Manufacturers have to stop treating supply chain disruptions as one-offs, McKinsey says — it's time for CEOs to make resilience a core competency

  • McKinsey & Company has been working with clients to make their supply-chain management more resilient.
  • But according to senior partner Asutosh Padhi, companies need their supply chains to be efficient as well as resilient — they can't overdo the preparation for disruptions such as the COVID-19 crisis.
  • Instead, companies need CEOs and CFOs to concentrate on overall supply-chain fitness, preparing them for large and small challenges.
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The coronavirus was the first major shock to the intricate network of supply chains that keep the auto industry humming since the Fukushima nuclear disaster in 2011. 

Fukushima hit Japanese car production hard because factories in that region of the country were supplying factories around the world, including in the US. 

Honda and Toyota recovered relatively quickly, but the accident spurred a discussion about how to improve the resilience of supply chains, the management of which is critical to a globalized system of "just in time" manufacturing, where companies maintain lean inventories and calibrate production to match demand.

No one talked enough, however, to prepare for the coronavirus pandemic. In late 2019 and early 2020, the virus idled auto manufacturing in China, the world's largest market, before later shutting down North America and Europe for more than a month.

Going beyond resiliency

Carmakers are still grappling with the ongoing impact of revamping their operations to stress worker safety, and those moves have extended to the convoluted supply chain that feeds into the assembly plants.

"Resilience not a new topic," Asutosh Padhi, a senior partner in McKinsey & Company's Chicago office who works with industrial clients, told Business Insider.

"But for the first time, in 2020 100% of company boards have had a discussion about resilience in supply chains."

Zeroing in on supply chains has indeed become a priority for the leadership of the world's largest companies.

"I am spending more time anticipating where new issues may surface, and trying to get ahead of them to the extent possible to ensure we continue to support our employees and customers," Alicia Boler Davis, Amazon's VP of global customer fulfillment, told Business Insider earlier this year.

"This is a CEO-level topic that's transformational," Padhi said. "Everybody has been to the emergency room. Now it's time to go back to the gym and to look at the fitness of supply chains."

From Padhi's perspective, the challenge is actually more difficult than simply anticipating future disruptions and planning for them, specifically.

Resilience should be a capability

Instead, companies need to think of the overall readiness of their supply chains.

"COVID is just one disruption," he said, explaining that firms are now stress-testing their networks by considering issues such as cybersecurity, geopolitics, and regional bankruptcies.

"All of those have been explained away as one-off isolated events, as opposed to thinking of resilience as a capability," he said.

He added that developing broad, supply-chain resiliency isn't something that can be tucked away in large bureaucracies. That's because leaders don't simply want their supply chains to be resilient, they want them to be efficient. And McKinsey's clients have argued that they don't want a trade-off.

"It's a CEO- and CFO-led topic," he said. "It can't be delegated."

It also demands what Padhi referred to as "imagination." And that starts at the top.

"You're building the mindset of the leadership team through the right set of people who can ask questions and lay out a transformational road map," he said. "If you don't do that, you'll swim in the complexity."

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