With so much having already been written on supply chain disruption over the past eighteen months – beginning with the initial shut-down of production in China, to fascinating tales of toilet paper hoarding, and now to the current inability to get backlogged demand through our ports of entry — I was initially reluctant to add yet another article to the stack. So what changed my mind? There are actually two reasons, which I’ll explain.
First, the problems and lessons learned from the COVID-19 pandemic are now forcing companies to become more agile, reassessing every element of their existing supply chains in preparation for the “new/next normal”. It’s now blank sheet of paper time as previous playbooks regarding sourcing, inventory levels, placement and risk mitigation plans (if they even had one) – together with any supporting infrastructure of people, processes and enabling technology – are being tossed out the window.
And while COVID-19 can be credited as the catalyst for forcing companies to perform these assessments, it doesn’t take a pandemic to bring a supply chain to its knees. In addition to the exposure contributed by single-sourcing key goods or from maintaining lean inventory levels (i.e., “Just-in-Time” versus “Just-in-Case”), designing a more resilient, risk-averse global supply-chain will require the inclusion of a broader list of potential risks to consider particularly when selecting foreign suppliers. These should include geopolitical conflicts, socio-economic factors including labor, crime and corruption, limited port capacity/infrastructure, weather-related disruptions, and even natural disasters (recall the 2011 earthquake and tsunami in Japan).
Take geopolitical risk, for example. The US’s over-dependency on China for products ranging from personal protective equipment (PPU) to rare-earth minerals has made it a growing concern from both a business and a national security perspective. A sobering report by the Hinrich Foundation (“Strategic US-China Decoupling in the Tech Sector”), states that “the China-US geopolitical competition has reached a competitive tipping point and morphed into a new ‘cold war’”, citing an increase in China’s bold hegemonic policies. The report further highlights China’s years of intellectual property theft, growing labor costs, and the more recent special tariffs levied by the Trump administration, as key reasons for an increase in US supply-chains decoupling from China and either moving into more risk-averse areas in Southeast China, near-shoring to Mexico, or even re-shoring to the US.
In an actual side-by-side near-shoring exercise which compared China with Mexico, the advantages quickly fell to Mexico citing a shorter supply chain with fewer physical touchpoints (damage/theft/service fees), lower freight costs, and eligibility for duty-free entry under the USMCA Free Trade Agreement, as well as side benefits that included ease of communication with vendors and the convenience of traveling to vendor sites.
Risk Management Meets Industry 4.0
The second reason for my writing is that there’s another movement afoot that aligns with supply-chain risk initiatives from the position of enabling technology capable of producing even greater resiliency. Labeled as “Industry 4.0”, this next industrial revolution is the result of the substantial transformation that is occurring through the digitization of manufacturing. For context, the first industrial revolution was through the introduction of water and steam power. Steam would give way to electrical power as the second industrial revolution, with the third being born out of the introduction of computers and their ability to automate previously manual tasks. Fast forward to today where the fourth revolution is now further optimizing that automation by connecting computers with smart machines and “disruptive technologies” such as Artificial Intelligence (AI), Machine Learning, Advanced Business Intelligence, Predictive Analytics and Data Lakes, capable of removing humans from decision-making processes, including applications capable of identifying and even predicting risk.
Where Industry 4.0 supports supply-chain risk initiatives is that the 4.0 movement includes the digitization of global supply-chains. This will translate into unprecedented transparency and connectivity across the entire end-to-end order and shipment process where supporting business functions such as Product Engineering, Procurement, Sales & Marketing, Transportation, Trade & Customs and Accounts Payable traditionally operate in respective silos.
For example, take Trade & Customs operations. Its typical placement near the end of the supply chain process, together with a lack of early visibility to international order, has served for years as a recipe for reactive firefighting as shipments become “stuck in customs” upon arrival until data/documentation issues are resolved. Under a digitized model, silos are replaced with connected supply-chain visibility that would allow Trade & Customs’ participation to move upstream to the earliest stages of new product build/buy decisions. As a result, they’re now in a position to proactively contribute critical advice on regulatory issues, import admissibility requirements, duty/tax minimization strategies such as Tariff Engineering, Foreign Trade Zones, Free Trade Agreements or changes in source countries (e.g., avoiding a 25 percent special tariff on Chinese goods by switching the sourcing to Mexico) – all key factors capable of removing cost, risk and time from their supply-chain.
If you’re currently building a business case to launch your own risk initiative, an interesting report from McKinsey & Company (“Resetting Supply Chains for the Next Normal”), might give you some additional support. For instance, in their survey of 60 senior supply-chain executives across industries and geographies, 85 percent responded that they struggled with insufficient digital technologies, 93 percent plan to increase resilience across the supply chain, and 90 percent plan to increase digital supply-chain talent in-house needed to support that new technology. In short, you’re not alone.
Whether your current project is to address the exposure from disruptions to your supply chain or to digitize the entire enterprise as a result of the increasing disruption caused by technology-driven innovation, what’s becoming clear is that companies will be forced to become agile and adaptive — able to change business models at unprecedented rates of speed in order to survive and thrive in the “new/next normal.”
Jerry Peck is the Vice President of Product Strategy at QAD Precision, with over 30 years of experience in Global Trade Management. His career has uniquely encompassed nearly every facet of GTM, including third-party logistics, trade operations within Fortune 300 multinationals, and professional services consulting firms.
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