Reshaping Supply Chains: When the range of Economic Possibilities are too high

We are in unprecedented times when a demand on a stocking point could vary immensely and how would you plan your supply? On an aggregate level in an economy the range of possibilities could be varying enormously, making large swings in consumption demand and in turn supply possibilities.

How do we reshape supply chains is the question?

Supply Chains are traditionally built on a pass-though model, which means costs linearly pass through the chain from one end to the other. If the chain is not an integrated one, these costs have to go through negotiations, both internal and external and margins get added to cost as well, but the general understanding has been that costs have to be accepted as a pass through. The more integrated the chain, more cost effective it would be from factor costs, therefore.

But not anymore. The risks of such large integrated chains in a post Covid-19 world would be seen as very high, the price signals from end to end do not pass through easily; if demand on one side has to be met with supply from the other, this is far more difficult to do than with smaller regionally or locally spread ones that respond to signals better.

All this was also fine as long as the power was fairly distributed, if there was a powerful customer, he could demand certain privileges at the most, but the general equation was one of differentiation that was built on the old model of pass-through costs and therefore most supply chains are actually cost models that had powerful built-in efficiencies that came from factor costs.

Think of the most efficient erstwhile models of supply chains, they are built on scale economies, buying power in procurement, concentration of geographic advantages, logistical efficiency, footprint mapping, network effects and technological alignment to the needs of the chain from feedback standpoint.

To replace any constituent in the chain would mean factoring additional costs, such is the power of the inter-connectedness in the chain.

But Covid-19 breaks this grind and a new construct is most likely to evolve as one needs to factor in the risks that these highly efficient chains had to forbear and it assumed that costs would be a pass-through. Start with the procurement cost itself, nothing can be accepted as a pass through now. If a certain construct of a supply chain ended giving you a certain cost, the new reality is that this equation needs to be rebuilt as prices are most likely not going to clear the market. The acceptable pass-through elements like overheads, margins and part of the fixed cost in the chain is no more a given.

Take the world's most proverbial example of an integrated chain, the Apple Supply Chain, this will be clear very easily. The fundamental power in the chain starts from Procurement, no wonder Tim Cook moved up from the CPO to the CEO, such is the impact he created. But today the model of procurement would need to change very dramatically as the old construct is no more valid with very few suppliers and very large inter-connected relationships managed through contracting. This will change as Covid has shown that in a widely inter-connected network, if complete transparency is replaced with complete opacity, the costs of managing such a chain would be higher than running smaller disjointed chains with short term buy-sell relationships that would be based on more real time price signals.

Take demand on a chain and it must be met by the requisite supply or vice versa. If you have multiple stocking points where this signal is interchanged versus one single piece, in a pre-Covid-19 world, it would have a no-brainer to vote for lesser number of pieces. Are we sure in the Post Covid-19 world?

Think of the enormous risk of producing entire assembly in China by sourcing from so many countries into China and then shipping everything to U.S. and then distributing from U.S. to the entire world. Is this model going to work now? What are the risks in the near term of this model if it is again constructed the way it has been done in the past?

The problem with this approach is that value as a differentiator has to be the new approach, no more costs. But value is always difficult to decipher and measure but we could try to construct that.

In a post Covid-19 world, to start with, responding to signals quickly and efficiently more than the factor cost advantages will differentiate leaders from the laggards. Responding to shocks will be the new normal for understanding value. Risks would have to be ascertained with far more rigor.

Agility and anti-fragility are both going to be important from now on.

The smaller and closer the response points (centers of procurement, distribution, etc from the source of supply) the better it would be as estimates of demand and supply, both would not be as simple as it had been in the past.

There are new borders in the making, these borders could be undefined, not physically identifiable, but they would be starting to be operative in the markets. New rules of engagement will be in the making.

To break up large chains built over long periods of time, is also not going to be easy. Finding the spots of business as markets and spots of production centers and of distribution centers and logistics is a large piece to be put together.

India has the opportunity of the century, it must prepare well and the right pieces must be put together. Much of this will be new entrepreneurship stemming from new world view of supply chains, but a lot will depend on public investments in the right places. The new look of entrepreneurship would evolve around bold vision of where the future costs are headed in the Post Covid-19 world. These costs will settle when the dynamics of supply and demand will leave the field open for those who can sustain shocks far more effectively. These are the ones who can provide response to a shock, whether demand or supply, in a very agile manner; they would do anything to provide quick solutions to the puzzles that emerge.

Value is multi-dimensional, whereas Cost is just one. Not being able to connect with a customer in need or could be in need in the future, could be as important as the overall output from efficiency.

The supply chain must be able to contract and expand based on the dynamics of the post covid world. Understanding a demand driver correctly, shaping it and supplying it with agility under different scenarios of shocks is the new normal.

Value and Risk are the new buzzwords.