The Supply Chain Masterclass - Disruption and Resilience

Supply Tech Insights invited me to share my views on disruption and resilience in times of Covid-19 at their masterclass. It was my great pleasure to join Rebecca Liao, Co-Founder and Executive Vice President Skuchain, a California-based company that empowers enterprise supply chains with blockchain to discuss resilient supply value networks. In this post, I elaborate on some areas Rebecca and I touched upon during our conversation, which took place on May 12th, 2020. This article is structured along a number of questions that came up during and around the discusssion.

1. With Covid-19 threatening globalization, do you think more supply chains will become vertically integrated and try to avoid going abroad to save costs and escape geopolitical pressures? 

Covid-19 has triggered a global crisis and it hardly matters whether a supply chain is vertically integrated, or whether the factories are in China, India, Italy, or Mexico. Companies have been hit everywhere and along the entire chain. Of course, those that operate largely within nations or blocs do not have to deal with the border restrictions or sudden regulatory changes – at least theoretically. Regarding vertical integration, I believe that companies have believes which hardly change. It is part of their culture. Leadership teams that do not believe in the benefits of vertical integration will probably not change their mind. Those that do, however, have the chance to buy assets at lower prices compared to the times before the Covid-19 crisis. Consulting firms and investors stress that it is in a downturn where the most rewarding purchases and investments are made. A wave of acquisitions and consolidation is to be expected.

In respect to relocation of supply chains, I think that we will not see much change but the continuation of the pre-coronavirus outbreak trends.

With a world that is becoming increasingly inclusive and balanced, supply chains are more and more regionally and locally concentrated.

• Goods-producing value chains have become less trade-intensive. While industrial output continues to grow in absolute terms, the share of goods traded across borders is shrinking.
• At the same time, a new globalized market has emerged. Already today, national statistics attribute 23% of all trade to services, a sector which is growing over 60% faster than trade in goods.

Bringing production of strategic products, like personal protection equipment (PPE) back to individual countries is something I do see happen in the future. But despite the concerns about the world’s high dependency on China’s manufacturing ecosystem, the United States-China trade tensions have clearly shown that it is hard for countries to grab new supply chains at scale even when they are offered to do so. Vietnam for example took on a lot relative to its GDP, but little of China’s market share; and beyond Vietnam and Mexico there was not much migration of flows. Bringing supply chains to Europe and the U.S. requires to significantly reduce cost which can only be achieved through automation in fields where automation is possible.

Supply chains seek opportunities and move away from constraints.

They are attracted by the opportunity to serve markets, including the large ones, like the U.S., Europe, and Asia, where about 50 percent of the world’s population lives. The enjoy the possibility to produce in countries where conditions are favorable, like in China, which offers a high-performance manufacturing ecosystem. India provides an edge in business process outsourcing and information technology, while Mexico is strong in automotive etc. etc.

Constraints are also manifold. Some products cannot even be dual-sourced due to their uniqueness. Raw materials supply chains cannot be shorted as raw materials are where they are. Food cannot be produced everywhere. Citizens in countries, from Germany to South Korea do not accept factories in their neighborhoods anymore – because they fear pollution and accidents. In some countries, unions make it regularly difficult to operate etc. etc. On February 17th, 2011, Steve Jobs explained to then President Barak Obama during a dinner that there were nowhere near enough trained engineers in the United States (U.S). The New York Times added in 2012 that “Apple’s executives believe the vast scale of overseas factories as well as the flexibility, diligence and industrial skills of foreign workers have so outpaced their American counterparts that “Made in the U.S.A.” is no longer a viable option for most Apple products”. The views at Apple might have changed with the new leadership, but the reasons mentioned in 2011 point out some of the factors that attract supply chains and what makes them relocate.

The world of trade is constantly evolving, and we are just entering the next phase, which is revolving around technology and digitization. The global digital economy is emerging. Which may turn out to be two, as we are moving towards two competing blocs with two sets of standards: one Chinese-centered with possibly Asia and Africa following, and a U.S.-centered block with Latin America and Europe possibly joining.

