The June 2020 Global Economic Prospects report by the World Bank forecasts that the global economy will contract overall by 5.2% this year. In the UK the fall in the second quarter is as much as 20.4%, despite the easing of lockdown measures and a recent resurgence in wholesale and retail, manufacturing and construction.
In an economic climate of financial protectionism, with a trade war between the U.S. and China and more local events such as Brexit, analysts are making gloomy predictions about global supply chains.
The paramount importance of reinforcing supply chains was highlighted in recent months as the coronavirus took hold. Despite food retailers reassuring customers there was no lack of food they were forced to admit that they were unable to cope with sudden changes in customer purchase behaviour in the form of panic buying: resulting in empty shelves in supermarkets even though there was ample stock in warehouses. The global shortage of Personal Protective Equipment for medical staff on the frontline meant that they were forced to use substandard or out of date masks. There was also a lack of oxygen tanks and ventilators due to the unprecedented demand.
More general and less vital supply lines were effectively cut or slowed to the point where the length of delivery time made the transaction pointless. The fact that the virus first shut down Wuhan, a major manufacturing and distribution hub in China, served to make the point that global supply chains need to be substantially re-examined if they are to be made fit for purpose.
Robert Battistoni, head of Consumer Products Solutions at IBM Global Markets summarised the nature of the problem like this:
“More than 90% of Fortune 1000 companies have second-tier suppliers in Wuhan…Many had little or no interaction with them. This risk to the global supply chain is phenomenal.”
Faced with such “interesting times”, the best strategy is to learn what can be done to adapt to the new normal, and to reframe a catastrophe as an opportunity.
While we cannot control the context of our business activity we can redouble our efforts to gain control over the content, firstly by objective informational analysis of the current situation and then by putting systems in place with the flexibility to absorb the impact of any further forced changes to our business.
The evolution of Industry 4.0 over the last decade has in fact provided all the of the tools, methods and strategies for businesses to react quickly and efficiently to changes in the economic environment. It may be one of the mitigating factors in the current crisis that avoided a complete economic breakdown.
The primary function of SAP Ariba is to provide a platform for realtime communication about the status of supplies within the network of business employees and also extending to tier 1 level suppliers and even further. The purpose of this constant interchange of information is to reduce latency in supply chain network communication, and through this drive efficiency in fulfilling customer orders. Ariba also facilitates supply forecasting and planning which will be crucial to the process of adapting to any potential shortages caused directly by coronavirus, or indirectly due to any temporary government lockdown and quarantine procedures.
On the 12th of March SAP opened access to the network “so any buyer can post immediate sourcing needs and any of the four million suppliers on Ariba Network can respond”. This network can dramatically reduce the time procurement managers and supply chain managers require in order to find substitutes for their pre-existing suppliers if circumstances (i.e. second tier suppliers) have left those suppliers in a position where they are unable to fulfil orders.
There are a variety of other logistics tools which SAP provides that will become increasingly necessary such as Extended Warehouse Management and Transportation Management, all of which work through the centralised realtime database model.
The way that the customers themselves are consuming products is changing. A simple example is a clear trend toward buying online and away from visiting physical premises. This is a feedback loop. The more that this behaviour continues the greater the tendency for it to continue. The worldwide pandemic of Covid-19 has acted as a catalyst in the movement toward online retail. This means that while previously retail companies made provision for a large portion of transactions to occur online, it is now fast becoming the primary economic space. SAP Customer Experience applications are not just a marketing funnel, moving customers to click and buy, but a way for businesses to develop understanding of their customer’s identities and through this process consistently foresee and satisfy their individual expectations on the micro level and solidify the customer base on the macro level. The connections between these levels of business activity are the means by which we are able to react to changes in the business environment.
