Innosight: When you look at businesses emerging successfully from three years of disruptions, what common themes do you see?
Craig Moughler: The businesses that have emerged stronger from the disruptions caused by the COVID-19 pandemic, geopolitical uncertainty, energy shortages, extreme weather conditions, and so on, have come to understand that the rapid changes to their operating environments are not going away. For companies that are not prepared, the disruptions can cause severe strain on results, both in the short term, and in some cases, in the longer term as well.
The better performers are not necessarily the largest companies in their industry, but those that have made a deliberate effort to design resilience into their business models, processes, and culture throughout the company.
Innosight: How do you define the concept of resilience?
Craig Moughler: Resilience, for me, is the ability to recognize and adapt quickly to changing environments, either the supply chain, regulatory, customer, or the financial environments. Historically, resilience has been applied to organizations as they prepare for and respond to crises. However, it’s not something companies can study once and then implement two or three changes because the operating environment is consistently changing. It’s more helpful to think of it as a key business process that is done routinely.
I want to spend a minute on a related concept: Agility. Agility is sometimes thought of as the ability to cause rapid change in one or more of those environments. While they are related concepts, they can be seen as distinct, as certain actions a company can take will positively impact both, but others may only benefit one or the other.
Innosight: What are the primary components of a resilient company? Where should leaders look first to build resilience?
Craig Moughler: Resilience needs to show up in many business areas. Some of the most critical ones I’ve seen are:
- Business structure: less operating leverage generally improves resilience.
- Financial structure: less financial leverage generally improves resilience.
- Channel structure: Direct selling channels can provide better information flow, and thus better resilience.
- Digital integration: Fast, complete information flow across the entire value chain improves resilience.
- Supply chain design: A supply chain that’s designed to provide short supply cycles will improve resilience.
- Culture: team-oriented cultures, which encourage horizontal communication flow and faster decision-making, even for tactical and strategic decisions, will result in better resilience.
Innosight: How are businesses changing their operational footprint or ways of operating in response to these disruptions?
Craig Moughler: Businesses have started to challenge some of their deeply seated norms when it comes to reevaluating their suite of strategies, key tactics, and operational norms. For example, in response to COVID-related disruptions, companies are rethinking their procurement and manufacturing models. At a strategic level, resilience has become a key evaluation criterion for suppliers of critical raw materials. Some companies have begun near-shoring production to reduce production cycles and eliminate exposure to long ocean freight transportation delays. Others have decided to build additional production capacity, many times closer to the customer base, to provide backup in case traditional production sources are disrupted.
At a tactical level, companies are building redundancies in the form of backup suppliers, or having flexible workforces that can easily scale up or down. Generally, any change that reduces the total supply cycle will improve resilience. Relative to operational norms, many companies have increased safety stocks of key raw material, WIP, and finished inventory.
These responses are decisions that help build resilience and many companies have started to see resilience as a key competitive advantage. For example, in a recent quarterly update, Tesla described backward integration as an avenue to build resilience. An onslaught of supply-chain obstacles has adversely affected the entire automotive industry. Tesla’s vertically integrated strategy has proven to be very advantageous when facing these supply chain challenges.
Innosight: How important is it to anticipate events in building resilience? Is it necessary to predict the types of events that could cause change, or can companies still prepare for impacts even if they don’t anticipate the specific event, such as in the case of COVID-19?
Craig Moughler: Anticipating events is an important part of the process. Certain types of disruptions, while infrequent, do happen with some regularity. A good example of this is the hurricane impacts on businesses based in the U.S. gulf coast. While the frequency of impact may be low, it can be said with some certainty that an impact will happen at some point, so designing resilience around that impact is imperative. Still, there are disruptions that cannot be predicted reliably, the so-called Black Swans, and for these, having the culture, processes, and a business model that is generally resilient is the best preparation.
Innosight: Are there any potential costs associated with building a more resilient organization that companies need to consider?
Craig Moughler: There can be costs and trade-offs involved. In some cases, there may be direct costs associated with improving resilience. For example, one common way to improve supply chain resilience is by establishing redundant production capabilities. While doing so can reduce exposure to a variety of physical disruptions, such as weather, fire, and earthquakes, it may also reduce manufacturing scale and thus increase unit costs. In these situations, it’s crucial to understand both the benefits and costs of proposed changes and balance them appropriately.
On the other hand, it’s important not to make assumptions about the trade-offs and to carefully analyze the costs and benefits of different options. It’s possible to look for ways to use operating benefits delivered in one part of the company to pay for added costs elsewhere. For example, one common theme in building supply chain resilience is to shorten the supply chain cycles, thereby allowing faster response to changes in the environment.
