Friday 5th Jun 2020 - Logistics & Supply Chain

Risk: A complex problem

Managing a global supply chain is getting more difficult and more risky, but the focus of Europe’s multinational companies is starkly different from that of their North American counterparts. These differences call for contrasting management strategies, but there is much that companies in the two regions could learn from each other’s approaches to supply chain risk.

In June of this year, we surveyed operations leaders and other senior executives from around the world about the risks their supply chains faced and their organisations’ strategies for dealing with those risks. 273 executives participated in the survey. More than three quarters of the respondents said that supply chain risk had increased over the past five years. A third said that this increase had been “significant”- a sharp increase over 2006, when we asked a similar group the same question. Then only a quarter saw a significant increase.

Asked about the primary influences on their supply chain strategy, however, and regional differences become immediately apparent. In Europe 60 per cent of respondents said that coping with increased complexity of products and services was having the biggest influence on their supply chain strategy. Rising energy prices were the second most important concern for European companies, cited by 33 per cent of respondents, followed by the impact of increasingly global labour markets and rising wage rates, mentioned by 25 per cent. Complexity was important for Americans too, but overshadowed by the challenges of rising fuel costs (39 per cent of respondents) and increasing financial volatility (38 per cent).

These findings might not surprise you. Europe’s already heterogeneous markets are becoming even more complex as the rapidly growing economies of the East become more important, while North America is suffering a rude awakening after decades of cheap fuel and years of easy credit. What we found most telling, however, were the different strategies being employed by the survey respondents to cope with these strategic influences.

In Europe, the focus was very much on cost savings and increasing efficiency, with 86 per cent of respondents citing a drive for increased efficiency as a key element of their supply chain strategy, compared to only 70 per cent of the North American executives we surveyed. Americans, by contrast, were more than twice as likely as Europeans to be pursuing active risk management strategies, with 60 per cent using approaches such as identifying alternate sources of supply for key components.

In our view, it is time for European organisations to adopt a similar proactive approach to supply chain risk. This is particularly important as the Europeans in our survey were a third more likely than North American firms to be increasing sourcing from low cost regions and nearly three times more likely to be increasing manufacturing there, with associated increases in supply chain length and complexity.

Despite citing complexity as a primary challenge, the European firms in our survey also seem to be less active than Americans in dealing with the issue. North American respondents were three times more likely than European ones to say they were working to increase their ability to offer differentiated products for different regions or markets.

It seems that European supply chain leaders’ relentless focus on efficiency and cost reduction has made them reluctant to take the steps to build the robust segmented supply chains needed to supply highly differentiated offerings to diverse customer groups. This attitude will have to change. In a separate, but related piece of work, we recently conducted an in-depth review of supply chain practice and performance at more than 60 companies across a wide range of industries. This analysis shows that, where segmentation is supported by effective planning processes, a well-designed supply chain network and disciplined execution, it can be achieved without incurring a significant cost penalty.

Deepak Mishra is a Partner in the London office of McKinsey & Company. Denise Paulonis is an Associate Principal in the firm’s Chicago office.

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