In the SAP webinar ”Leading with Confidence During Disruption: Supply Chain Strategies” Jim Kilpatrick, Deloitte’s leader for Global Supply Chain and Network Operations gave and overview of some of the key points to consider:
“[Regarding] Traditional buffers that organisations use around inventory and excess capacity… we’ve been pretty good as supply chain professionals about taking that to the absolute minimum over the last couple of decades… and there are two differences here: one is, what is the demand-side disruption? If you’re selling into markets or customers that are perhaps even shut down now in these containment cases, you’ve seen a massive shock to the demand side, and in some cases when you source out of an impacted market you’ve seen a supply-side shock, so I think you have to separate the two… Certainly if your demand side is impacted its absolutely essential that you understand what the shifts are in demand. It might be shifting from a traditional retail channel through to an online channel… you have to certainly spend a lot of attention on forecasting cashflows because we’re reminded here that its not just the flow of product but the flow of cash and the flow of information that goes with it, and in many cases if you’re short, clients (of ours) and companies in general have had a hard time really differentiating service to customers and allocating inventory… often models of order fulfilment are first-come-first-served which can mean you’re sending the product places where its not absolutely required… you’re perhaps serving customers who are not the right priority at the right time… on the supply side… first and foremost if you have access to inventory now’s the time to revisit your inventory policy… make sure you get your fair share of those allocations I just mentioned but also be surgical about where you need to inject incremental safety or strategic stock in the event that your supply chain is disrupted and certainly you need to get as much visibility as you can into your extended supply chain network. What we were seeing in the early days was it wasn’t necessarily the tier one suppliers that were causing the shocks to the system: it was their suppliers’ suppliers…”
In the era of big data companies are increasingly turning to information gathering and analysis of customer experiences (as much as their supply chains) as a means by which to generate a more nuanced survey of the market they are operating in, so that they may adjust their products and processes to increase customer satisfaction and brand loyalty. The best practice of the future will use this data to augment traditional supply chain network data and recalibrate logistic processes on a realtime basis with even more accuracy. What we know so far is that despite all of the information networks provided, businesses did not have enough flexibility built in to their systems to cope with the shock.
So why did all the tools for creating clarity and stability in the business supply chain provided by SAP and their competitors not appear to avoid the breakdown that occurred?
As we have seen, we can be sure that the problem would have been larger without the parachute of technology.
Also, it may be that the period in industry of monolithic manufacturing centres has reached its zenith and businesses will start to use all of this technological insight to allow a diversification of supply chains: so rather than relying on one or two main sources of manufacture we may see the use of twenty or thirty sources and temporary warehousing and assembly facilities, all overseen and directed using services such as SAP Ariba. One of the goals of Ariba is to reduce warehousing and other supply chain buffering costs but it may also be used to diversify and it may be that the cost of diversification is ultimately much less than a complete break in supply lines.
Since the 2008 economic crash there has been a slow but persistent trend in some sectors toward shortening supply chains. This method of production has less links in the chain to break. Large companies have been re-shoring previously offshore production as a means to gain greater control over the supply chain.
“coronavirus has opened the floodgates and forced businesses and consumers alike to consider domestic suppliers out of sheer necessity, despite higher costs in many cases.” [Supply Chain Management Review]
This degree of complexity is daunting but the successful businesses of the future will surely be those who invest in dynamic supply chains, which can react to world events of the scale which we have seen with coronavirus. The investment will certainly be in software solutions but also in the human resources to implement and maintain those systems, as well as larger numbers of company employees involved in supply chain management itself.
We may begin to see an even greater degree of outsourcing of supply chain management and logistics: companies with a specialised skill set to administer the supply chain management software of others on a consultation basis. These companies would be made up of those who understand how to react to a problem, having faced those circumstances before, and who have built up a network of their own trusted sources and employees who are fluent in the use of SAP products and others. They would be brought in to pinpoint and fix specific problems and would have a portfolio of regular contracts.
The supply chain is at its core a human chain, passing parts and products, information and ideas from one to another. The term chain itself is problematic as it implies linearity whereas best practice involves a network of individuals.
Ultimately the solution to the modern supply chain may reside in the manufacturing techniques: the factories themselves evolving into multi-manufacturing units using 3-d printing and other methods rather than huge spaces dedicated to creating one product, but none of this will take place in the short term.
Industry 4.0 will adapt to form a new network of manufacture and supply that will see us through the intervening period using all technological solutions available. It is not so much a revolution in industry as an evolution, subject to nature and physical laws, but the change will happen as much through collective will as through external events because the primary resource for businesses is in all cases, people.