Normally shorter cycles can allow you to drive lower inventories, as the supply chain becomes more responsive. For certain types of disruptions, though, added safety stocks can be helpful. Some of the working capital saved by shortening cycles can be re-spent to increase safety stocks. By being both disciplined and creative in the analysis, we can many times find ways to build resilience without sacrificing other metrics of the business.
Innosight: What skill set is needed for the team that evaluates a company’s position and develops a plan?
Craig Moughler: A company’s resilience will only be as good as its most limiting factor. For example, if a company’s IT and data processes are not well integrated, it will cause, among other things, data analysis and thus decision-making to be slow. In that case, working on improving the responsiveness of raw material suppliers will not likely yield the desired results.
A systems approach will ensure that a company gets maximum benefit for their effort.
When the effort turns to developing and implementing specific improvements, deep subject matter experts are needed, as well as great project and change management skills. Of course, team members who have the right cultural attributes, as discussed previously, are important as well.
Innosight: Will the market continue to value resilience in the same way it has had over the past few years? We’re working with a basic materials company now, and while their customers are currently willing to pay more for reliability, the company has concerns about whether that will persist in the future.
Craig Moughler: That’s certainly the dynamic present in a lot of industries. It depends on the industry and the product. If it’s a standardized chemical that can be easily sourced, then buyers might not be willing to pay much more for reliability, thinking that they can always find the material somewhere else, which is possibly a dubious assumption. 1% or 2% more is a small price to pay for the ability to operate when your competitors cannot. We’ve all seen companies where the purchasing group dominates the discussion and doesn’t consider the bigger picture issues like resilience in procurement decisions, but overall, COVID has brought the importance of resilience to light.
Innosight: Who or what groups should own resilience efforts inside organizations?
Craig Moughler: I’ve always been hesitant about suggesting a Chief Resilience Officer because it becomes that person’s job, which means, implicitly, it’s not anyone else’s job. Instead, I think it’s essential to build resilience into everyone’s job. The burden is typically heavier, of course, with the supply chain leader and/or finance leader, but it’s important that all functions consider the resilience impact of their decisions.
It’s also important that the senior management group takes ownership for evaluating and improving resilience. Like all major strategic issues, it’s helpful to have periodic reviews at the level of the executive team and with the board.
This ensures that everyone is at the very least thinking about it and that they understand it. When a person within the organization identifies a risk, they’ll be open to mentioning it, because they know that senior leadership is on board.
Innosight: How do leaders advance the conversation about resilience and elevate it to the executive team?
Craig Moughler: There’s a saying, “never let a crisis go to waste,” meaning the best time to get people on board with change is during a crisis. To some degree that is true. The best opportunity may be when a crisis happens, and you’ve experienced a performance impact because of it. We had success pushing the message that resilience is critical through our organization, but it really hit home when supply was tight across the industry, and so customers began to be affected. We had opportunities that we never had before because some of our competitors were struggling with resilience.
Innosight: How does a company’s organization and culture come into play?
Craig Moughler: Organizational decisions and culture come into play to a very great degree, especially in dealing with unanticipated disruption. Companies that have hierarchical communication, centralized decision-making, resistance to change, poor process management skills, a predominantly internal focus, and poor team orientation are at a decided disadvantage. All of these traits hamper a company’s ability to see and understand important changes in the environment and make the changes necessary to survive and even thrive, in a high-change environment.
Innosight: Which systems do you think are the most effective for supporting resilience in different types of systems?
Craig Moughler: The core ERP and supply-chain planning systems are extremely important for visibility into what’s happening in a company. Having some intelligence built in is also important, but it doesn’t necessarily have to be AI. Also, having quick access to data that demonstrates what’s happening in the customer and supplier spaces is very important, and having the customer data integrated into, say, the supply-chain planning system is very helpful.
In the depths of the COVID crisis, Valvoline had daily demand data from most of their retail DIY customers, as well as their 1,700 or so Valvoline Instant Oil Change service centers. At the very beginning of the pandemic, consumer demand was extremely volatile, but Valvoline had daily visibility and could plan ahead for replenishment orders well before the orders actually showed up.
Innosight: I can see how visibility and transparency can help in situations where a company may have stock somewhere, but their supply chain system doesn’t know where it is. That would be frustrating for everyone involved.
Craig Moughler: Exactly. That’s why IT systems, particularly those that prioritize speed and transparency, are crucial. Automated processes can also be helpful, but they need to be carefully chosen to ensure they can handle the changes and workload associated with operating during a crisis. Sometimes automation is designed for efficiency, but not necessarily for flexibility.
About The Authors
Craig Moughler was the Chief Supply Chain Officer at Valvoline and retired in December 2021. In March 2023, Valvoline separated into two companies. Valvoline’s products and solutions business, Valvoline Global Operations, was acquired by Aramco. Valvoline, Inc. (NYSE: VVV) is comprised of Valvoline Instant Oil Change, Great Canadian Oil Change, and Express Care.