2. As minimizing costs has been the primary request to supply chain managers and as resilience does not allow to design the most cost-effective supply chains, how are companies going to manage the tradeoff between going lean versus building resilience? 

The objective should be to achieve “lean resilience”. A state where resilience is part of the design and daily supply chain management practice. It is a way to “instantly amortize the investment” in resilience through the productivity gains and cost reductions achieved through using the same digital tools, like supplier and shipment monitoring and asset tracking solutions for example.

Supply chain resilience has multiple dimensions. It spans from avoidance to response, to rebound, to stabilization, to learning. It has organizational, planning and management implications. Companies are currently focusing on the following non exhaustive list to ensure supply while avoiding shocks:

• Supply chain and stock keeping unit (SKU) rationalization – we will see efforts to reduce the number of SKUs.
• Procurement and sourcing practices – single sourcing SKUs will be scrutinized.
• Supply network intelligence – supplier mapping will be expanded.
• Supply network design – we will see more China plus strategies.
• Ecosystem intelligence – big data analysis and data/intelligence services will rise.
• Supplier monitoring – 24/7 supplier monitoring will be the standard.
• Demand forecasting – planning cycles have been reduced from 13 to 4 weeks.
• Manufacturing agility – changeover and ramp-up times will be reviewed.
• Physical distancing – continuing operations in times of pandemics.
• Decision-making – leadership processes will be optimized and accelerated.

These different areas do have specific realities, challenges and trends.

Supply chain managers naturally push for reducing SKUs. But it is the marketing team that holds against it to provide choice to customers. Hence, SKU rationalization is not a new topic. But in the wake of Covid-19 SKUs are expected to be reduced.

Companies are aware of the risks that comes with cost-optimization. Supply chain managers avoid single sourcing whenever they can. But some goods are unique and cannot even be dual-sourced.

Companies that have extensively mapped their supply chains, like GM for example, navigate Covid-19 better than those that have not undertaken the exercise. They can do this because they know their suppliers, the locations, capabilities, capacities, and constraints and are able to switch easier between different options and locations. Provided that there are suppliers left to choose from. Which is not a given during a global crisis.

Knowing your suppliers is good, however, knowing as well all what is happening in the entire ecosystem is better. Seeing a disaster arriving helps avoiding damage. Big data analysis provides information about adverse weather conditions, labor disputes, congested roads, infected people in a specific area, etc. etc. Intelligence services provide analysis or data that feeds internal analytical tools.

Asset tracking and shipment monitoring also improves resilience. The drop in sensor cost made asset tracking and shipment monitoring affordable and widely accessible. With broader adoption and further innovation, the costs of such systems will continue to decline. Skuchain offers a blockchain-based Inventory Tracker that provides just-in-time data across the supply chain ecosystem and Roambee, a company I am involved in offers an internet-of-things based solution for inventories and shipments.

Currently our forecasting systems fail us because of the high level of supply chain disruption. Planning cycles need to be shortened. Traditional demand forecasting techniques are going to be replaced by real-time demand sensing. That is where machine learning (ML) comes into play to create a much more accurate forecast based on the current realities of the supply chain.

Manufacturing agility is needed to respond flexibly when demand collapses or explodes. It is about using the same production line for different products with easy and quick changes of dies.

We also need to learn to continue operating in times of pandemics. There are potentially more waves and new pandemics in front of us. It is unthinkable for me to close half of the entire economy each time.

Finally, digital platforms and tools, data and data analytics are only as good as an organization’s ability to make use of the information generated in the decision-making process. Supply chain leaders are fast, fact-based, agile, and learning organizations.

3. Inventories can help to absorb shocks. Given the fact that disruptions are becoming more and more common, how are the inventory strategies of organizations going to change?

Supply chains are material in motion, which is another way to say cash in motion. Therefore, companies try to reduce inventories or get them financed by someone else. Skuchain offers an innovative way of inventory finance.

I do not believe that the solution lies in higher levels of inventory. Let us take again the example of PPE. Of course, stocking strategic items like masks is useful. But the questions remain how to manage these stocks and what is the right volume to have to be safe when the crisis hits? The most effective answer to disasters and disruptions is agility. Seven aspects come to my mind which can help to deal with supply shocks and demand hikes.

