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Future of Supply Chains

While the coronavirus pandemic is a black swan event to some extent, companies were already rethinking their supply chains in the wake of the trade tensions between the US and China so that they were more resilient and robust. 

By: Adi Gaskell, Katerva’s Futurist 

During the coronavirus pandemic, supply chains were seldom out of the news.  What began with concerns over the availability of food, toilet paper and hand sanitizer quickly progressed to concerns over the availability of ventilators for hospitals and personal protective equipment for doctors and nurses.  Barely a day would go by without stories of shortages of one of the above, and as vaccines are developed and tests for the virus are distributed, these discussions are only going to continue.

It’s prompted various commentators to argue that the hugely efficient, just-in-time supply chains that had underpinned the global economy for so long were not fit for such circumstances, with some even voicing the heretical thought that more friction should be added to the process so that more stock is held for just such rainy days.  It’s hard to tell just what the ‘new normal’ will be for supply chains, but what seems certain is that changes will emerge.

The new normal

Perhaps the first thing to remember is that supply chain disruptions are not, in themselves, that unusual.  Recent years have presented businesses with various climate-related disasters, geopolitical events and public health crises to deal with.  In purely trade terms, both Brexit and the trade war between the United States and China threaten to disrupt supply chains.  In this increasingly turbulent world, low inventory levels and low cost suppliers can be as much a risk as an advantage.

While the coronavirus pandemic is a black swan event to some extent, companies were already rethinking their supply chains in the wake of the trade tensions between the US and China so that they were more resilient and robust.  Speed and cost were being replaced with flexibility and redundancy to better enable operations to endure in times of stress.

This transition will be expedited by the shock imposed by the coronavirus, with the transition especially pronounced among organizations that suffered a shortfall in supplies.  A good example of a company that is investing in a more resilient supply chain is Procter & Gamble, whose cloud-based supply chain platform aims to provide real-time information on both production and demand to supply chain managers.  This system has enabled the company to weather the shock produced by Hurricane Sandy in 2012, which disrupted the functioning of the factory that supplied 92% of the company’s perfumes.

Digital infrastructure

These kinds of analytics and digital tools are likely to be increasingly important in providing the right information at all stages of the supply chain, and to all participants in the supply chain.

“Share information along the supply chain,” says Zach G. Zacharia, associate professor of supply chain management and director of the Center for Supply Chain Research at Lehigh University’s College of Business. “Understand who your suppliers are and who their suppliers are. Look for ways to work together so you will all survive.”

Toyota is another company that has invested heavily in the resilience of their supply chain.  They have developed a database to visualize the supply of each component so that they can immediately identify at risk components during any situation.  The system is also capable of identifying if a component is manufactured by a single supplier, and is therefore harder to replace, with the company striving to reduce dependency on these sole suppliers and build in sufficient redundancy to allow suppliers to be plugged in and out as required.

Competitive advantage

Investment in the robustness of one’s supply chain is likely to provide a clear competitive advantage as the turbulence and uncertainty of the global economy increases.  It’s an investment that makes sense even in more benign times, however, as changing market characteristics lend themselves to quicker turnaround times and faster responses to changing customer demand.

As with many aspects of business, the coronavirus pandemic has not changed requirements as much as it shone a light on pre-existing needs.  For instance, in France and Italy, it was the luxury goods manufacturers, with their agile supply chains and manufacturing processes, that rapidly pivoted to start supplying the healthcare sector with vital equipment.  It took just a few days for LVMH to switch from manufacturing perfumes to manufacturing hand sanitizer, with numerous fashion brands pivoting to producing personal protective equipment.

Such agility required far more than simply retooling factories, and needed these companies to have the flexibility in their supply chains to allow them to quickly source the requisite raw materials, the product design skills and capabilities to develop, test, and distribute the materials to hospitals as quickly as possible.

To build a supply chain fit for the post-covid world is likely to require a number of core capabilities within each organization, including an agile network of suppliers that allow companies to cope with vicissitudes in supply and demand; the digital infrastructure to coordinate this network of suppliers effectively and efficiently; real-time information that provides both visibility across the entire network and allows for the rapid generation of insights.  This data should include not only what’s happening within the supply chain, but also a wide range of ‘dark data’, such as weather patterns, that can heavily impact operations.  Last, but not least, companies will need teams that are sufficiently empowered to make decisions without going through lengthy approval processes.

While the economic shocks imposed by the coronavirus pandemic are undoubtedly once in a lifetime in their size and scale, instability is likely to be more and more commonplace in the coming years, so developing resilience in one’s supply chain will become an economic necessity as much as it is a competitive advantage.  Companies that make the investment are likely to yield handsome and repeated yields over the coming years.

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