Supply Chain Roundtable: Trade Uncertainties, Climate Disruptions and Ascendant AI
Supply management organizations are seemingly under constant threat of disruptions or other forms of the unexpected, and the technologies and tools to avoid or mitigate them are continuously advancing.
Those dynamics are the focus of Inside Supply Management® Weekly’s newest regular feature, a monthly roundtable of experts from Institute for Supply Management® (ISM®). ISM’s Publications team never hesitates to tap their knowledge for articles, and their names are familiar to those who have taken a course from ISM or heard them speak at an Annual Conference or other event.
Thomas W. Derry is ISM’s CEO, Jim Fleming, CPSM, CPSD, is Manager, Product Development and Innovation, and Paul Archiopoli, C.P.M., CPSD, CPIM, CMFGE, is a Subject Matter Expert.
With Donald Trump returning to the White House, another climate disaster and the dawn of what could become the year of artificial intelligence (AI), the trio had a lot to discuss.
Q: What approaches should companies think about regarding the tariffs and other protectionist policies likely to come? Our January/February magazine cover story detailed some of the other uncertainties and “we don’t knows” regarding economic policy — how can supply managers be prepared for the unexpected?
Derry: As we have witnessed in the early days of the Trump administration, measures such as tariffs can be imposed or threatened in non-predictable ways. The administration is using tariffs not so much as an economic policy measure but as a political cudgel, as was recently the case in threatening tariffs and sanctions on Colombia if that country refused to accept deported immigrants. That suggests that the most proactive supply chain strategy is not to find new suppliers in tariff-exempt countries — which is costly and time-consuming, even in the best of times. Rather, a company should determine its short-term strategy (or strategies) for when tariffs are (expectedly or unexpectedly) imposed on its imports. These strategies range from absorbing the tariff and looking to offset the increased cost elsewhere in the business, sharing the tariff burden with suppliers, passing the additional cost on to customers, buying ahead of the imposition of tariffs, or identifying acceptable tariff-exempt substitutes where feasible. Longer term, as today’s fluid environment becomes more stable, companies can consider reconfiguring their supply networks to avoid tariffs.
Archiopoli: Preparing for the unexpected can be a double-edged sword. A mentor once told me “When you hear hoofbeats, think horses, not zebras.” In other words, stick to the basics and don’t overthink the situation. The threat of tariffs may be much ado about nothing or little more than negotiating position. Supply managers can be prepared by coordinating with their sales and operations planning teams to develop strategies that inform stakeholders where they see risk in terms of supply as well as potential increased cost and developing risk reduction strategies across ISM’s Integrated Supply Chain Model — plan, source, produce and deliver — since supply managers cannot normally act unilaterally. Tried and true strategies include dual sourcing, hedging, safety lead time and safety stock, and buying supplier capacity.
Fleming: Paul is spot on with the “tried and true strategies, including dual sourcing, hedging, safety lead-time and safety stock, and buying supplier capacity.” These fundamentals establish a solid baseline. Another area gaining traction in supply chain management is scenario planning. This process has traditionally been an executive-level business activity, but it is evolving. Plausible supply chain scenarios are explored with potential strategies defined for each scenario. Leading indicators and/or market trends are outlined to flag an emerging scenario, thus providing a more proactive approach to dealing with such change.
Q: Just as companies exhaled when the dockworkers and East/Gulf coast ports reached a tentative agreement, the California wildfires erupted. For what supply chain disruptions from the fires must be prepared? Are these two events just more examples of the “new normal” of constant disruptions and unpredictability?
Archiopoli: There is nothing new or “normal” about potential disruptions, they have always been there and always will be. The best way to “be prepared” is to have detailed plans in place that identify and mitigate risk. These usually are written plans that specifically detail what actions are to be taken in case of “unplanned events.” Additionally, it could be helpful to reflect on force majeure and when it’s necessary.
Fleming: Supply chain disruptions have always been present, but the general public is becoming increasingly aware. ISM’s origination — as the National Association of Purchasing Agents (NAPA) in 1915 — stemmed from the need of the U.S. government to help control World War I supply shortages and procurement. Early practitioners realized that applying systems thinking, math and science created a more stable supply chain. As the profession evolved, corporations understood the impact disruptions could have on both the bottom-line costs and top-line revenue. Companies and employees continue to transform their strategic capability to adapt and thrive in such circumstances.
Derry: Weather- and climate change-related supply chain disruptions are increasing in frequency each year. As a risk factor, it’s no longer a case of “if,” but “when.” In the wake of the pandemic, more companies are embracing a dual-sourcing strategy, choosing to optimize resiliency. It would make sense for companies to understand their supply networks at the sub-Tier-1 level, identify locations more prone to natural disaster disruptions (for example, those near coastal areas, with a history of hurricane or tornado activity, or subject to drought). At a minimum, companies should make sure those suppliers have a robust business continuity plan for such contingencies.
Q: AI is top of mind for many procurement organizations regarding what they’d like to learn and leverage this year. What are the uses that can provide the greatest and most immediate ROI?
Derry: CAPS Research just published research findings for its members on this topic. In the context of risk mitigation, one of the top five use cases for the use of AI in procurement as cited by practitioners is identifying supplier and business continuity risks. (Editor’s note: CAPS Research is the Tempe, Arizona-based organization in strategic partnership with ISM and Arizona State University; Derry is co-interim Executive Director.)
Archiopoli: AI is most definitely a hot topic. The “easy uses” are things like automated planning/forecasting, PO automation and route planning. My personal point of view is that the current maturity level of AI is most productively employed in spend analysis, digital twinning and generation of complex RFP.
Fleming: Paul highlights areas that AI is already impacting the supply chain. But a limiting factor facing many corporations is the fear of the unknown. Progressive companies are adopting governance standards to enable additional exploration of AI. Like many technologies, early adopters are ready to move forward and can benefit from boundary conditions provided by an internal governance board. Google, IBM and IHG Hotels & Resorts are some of the more progressive organizations leading the charge through enabling ideation and exploration by employees.
Q: During the coronavirus pandemic, many companies and procurement organizations developed strategies to improve their flexibility and agility. What lessons from COVID-19 should be especially valuable in a global environment that remains volatile?
Fleming: Significant progress was made post-COVID with strategies such as expanding visibility and risk mapping of Tier-1 supplier (and some cases Tier-2 and Tier-3) spends, geographies, transportation modalities, warehouse locations and alternate sources. Risk mitigation plans were created based on probability of occurrence and impact to the business. Although not completely infallible, such strategies have created a more robust supply chain.
Archiopoli: My perspective is that COVID-19 was a wakeup call to develop more flexible and agile processes and that happened to some extent. But frankly, it was more of a reminder to execute on common-sense basics like having inventory planning and safety stock, particularly for “fast moving” items.
Derry: Perhaps the single most important supply chain lesson from the pandemic was the realization that a singular focus on cost resulted in overlooking critical factors related to assurance of supply and resiliency. CEOs and boards of directors awakened to the fact that lack of supply produces many undesirable results, including foregone sales/revenue, loss of market share to competitors, an increase in work-in-progress inventory — all of which lowers working capital efficiency. Each of these outcomes is arguably more damaging to the company than higher costs associated, for example, with dual-sourcing strategies. Trade-offs must be made, and a company needs to decide which trade-off scenarios work best for it.
(Image credit: Getty Images/Pakorn Khantiyaporn)