• First, distributed manufacturing which allows for smaller production sites distributed across the planet, closer to the market with shorter lead times.
• Second, flexible production lines that allow quick changeover or single-minute-exchange of dies (SMED), enabling swift switches between the production of different products to increase flexibility.
• Third, the quick ramp up, i.e. the ability to rapidly expand production capacity in times of sudden high demand.
• Fourth, digitally enabled visibility of inventory to know whether and where available stocks are located.
• Fifth, fluid borders and open critical infrastructure like ports and airports as well as sufficient transport capacity to move stocks to the places where they are needed.
• Sixth, a standard for essential workforces to ensure that crews reach their planes, trains, trucks, ships, and homes.
• Seventh, a form of global alignment and governance to ensure optimal distribution of essential goods.

Covid-19 is a system shock which requires a system response. We have seen a lot of shortcomings in our answer to the current pandemic and need to upgrade or response mechanisms.

4. What kind of innovations can we expect in supply chains now that most companies have suffered financial losses in one way or another? 

Based on my discussions with the C-suit and my observations in the work with companies, the leading players are going to continue to invest in innovation.

As with everything, also innovation is disrupted by Covid-19 which puts a bit of a break in the innovation process. But I expect that this slowdown will be largely overcompensated by the demand pull that can be expected once the crisis is over. This new coronavirus outbreak has been a wakeup call for many corporations and governments as it clearly demonstrates the importance of digitization and digital tools.

I am convinced that we will witness an acceleration of the adaptation and adoption of existing digital solutions, accompanied by a wave of innovation:

• I expect more automation. “Thirty-four percent of financial leaders surveyed plan to leverage automation to improve the speed and accuracy of decision-making within their supply chains,” reports Supply Chain Dive. As robots are very specialized the demand will spark the need for more innovation.
• Robotic process automation (RPA) is part of the “automation package”.
• The surge in demand for visibility will bring sensor costs further down opening up avenues for new products and services.
• Supply chain analytics and data services will be financed to step up. Artificial intelligence (AI) healthcare startups raised more than $2.5 billion last quarter, according to data research firm CB Insights. AI will be a driver of innovation, enhancing supply chain solutions.
• The analytics also includes supplier matching tools, which will make it easier in the next crisis to locate suppliers of essential goods.
• Covid-19 showed the need for demand sensing solutions, as many demand forecasting tools fail us.
• Innovation in supply chain and trade finance will be in high demand, considering that cash is expected to be tight.
• Computer vision will drive innovation in the field of physical distancing and safety to ensure operating in times of pandemics.
• A surge in innovation can particularly be expected in the field of remote operations or managing access to enterprise systems from everywhere, not only from home.
• Finally, cybersecurity needs to innovate to deal with the new risks resulting from decentralized access to company systems.

Covid-19 will be an accelerator of digital innovation across the economy, addressing perceived and real pain points, currently negatively influencing customer experiences.

5. The crisis has shown that transparency in supply chains allows organizations to better react. Will companies change their data management practices and invest time in establishing transparency to eliminate organizational silos?

We are at the advent of exponential digitization. This will bring much more data and transparency. So much is still to come. According to a recent EY poll, only 6% of respondents are very confident in their systems and capabilities for end-to-end supply chain visibility.

Silos are very resilient. They demarcate territories. They mark areas of responsibility and sovereignty. Many people find it hard to live in a world of flux, where roles are constantly changing and where influence is determined by the value of our competences and experience in the context of a specific temporary assignment.

However, new generations and the gig economy, flat, fluid, and flexible organizational structures and digital tools and platforms are gradually changing the silo-thinking and behavior. Younger generations have different priorities, preferences, and habits. They are used to open source, to WhatsApp groups, where everyone sees everything. They are digital natives navigating large online communities. They demand free access and experiences. The gig workers place freedom and flexibility above territory and regular paychecks. Which all together announces the possible end of the siloed world.

