How Supply Chains Are Changing in the Wake of Critical Shortages
The Future of Just-In-Time, Dominant Foreign Suppliers and Supply Chain Digitization
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Our criteria for inclusion of a thought leadership piece in the BoTL newsletter are:
· Tells us something we don’t know
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In this issue: Supply Chains in the Wake of Critical Shortages
Top thought leadership studies quoted in this newsletter:
Fast Forward, Rethinking supply chain resilience for a post-Covid 19 world
Capgemini Research Institute
Global Supply Chain Disruption and Future Strategies
Foley & Lardner LLP
Global Supply Chain Survey – In search of post-Covid 19 resilience
Euler Hermes
The rise of the digital supply network
Deloitte University Press
Supply chains are not getting all the attention they need. Even now, when they are blamed for recent or ongoing shortages of anything from toilet paper to vaccines and semiconductor chips, surveys of top executives show that managements prioritize digital transformation and cost efficiencies. Supply chains remain close to the bottom of the list of priorities.
That’s because, for most of the time, supply chains work well. They tend to break down during anomalous events, such as extreme weather conditions, wars (including trade wars), sudden surges in demand, pandemics or accidents, such as when a humongous ship carrying containers with supplies gets stuck in a channel. They are also extremely complicated and far-flung, and getting even more so as companies become more borderless and interconnected. Dealing with supply chains requires addressing an array of issues including logistics, globalization, sustainability and digitization.
And while two-thirds of organizations say they believe that their supply chain strategy will need to change significantly in order to adapt to a new normal post-Covid 19, a majority express confidence in their supply chains. So:
How broken are supply chains?
What will change and what will stay the same?
This newsletter tries to answer this question by looking at the top 3 supply chain hot button issues.
Hot Button Issue No. 1: Just-In-Time
THERE IS LOTS Of GRAY AREA BETWEEN JUST-IN-TIME AND VERTICAL INTEGRATION
Just-in-time (JIT), in which companies receive parts or goods as close as possible to when they are actually needed, so that they don’t pay for what they don’t use, has come under fire. Under the dramatic title of “How the World Ran Out of Everything,” a recent New York Times article essentially blames JIT for the shortages of parts that idled car factories when their supply chains across the world broke.
An article in the WSJ (“Auto Makers Retreat From 50 Years of ‘Just in Time’ Manufacturing”)raises the specter of vertical integration of the 1920s, when Ford had control of all the things needed to make a car, including steel. WSJ cites Toyota’s stockpiling of up to four months of some parts, Volkswagen’s building six factories so it can get its own batteries, and Tesla’s trying to lock up access to raw materials.
How deep is this repudiation of JIT? As deep as it allows companies to stay cost effective while securing access to critical parts. The New York Times says that “the virtues [of JIT] have added value to companies, spurred innovation and promoted trade, ensuring that Just-In-Time will retain its force long after the current crisis abates.” Indeed, the Cap Gemini report notes that cost remains a dominant concern overall and organizations are willing to consider alternatives to just-in-time manufacturing if the costs are not significantly higher.
For a reality check, here is the future of JIT in numbers:
10 percentage points down: Proportion of organizations focusing on just-in-time sourcing and manufacturing is expected to drop from 39% pre-Covid to 29% in the next three years.
17% of executives from across major industries strongly agree that their focus on just-in-time manufacturing models that emphasize low costs and lean inventory across the supply chain will lessen.
Hot Button Issue No. 2: Dominant Foreign Suppliers
USING SUPPLIERS CLOSER TO HOME ISN’T ALWAYS A PROBLEM SOLVER
CBS’s 60 Minutes recently devoted a segment to the seemingly mundane issue of supply chains. What riled up Lesley Stahl was the geopolitical dangers of far-flung supply chains. Specifically, she was talking about Taiwanese dominance in the semiconductor industry, which poses risks for U.S. cars and electronics makers. (Some blame the semiconductor shortages on faulty demand forecasting by U.S. firms and not production levels in Taiwan.)
Noted: Semiconductors are a special case, being a critical and much-in-demand item that’s becoming even more so with the onset of 5G. The majority of chip production currently occurs in Asia. Chips are also among the products most likely to have their supply chains affected by national policies, such as U.S. President Joe Biden’s push to supercharge chip manufacturing in the country.
And there are many arguments for nearshoring, including job creation in the country, lower transportation costs, the patriotic appeal of Made in the USA and eliminating geopolitical risks to the inventory.
But reshoring is not a straight on win-win. An article in the Economist asks the question: “Is a wave of supply chain reshoring around the corner?” And answers it with: “Experience and evidence suggest they are stickier than you think.” The far-flung supply chains have stayed in place despite tariffs or advancements in technology, and reshoring does not necessarily lead to more domestic suppliers. Or even worse. Adidas, for example, tried 3D printing shoes in the U.S. and Germany, but because of a lack of local production of certain components, it had to simplify the design of the shoes to the point that consumers lost interest.
What’s next for global supply chains? Research shows it’s going to be a readjustment rather than a retreat:
Less than 15% of companies consider reshoring.
Up by 7 percentage points. Forty-three percent of organizations plan to have their supplier base situated locally in the next three years, up from 36% today.
Up by 7 percentage points. Fifty percent of organizations expect to have their production plants situated locally, up from 43% today.
Hot Button Issue No. 3: Transparency and Technology
IT’S THE DIGITIZATION, STUPID
We started this newsletter by pointing out that digital transformation is typically top of mind for top management, not supply chains as such. Such prioritization makes sense as long as supply chains are an integral part of that digital transformation. Technology needs to be more of a hot button issue for supply chains.
Applying digital technologies to the supply chain provides transparency, which means that companies are alerted to the red flags in their far-flung supply chains and are thus better able to assess supply risk. Data-driven analytics help make predictive forecasts so that companies will not be forced to stop production when they run out of components. And employing digital twins can create a virtual reality that, in effect, protects on-the-ground supply chain reality from going awry.
Studies show that companies lag in terms of the transparency of their supply chains and the implementation of digital solutions:
Just 9% are resilient in terms of visibility into the upstream and downstream supply networks and emphasis on data sharing with partners.
16% have invested in a digital twin solution, and are using it to conduct scenario planning exercises on a regular basis.
20% are considering digital supply networks, which allow for a continuous flow of information and analytics to anticipate disruptions and improve supply chain efficiency.
Back in 2016, Deloitte pioneered the concept of a Digital Supply Network to replace the traditional, static and linear supply chain.
“DSNs integrate information from many different sources and locations to drive the physical act of production and distribution. By leveraging technologies such as sensor-based data sets, DSNs enable integrated views of the supply network and rapid use-case-appropriate latency responses to changing situations.”