. Fewer than half of the respondents in our survey say that supply chain risks are regularly reported at board level, and only one in ten say they have a specific budget allocation to support risk management issues. Respondents also lack confidence that their most senior leaders are sufficiently engaged with the challenges posed by supply chain risk. Only one in five feel that their supervisory boards have a deep understanding of the topic, and a similarly small fraction use quantitative KPIs and targets to help their organizations measure and mitigate supply chain risks (Exhibit 4).
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In interviews, survey respondents repeatedly expressed concern that their senior-leadership teams were slow to act on supply chain risks. “There is the potential for the board to say, ‘It is what it is,’ and not translate insights into initiatives,” says one pharma supply chain executive. “Decision making focuses on the usual issues, like new product introductions, not on resilience measures,” adds a medtech executive.
Our 2023 survey suggests that the future of supply chain resilience is in the balance. Respondents report significant progress in their efforts to improve the flexibility, efficiency, and responsiveness of their supply chains. Digitization goalsset during the pandemic have been met or exceeded, and the development of regionalized supply chain footprints continues to gain momentum.
Respondents accept they have more to do, however. Few believe that they are getting all the available value from their advanced digital planning tools, with progress hampered by weaknesses in basic supply chain processes, low adoption rates, and a perennial shortage of digital talent. This digital-use gap is likely to widen in the coming years as more advanced tools, including AI-powered systems, become readily available.
Perhaps the biggest challenge reported by respondents is keeping their companies’ senior leadership-teams engaged. In the absence of an immediate supply chain crisis, top-management focus tends to shift onto other issues. Supply chains remain vulnerable to a wide range of disruptions, however, from geopolitical tensions to natural disasters and climate change. For supply chain leaders, maintaining their hard-won seat at the top table and continually educating the board on the importance of risk and resilience will be key tasks in the coming year.
Knut Alicke is a partner in McKinsey’s Stuttgart office, Tacy Foster is a partner in the Charlotte office,Katharina Hauck is an expert in the Munich office, and Vera Trautwein is a senior expert in the Zurich office.
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