6. What about the elephant in the room? What will happen to China's role as the production hub of the globe?

The global demand and supply networks have been rattled by the Covid-19 outbreak, or more precisely by the public and private sector measures, such as massive flight cancellations and border regulations with significant impact on our social and economic lives. This led to calls by national governments to rein in global supply chains and bring manufacturing back home. “Japan has earmarked $2.2 billion … to help its manufacturers shift production out of China as the coronavirus disrupts supply chains,” reports Bloomberg. India and the U.S are moving into a similar direction.

However, the trade and maritime industry with its giant ocean vessels are not banking on a retreat from globalization.

“China will continue to be the world’s factory because nothing else comes even close,” says Peter Sand, chief shipping analyst at industry trade body BIMCO. This is a believe, which is in line with the outcome of an American Chamber of Commerce in China survey conducted by PricewaterhouseCoopers in March 2020. More than 70% of the respondents said they had in the short-term no plans to relocate production and supply-chain operations outside the country because of the pandemic. Alan Beebe, president of AmCham China, said in a statement “In contrast to some global narratives, our China-based data suggests that the majority of our members won’t be packing up and leaving China soon”.

I believe that China has built significant competitive advantage over other countries. It is not simply about moving factories but entire ecosystems with infrastructure, business environment, workforces and abilities need to be transferred. Achieving such a move requires to overcome many hurdles and close many gaps in the countries that wish to attract supply chains. Huge investments are required to build new ecosystems, possibly more in the range of trillions than billions of dollars. Nevertheless, new offers will be made by various countries to grasp some supply chains. Among these are countries in Southeast Asia and South Asia, the Middle East and North Africa (MENA) region and Latin America.

7. How are companies improving their e-commerce reach? Will we see more third-party logistics (3PL) and fourth-party logistics (4PL) companies coming to the fore?

Millions of people hunker down at home. They are adapting new routines, habits, preferences and even lifestyles. Online has become an especially important channel to cover our needs during the outbreak. E-commerce is now even more entrenched in how we browse, buy, and get things brought to our homes.

Companies respond to the trend. Nike was a first movers. The brand heavily promoted online shopping in recent months. In March, the sportswear company reported strong earnings. Online sales in Greater China rose more than 30% in the first quarter of 2020. A free app introduced in China contributed to this success. Through a virtual "training club", the Nike platform encouraged users to work out from home. In parallel, several products, including limited-edition sneakers such as Air Jordans were launched online. According to CEO John Donahoe, the weekly active users for Nike’s activity apps shot up 80%.

E-commerce requires strong logistics partners. Online players will aim to eliminate single points of failure. As they will start sourcing products from multiple suppliers to mitigate risks, e-commerce supply chains will become more fragmented with more 3PL and 4PL players. Goods may be arriving from various suppliers and countries by ocean, air, truck, and rail. E-commerce companies require seamless, fluid, and integrated processes which leaves little room for siloed companies. The future will bring more and much better digitally integrated 3PL and 4PL providers.

8. Can we finally see the inception of contactless last mile deliveries to reduce the risk through transmission? 

I do not see this happening. Companies have introduced some new procedures during the Covid-19 outbreak. Some of this may stay. But much will disappear once the citizens and governments regain comfort. Drive and collect is one of the few practices that may outlast the pandemic. Not driven by the idea of safety but because of the convenience it provids as an additional delivery channel.

9. Are companies looking to invest in or improve their approach to risk management? Are we going to see more and more specialized ‘Crisis Management Teams’ in supply chains?

Supply chain risk moved to the top of the leaders’ agendas in the public and private sector. Companies will look at the entire risk management system. This includes the teams that ensure that the level of risk is in line with their risk appetite. This appetite which is determined by the CEO, the board members and owners varies from company to company. A recent report from McKinsey indicates that Covid-19 will lead to dedicated risk management functions within many supply chains.

Traditionally, risk and opportunity management are at the center of the CEO responsibility, who must ensure foth resilience and growth. Therefore, it is critical to keep the balance. Overemphasizing the risk side prevents a company from growing. Like in the supply chain where too many buffers impede profitability.