measuring supply chain resiliency

How To Measure Supply Chain Resiliency

Each year the Oxford English Dictionary publishes a list of trending words. Recent examples have been "chillax" (a combination of chilling out and relaxing) and "binge watch" (watching consecutive television series). In the world of supply chain, “Resiliency” would probably be the winner. Geo-political uncertainty, COVID, increased clock speed of supply chain and more climatic disruptions are some of the forces that have driven this topic to prominence. 

Everyone agrees that Resiliency is a good thing. But how do we measure it? How can we judge whether our supply chains are getting more or less resilient? And how much does it cost to achieve resiliency?

Resiliency is aiming to counter three situations:-

• Protecting against every day fluctuations, usually short term. 
• Protecting against unexpected events on a larger scale - mid to long term.
• Recovering from the effect of catastrophic events 

We focus more the medium to long term. We outline six levers of resiliency, each with associated key performance indicators (KPIs) and costs. 

1.  Supply Chain Configuration

Supply chain configuration is about where are sites located in relation to customers. The choice to single, dual or multi source is an important element. And when we say dual sourced we mean truly dual sourced, not just having a second plant that can produce only a fraction of the required quantities. With multi stage production, for example Drug substance or API, Drug Product and Finished Product the dual sourcing can become complicated. But the target should be to secure the markets which represent 70% of sales. 

KPI – dual sourcing %, % demand met from same region

Costs - additional costs from the loss of economies of scale, cost of excess capacity

2.  Capacity

How much production and distribution capacity is available compared to demand. This is for both internal and external sites. External manufacturers will not usually share the capacity availability so it will be a matter of judgement.. The difference between operating and installed capacity always needs to be made. Extra shifts or modifications to equipment can be made but often the lead-time for this can be a year or more. 

KPIs - Estimate of spare capacity available 

Costs - extra investment for excess capacity

3.  Supplier Reliability

What is the OTIF performance of the sites that are supplying our supply chain, both internal or external sites? Managers need to show a demonstrated run rate which is what the plant has actually produced during the last 2-4 years, not what the plan says. A plant may run 5 days per week but if the adherence to schedule is only 80%, in effect that is 4 days per week. 

KPI – Supplier OTIF or similar measure, adherence to schedule or plan (ATP, ATS)

Costs - Efforts to improve ATP and ATS

4.  Inventory

This is the most traditional of resiliency measures. Little more needs to be said about this except that inventory needs to be measured at all stages - raw materials, drug substance, drug product and finished product. Time to convert is important for companies which keep stocks of pre-finished goods. 

KPIs - inventory days cover and safety stock levels. 

Costs -  inventory carrying costs

5.  Critical Direct Materials

How many of your raw materials are secure? Product owners should have an idea of what are their critical raw materials. This topic has become more important since COVID and the Ukraine war. Keeping track of thousands of raw materials is not easy and is an example of where automation and some machine learning can assist. 

KPI - % Of Critical Raw Materials that are Secure, % of revenues reliant on particular raw materials 

Costs - loss of purchasing power by splitting the expenditure over different suppliers. 

6.  Forecast Predictability

The plea for more accurate forecasts will continue to be made for centuries after this article is written. But knowing what your forecast accuracy and bias is an important starting point.  For a large pharma company, it was important to track the % of volume that came from China which had the greatest effect on volatility. 

KPI – Forecast Accuracy % and Bias %, % of revenues coming from highly volatile markets

Costs -  opportunity costs of stock out : actual cost of investing in people and capabilities for forecasting

None of the above measures is new or revolutionary. Putting them together into a consistent scorecard does, however, require commitment. It is also possible to work out the cost of providing resiliency as an insurance premium. Typically this is 0.5% to 2%. 

Resiliency and AI / ML / 4.0

There is now huge investments going into automating and equipping supply chains with Artificial Intelligence, Industry 4.0 and so on. We believe that this can support the provision and aggregation of the critical KPIs listed above. It will not, however, be a substitute for supply chain managers who have their finger on the pulse of global supply chains. They should always have an answer to the questions "What are your top 5 supply risks?" and "What actions have you taken to mitigate them?"

Contact us to assess how resilient your supply chains are