Disclaimer: The views expressed in this article are those of the author and do not necessarily reflect the views of the Economic Times – ET Edge Insights, its management, or its members

Logistics_Buisness Man 1

When it comes to supply chains, I will use a cliché; the word “Chain” is as strong as the weakest link and this pandemic exposed and affected all the links. It’s a disruption that affected all major parts of the world at one single time without giving any sufficient time to respond. It exposed the global supply chains in a flash of a moment. It’s the first time the world suffered a “Supply Shock” rather than a “Demand Shock”.

Decades-long focus on supply chain optimization to minimize costs, reduce inventories, and drive up asset utilization has removed buffers and flexibility to absorb shocks/disruptions.

Consolidation of suppliers, where efficiency has historically been the key strategy driver and limited focus on de-risking procurement and supply chains over the last several years, has contributed to the current state of affairs. In earlier times we use to mention words like Single source. A few years ago, we graduated to the word “De-risking” probably now it’s the time to use the word “Geographic De-risking”.

The future focus on Supply Chain will shift as follows:-

  • Best/Least Cost country Sourcing to Supply Reliability & Supply Assurance.
  • De-risking to Geographic De-risking (Suppliers located in different zones/regions/countries/ continent)
  • Strategy to Scenario Management Strategy (Business Continuity)
  • Supplier Partnership to Supplier Business Continuity planning
  • Insourcing/Outsourcing to Flexi Sourcing.
  • JIT supplies to Inventory Optimization.

In short, the future Supply Chain will be more smarter (digital), flexible, nimble and resilient.

 

COVID 19 exposed the Supply Chains and Impact of the same will be in the following ways:-

  1. COVID-19 has exposed the vulnerabilities of complex global supply chains built on lean manufacturing principles. This is particularly true in the healthcare sector, where the scramble for protective equipment, raw materials for pharma mfg has laid bare the inherent risks of inventory and single-sourcing models driven exclusively by cost control.
  2. Supply Chains worldwide focussed heavily on the strategy of Best cost country sourcing (China) leading to over-dependence. China being the epicenter of COVID and the lockdown there being implemented in a flash, affected the supplies before anyone had time to respond. This will change the focus to Supply Reliability and Assurance.
  3. Derisking- Though people thought of derisking however again due to cost as a constraint people did not focus on the geographic location of the alternate suppliers. Unfortunately, the alternate supplier was also found in the same region/zone or country. Our focus on logistics cost also mandated that the suppliers to be in closer proximity to factories. As a result, the suppliers tend to be in the same zones/regions. The future will be that- each supplier will have a “Risk Score”. This will determine the share of business, inventory plans for the suppliers. The future will be of geographic derisking and supplier location in different regions/counties if not continents.
  4. Focus will be a shift from mere Sourcing Strategy to Scenario Management- Based on evolving circumstances or likely scenarios globally, organizations may need to evolve supply chain strategies which could be adopted when those scenarios arise. In the meantime, one would have to prepare the supply chain by implementing the envisaged action plans to meet and be ready for those scenarios.
  5. We will also see a decentralization of manufacturing capacity, with companies looking to bring production home. This trend will also be fuelled with the adoption of automation and small batch production. Many countries/companies will start moving portions of their supply chain back home. Global Supply Chains will become more local and self-sufficient. Each mfg location will now tend to have their own set of suppliers who can be depended for a smaller share of supplies to ensure continuity of production.
  6. Smart Supply Chains-
    • Digitizing the buyer-supplier relationship is a fundamental element for building. It will help identifying and onboarding new suppliers far less time-consuming. With technologies like artificial intelligence and the Internet of Things, supply chains could quickly switch to alternative suppliers/providers when regular suppliers face disruption. Also Crowdsourcing, AI, Predictive Analytics will give live triggers in case some regions of world/zones could lead to disruption of supplies. Prescriptive/Predictive Analytics will help in reconfiguration of the supply chain to meet the “Avl to Promise”.
    • Material visibility- Focus earlier was on outbound logistics now the focus will also be on inbound material visibility.
    • Evaluation of alternate outbound logistics options/routes/partners to meet ETA dates.
  7. Partnership between buyer and supplier will be deeper and more transparent. It will extend from the current system of audit/compliance measurement to Business continuity planning. It will forge the relationship stronger and will lead to further integration. It will also result into scanning the Tier II and Tier III suppliers and Raw material suppliers of suppliers. The focus will be on building end to end supply chain resilience.
  8. Switching from one supplier to another for short term benefits will reduce as capacity booking and relationships with reliable sources will increase.
  9. Earlier efficiency model was looking at insourcing or outsourcing based on cost, capability, etc. The new model will be of Flexi sourcing. Adapting to the situation in order to change the sourcing model to insource/outsource the operations to suit the Business continuity plan. It will require Supply Chains to have options for each stage of mfg flow to ensure business continuity.
  10. JIT will give way for Inventories planning/optimization based on parameters of Business continuity planning and risk score of suppliers. Inventory plans will be linked to supplier risk scores.

The current crisis is an opportunity to reset/revisit a system that has relied on outdated processes. Creating smart and nimble supply chains is the key to building a global trade network that would be capable of facing the future storms.

This is an opportunity where Supply Chain has emerged from being a support function to a core function. The future is of Supply Chain.

Disclaimer: The views expressed in this article are those of the author and do not necessarily reflect the views of the Economic Times – ET Edge Insights, its management, or its members

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