DNV GL Lietuva

Business Assurance - Viewpoint

Competitive advantage through supply chain resilience

General insights

Pandemic disrupts supply chain flow and cause financial impact

More than half (56%) of the companies experiencing negative business impacts due to COVID-19 connects this to supply chain disruptions. The movement of materials, supplies and goods seem to be particularly hard hit. A total of 44.6% indicated delays in supplies as the main disruption, while 34% suffered logistic issues and 24.3% experienced limitations to international trade.

The disruptions have resulted in reduced sales and revenues for 56.4%. Moreover, 39.1% have experienced reduced production and for 34.8% operational costs increased.

COVID-19 Negative impacts on business continuity

Many have a structured supply chain risk management approach

Companies are working actively and applying a well-rounded approach to manage supply chain risks. It starts with identification and assessment of risks (76.7%), identification (45.2%) and implementation (41.6%) of mitigation actions, and monitoring of implemented actions (50%). However, companies’ efforts seem to mainly be targeting the closest suppliers. While 58.8% report mapping direct suppliers (tier 1) only 26.2% report mapping of sub-suppliers (tier 2 and beyond), exposing the need to penetrate deeper for more comprehensive control.

Supply Chain risk management approach

COVID-19 emphasizes supply chain risk management benefits

The ongoing pandemic is pushing supply chain risk management higher on the agenda. Before hit by the COVID-19 crisis, 34.9% considered their company-approach to be mature.  During the pandemic, the share of companies self-assessing their approach as mature has increased to 42.2% (+7.3 percentage points). This underscores the advantage of active supply chain management as well as a sense of urgency caused by the pandemic.

Supply Chain risk management approach

Operational issues and market situation dominates risk picture

Not surprisingly, the epidemic/pandemic (41.5%) is high on companies’ lists of important supply chain risks. However, it comes behind shortage of manpower and competences (47.6%), market volatility (46.8%), product quality and safety issues (43.5%) and financial/bankrupt (41.9%).  When looking at what companies point to as the single most relevant concern product quality and safety issues stand out. The pandemic could certainly be said to indirectly influence the other risks; however, it seems that the main risk picture is largely driven by factors such as competence and capacity, market, and product quality and safety.

More relevant risks in supply chain

Communication and monitoring are core to mitigating actions

A high number of companies seem to follow the 4-step best-practice in mitigating supply chain risks. The starting point is to communicate expectations to suppliers (57.4%). Then follows request to provide specific information (44.2%), carry out audits (40.9%), and request suppliers to implement improvement actions (38.9%).  It is interesting that 33.5% indicate that they have expanded the supplier base rather than shortening it (5.5%).  This could indicate that companies systematically try to spread the risk, rather than betting on one horse. The pandemic has highlighted a new level of unpredictability and instability that companies must be equipped to face.

Actions to mitigate identified risks

Product and market volatility concerns drive similar actions

Companies for whom product and safety are of greatest concern tend to focus on structured dialogues and continual improvement. This starts with clearly communicating expectations (74.9%), requesting improvement actions (67.4%), asking suppliers to provide specific information (62.3%) and carrying out assessments (58.6%). Companies most concerned by financial issues tend to follow a similar pattern. A total of 65% communicate expectation to suppliers, 51.4% request specific information, and 49.3% carry out assessments.  On the other hand, when market volatility is considered the main risk, companies tend to first and foremost expand their supplier base (52.6%).

Strategies implemented in order to mitigate identified risks

Pragmatic solutions applied to ensure continuity

As many as 2 in 3 companies have taken action to mitigate supply chain disruptions. A more flexible and collaborative approach has been necessary to preserve continuity. The pandemic has hit globally, leaving few geographies untouched. Companies have been left with few options but to deal with the problem in a solution-oriented way. A total of 31.4% have allowed more favorable lead times and delivery deadlines, 25% have maintained orders despite reduced sales, 19.8% have reviewed more favorable commercial terms and conditions for suppliers, and 17.7% even assisting with operational or technical advice.

preserve Supply Chain continuity

Constraints force alternative ways to qualify suppliers

Onsite audits at supplier facilities have been reduced for 28.4% of the companies during the pandemic. The drop has partly been compensated by increased use of remote auditing and document-based qualification of suppliers.  The alternative methods have been vital to companies’ supplier qualification programs and contributed to almost closing the gap left by reductions in onsite audits.   It is encouraging to see that 51.8% believe that remote audits can effectively contribute to their supply chain management efforts. While an immediate mitigating action forced by the pandemic, the quick application provides insight for companies, auditing partners and scheme owners alike on how to benefit long-term. Remote audits in combination with on-site audits, when and where permitted, could compliment and create efficiencies for most supplier qualification program.

Impact of Covid-19 on qualification/approval of suppliers

COVID-19 fuels strategic changes and technology adoption 

COVID-19 is leaving a mark on companies’ supply chain strategies over the next 3-5 years. The main change planned span is to select alternative suppliers (57.3%). Then follows at lower rates: revising supplier qualification criteria (36.2%), introducing digitalization (35.9%) and reviewing stock management practices (35.4%).  When looking into the technologies already applied or considered for use in the next 3 years, 40.6% point to remote audits.  A total of 35.8% are already using or plan to adopt big data analytics processes to enhance decision making and 27.7% are already using or contemplating application of blockchain technology to enable traceability.

Supply chain strategy due to  Covid-19 crisis

A sustainable supply chain is considered more resilient 

A high share of companies (80.5%) considers a more sustainable supply chain to also be a more resilient supply chain. Over the next 3 years, 37.5% will require suppliers to provide information about sustainability and 36.8% will enter into a dialogue with suppliers to enable a shared understanding of sustainability challenges. External audits on sustainability topics will also become more common, but currently companies are intending to apply own protocols (16.2%) and wanting to apply a recognized audit methodology (13.8%) at lower rates.

Considering sustainable supply chain like more resilient

Manufacturing-based industries hit harder

The negative impact caused by COVID-19 varies by industry.  Manufacturing-based companies seem to suffer particularly hard. For example, among the automotive companies a total of 66.6% vs. 55.8% on average indicate negative impacts caused by supply chain disruptions. Among manufacturers of fabricated metal products, the number increases to 63.4%. As a result, companies in these industries seem to face significant financial consequences. In automotive, a total of 76.8% experienced reduced sales and revenues and 56.8% had to reduce production. Among the metal manufacturing companies, 61.7% experienced reduced sales.   Other industries seem to face less severe disruptions and consequences. In the food and beverage industry, for example, 46.9% vs. 38.7% on average indicate no or limited impact.  While 48.8% of the food and beverage companies reported reduction in sales only 30% experienced operational constraints. The picture is similar in the ICT sector, where 51.5% did not experience disruptions and 32.4% reported not suffering from significant consequences.

VP 20Q4 Gen Insight 11