Member Article

Resilience during prolonged acute crisis: control the supply chain

The business world has become a riskier place. Supply shocks are increasing in frequency, intensity, and are coming from a wider range of sources. The Covid-19 crisis is the crowning example of the types of disruption that demand a rethink of global supply chain management. While the world has been turned upside down in 2020, there are companies who have handled the situation with grace. Their secret to resilience: supply chain dominance.

The coronavirus crisis has caused the largest global economic contraction in eight decades, according to World Bank/IMF analysis. The effect on businesses has been staggering, with as many as 51% of organisations having taken three to six months to recover from supply chain disruptions, according to a recent report. Another 17% expect to take six to twelve months to recover. The crisis has necessitated a shift in conventional thinking.

The same report indicated that 60% of organisations had to adapt their business models during the pandemic to survive, with 65% citing supply chain resilience as a priority after Covid-19.

The world, even prior to the outbreak, has become far more uncertain. Trade disputes, market volatility, and armed conflicts have left their mark on global supply chains. Researchers for McKinsey & Company recently learned through hypothetical modelling that over ten years, on average, companies can expect to suffer losses equivalent to 45% of one year’s earnings due to unmitigated supply risks. They also offered further insight: companies that invest now, in digital processes, in supply chain risk reduction, multi-sourcing parts and raw materials — can offset a lot of the harm. By acquiring greater levels of diversification, localisation, contingency planning, and agility within supply chains, companies can protect themselves from the worst eventualities.

Luxury brands survive

Covid-19 has affected industries differently, with certain sectors being far more exposed. But if we look to the retail sector, an interesting story emerges. Countless companies have been struggling to avoid shop closures, job cuts, and eye-watering revenue losses due to Covid-19 lockdowns. The crisis hit retail hard. But there are a select few companies who have weathered the storm far better than their peers: luxury brands.

What explains this resilience?

Companies like Gucci, Hermes, and Louis Vuitton, beyond having high price tags, share something in common: they are owned by large well-established luxury conglomerates. These groups have spent the last few decades carving out dominant positions in the retail sector. They often own the majority or all of their own supply chain processes. Rather than continuing to pay for suppliers and outsourcing expertise, they have acquired entities at each stage of the supply and production process. The result is a self-contained ecosystem with excellent supply chain control, price setting capacity, and company resilience.

Despite the punishing conditions of the year, the 2020 edition of the annual Deloitte Global Powers of Luxury Goods report showed continued concentration of power in the sector. The top 10 companies were the same for the third year in a row and, with their combined revenues accounting for just over half of all revenues generated by the leading 100 companies. The top three also accounted for a quarter of all sales, with LVMH and its storied history of acquisitions sitting at the number one spot.

Bean to cup

The approach is reminiscent of one familiar in the coffee world: the bean to cup strategy. Starbucks is the pro-typical example of this, with its in-house staff involved at every stage, from sourcing beans directly from farmers, to roasting and service of the coffee.

Having a vertically integrated supply chain comes with a number of benefits. One of these is the ability, through close contact with farmers, to maintain the consistency of the product around the globe. This consistency gives the brand reliability that engenders trust from consumers. Being vertically integrated also allows the company to use advanced logistics to better monitor its supply chains.

The result is that the company can monitor and react where needed. This has allowed it to survive the blows to sales during the crisis.

“I am very pleased with our strong finish to fiscal 2020, underpinned by a faster-than-expected recovery in our two lead growth markets, the U.S. and China,” said Kevin Johnson, Starbucks’s president and CEO. “The guiding principles we established at the onset of the pandemic, combined with our industry-leading digital platform and our ability to innovate rapidly, continue to fuel our recovery,” he said.

Security and resilience

A vertical integration strategy works even in highly technical or niche sectors where quality is king. Oberthur Fiduciaire, the security printer, is an example of a company taking the approach into the complex and technologically demanding field of banknote printing.

When it comes to producing national currencies, security, quality, and traceability are incredibly important. Along with the technology and the expertise, having unquestionable control over your supply chain is not merely desirable, it is a necessity.

In 2017, Oberthur Fiduciaire announced the acquisition of VHP Security Paper in The Netherlands.

“VHP Security Paper has been producing and supplying state-of-the-art banknote paper throughout the world for more than 200 years,” said Thomas Savare, CEO of Oberthur Fiduciaire.

The acquisition consolidated Oberthur Fiduciaire’s position as one of the largest and fastest growing banknote printers in the world. Most crucially of all, the acquisition secured one of the company’s most important supply needs. Together the two companies now have around 600 years of experience in a highly specialised sector.

“Part of the security of the business comes from the supply chain, which is unique to the industry” Savare said, adding: “Banknote paper is a very specific one, only used for banknotes, and manufactured by extremely niche suppliers who will only sell to recognised banknote printers”. In an industry where trust is everything, having this kind of control over the supply chain also serves that all important secondary purpose: resilience. There are no unexpected supplier problems, when the supplier is part of your own self-governed ecosystem. The company can set its own security agenda, it can integrate systems to improve traceability, and it can react to problems in a coordinated way.

Whatever the sector, having near-total control over your supply chain is one of the clearest ways of shoring up your company against severe and unexpected risks, thus maintaining trust among your customers at the highest level.

This was posted in Bdaily's Members' News section by Alexandre West .