5 Reasons Why Your Supply Chain Design Must Change with the Times

As the COVID-19 pandemic underscores, the design of supply chains is not static — it changes in response to shifting market conditions and unexpected disruptions.

Over the last two decades or so, these design-altering events appear to have become more frequent and wide-ranging, yet company responses have not kept pace with these changing demands.

One of the main reasons for the misalignment is that enterprises are using outdated methods and data sources to review and re-engineer supply chain designs. This shortcoming blunts their ability to respond to market changes, a potentially disastrous weakness in today’s fast-paced competitive environment.

The imperatives for change

The supply chain design methods in everyday use today date back to the 1990s, when the competitive demands were different from those that firms now face. Meanwhile, the design discipline has moved on in terms of its areas of focus and the tools available to designers.

Here are five ways in which supply chain design is evolving beyond the practices of the 1990s.

1. The focus is shifting away from cost minimization and towards value creation

On the one hand, this shift in the operating environment leads to more complicated tradeoffs between design objectives such as cost versus market share.

On the other hand, it creates a more expansive design and decision-making process that ventures beyond the physical configuration of supply chains and considers factors like outsourcing, leasing decisions, and go-to-market decisions. What are the pros and cons of capturing additional revenue by meeting customers’ increasingly demanding delivery expectations versus the need to keep fulfillment costs under control?

The change in perspective also involves broader questions. For example, should firms adopt supply chain strategies that are changeable in the near term, rather than being optimized for specific conditions such as low- or high-tariff trade policies? Or should supply chains be designed for sudden changes in those policies? The relative importance of different service-related cost tradeoffs has changed.

2. The emphasis on long-term, periodic design reviews is giving way to tactical, continuous reviews

Descriptors such as uncertainty, volatility, complexity, and ambiguity define markets and the supply chains that support them. In response, companies have to be ultra-agile and able to revisit supply chain designs regularly.

In addition to keeping the company abreast of market changes, a continuous review process helps organizations anticipate disruptions and prepare for them. It is necessary to act before a large-scale disruption occurs and adjust mitigation plans afterward.

Being proactive in this way avoids having to start from scratch every time an enterprise plunges into a new crisis. Moreover, the actions taken before a crisis determine the effectiveness of the recovery operation. Preparedness has become a competitive necessity.

3. There is increasing interest in building local/regional redundancy into supply networks and multi-sourcing

In a highly dynamic, uncertain world, companies are turning to localization as a risk mitigation strategy. Recent upheavals in international trade brought this strategy into the limelight.

The Brexit controversy, a trade war between China and the United States, and the impact on trade of the COVID-19 pandemic are prominent examples of these upheavals. The upshot for many companies is that they need to reduce their reliance on customer bases, manufacturing operations, and supplier networks globally dispersed and prone to the vagaries of globalization.

As the attractions of global supply chains — enabled by low trade barriers and low-cost conveyances — have eroded, local/regional supply chain designs have gained support. In developing and implementing these designs, companies must address the complex tradeoffs and design decisions outlined in the first change described above.

4. Large-scale, research-driven operations models are evolving toward models that use artificial intelligence/machine learning and data analytics to inform and optimize design choices

This shift in emphasis is driven by recent advances in data science and a massive increase in the volume of data available to supply chain designers. Data analytics and machine learning tools elucidate the structure and performance of supply chains as never before. Modern-day network science methods highlight the complexities of relationships between trading partners.

Also, models of supply chains are now more intricate than in the past and reflective of today’s market dynamics. For example, a study carried out at MIT CTL’s Computational and Visual Education (CAVE) Lab, explored the integration of direct sales and third-party flows as well as multiple distribution channels with deliveries to consumers and stores. Moreover, it is now possible to display analytical results in easy-to-understand, intuitive visual formats that executives can quickly grasp and interpret. This high-level visualization is what the CAVE Lab achieves with its cutting-edge technology.

5. Interdisciplinary supply chain design processes are gaining ground

Given the competitive pressures and business complexities described above, supply chain design can no longer be the preserve of the supply chain function — marketing, sales, and finance need to be involved in achieving optimal performance for the organization. The advanced visualization techniques described in the previous section facilitates this shift towards multi-disciplinary design projects.

Experience from recent disruptions — notably the COVID-19 pandemic — also suggests that cross-functional crisis management teams in a ‘war room’ setting are better able to tailor effective responses than teams that only represent operations.

Migrating to a cross-functional approach requires companies to redesign relevant organizational and decision-making processes. For example, a more enlightened version of the well-established Sales & Operations Process (S&OP) called Resilient S&OP offers the ability to analyze a broader range of tradeoffs and changes in demand. Research underway at MIT CTL is developing Resilient S&OP processes that can be incorporated in the supply chain design process.

A long road ahead

The above list of five changes to the supply chain design process is not exhaustive, but it does provide a representative picture of the activity’s changing role — and the consequences of not staying ahead of the design curve.

It has always been true that supply chains should be designed to serve firms’ strategic objectives, be they resilience, sustainability, or other goals. However, to achieve this alignment and succeed in today’s unpredictable markets, companies need to move their design approaches from a cost to a value focus, from periodic to continuous, and from a silo to an interdisciplinary mode of operation. And they need to use the new generation of tools, data sources, and analytical methods geared to the challenges of the new norm.

Companies should also be aware that these changes have by no means run their course; the supply chain design discipline is still evolving. Moreover, the experience gained from managing crises such as the COVID-19 pandemic will likely accelerate the pace of evolutionary change. For example, perhaps we will learn how to implement more structural changes to organizational decision-making processes in light of these experiences.

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