Inventory Pressures, Visibility Improvements Among Issues Challenging Supply Chain Managers

A survey recently published by global management consultancy McKinsey, entitled the “Supply Chain Pulse,” highlighted the ongoing changes in the ways companies are managing goods flow processes, including sourcing new materials, manufacturing, and distribution, as it relates to global trade and commerce, which tallies $32 billion annually across goods and services.

Vera Trautwein, McKinsey senior expert and co-author of the survey, told Logistics Management that for this annual survey, McKinsey asks companies how their supply chains have performed over the previous 12 months, the ways in which they have changed, and their plans, with the questions covering four major areas of supply chain management: network design, planning, digitization, and risk management. Trautwein said that data for this year’s survey was collected from 101 respondents, representing a wide range of industry sectors and locations on six continents, with the survey running over a four-week period from the middle of April to the middle of May 2023.

A key focus in the survey was on managing inventories, with 68% of respondents indicating that optimizing inventory levels over the next three years is viewed as a top priority for supply chain executives. But that finding came with the caveat that there is uncertainty among supply chain executives in that they are unsure how inventory management strategies will change over that time, with 22% planning to increase inventory; 29% planning to revert inventory back to lower inventory levels; 24% planning to keep inventory constant; and 26% planning to reduce inventory below pre-pandemic levels.

“Supply chain leaders are uncertain what the right inventory strategy of the future looks like,” said Trautwein. “On the one hand, we know we need risk buffers for today’s supply chains. On the other hand, we get cash flow pressures from the senior management. Public companies especially are facing these pressures due to shareholders’ expectations. Companies began to ramp up their inventories in response to pandemic-era supply chain disruptions. That led to a quarter of respondents pursuing aggressive inventory reduction goals and expecting stocks to drop below pre-crisis norms. This suggests that either these organizations historically held more inventory than they needed, or that they do not expect significant supply disruptions soon.”

The subject of supply chain visibility was also addressed in the survey, with 67% of respondents indicating they plan to take steps to improve supply chain visibility processes, but less than half, 30%, said they have completed implementation over the last 12 months.

A potential reason for that, according to Trautwein, is that improved visibility has revealed weakness in underlying processes companies use to manage their supply chains, with 71% saying that they expect to revise their current planning processes and governance over the next three years.

“We are also seeing many companies shifting focus to extending that visibility further (say upstream to suppliers) and/or leveraging that visibility to do more, for example, predictive disruptions and re-routing,” she said.

Looking at digitization, McKinsey found that while a majority of surveyed companies have invested in digitization - with most having spent more on it than originally planned - the rate of digital supply chain investment has slowed from 80% in 2022 to 71% in 2023.

Trautwein attributed that to many companies such as those in high tech, consumer, and life science industries having already digitized significantly and will not increase further.

“Consumer and life sciences companies in particular are no longer accelerating their digital investments and instead focusing on filling the digital talent gaps,” she explained.

Key findings cited on McKinsey’s “Supply Chain Pulse” survey, included:

• 95% report challenges with their supply chain footprint in the last 12 months;

• 50% report their supply chains are reliant on another region and 89% plan to reduce this dependency with a focus on Western Europe and Southeast Asia;

• 64% regionalized their supply chains with 42% bringing production closer to where they expect to sell their goods (+25% YoY) and 100% doubled backup production sites in the last year;

• 66% brought suppliers closer to their main markets (+34% YoY), driven mostly by the automotive and consumer industries, with 78% moving away from single sourcing of raw materials;

• 71% increased digitization (-10% YoY) with 92% reporting having insufficient talent to operate digitally enabled supply chains and none report improvement in the talent deficient; and;

• Sustainability is reported as the number-one topic (77%) driving the supply chain agenda in the coming three years, among others.

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