From empty supermarket shelves to delays manufacturing electronics and cars, the COVID-19 crisis has provided a stark example of global supply chain disruption.
In the early months of the crisis, 94 per cent of Fortune 1000 companies suffered supply chain disruptions. Underestimating the risk of supply chain shocks led to production stoppages, critical supply shortages and closing factories.
Research conducted by The Boston Consulting Group in May found that 43 per cent of companies are seeking to make permanent changes to their supply chains as a result of COVID-19.
In a report released last week, the consultants argue that the crisis has established a strong investment case for a digital supply chain, and the urgent need to prioritise resilience as a core competency.
Report co-author and BCG Managing Director and Partner Rebecca Russell explained that resilience hasn’t been an important investment driver locally. Australia, which has not experienced the level of severity of political or economic shocks as other parts of the world over the last 30 years, has prioritised cost efficiencies during this period of stability.
However, beyond the coronavirus crisis, BCG believes global uncertainty is here to stay and companies need to adapt. Supply chains are at even greater risk of disruption as the world experiences more frequent crises.
“Given that we think uncertainty will remain, resilience becomes an increasingly important consideration for businesses,” Russell told Which-50.
The report states, “While the direct impacts of COVID-19 will pass, the more dynamic and unpredictable business environment, rising political tensions, and broader issues such as inequality and climate change, will all have direct and ongoing implications for supply chains.”
According to the report, Australia has unique economic risks that make supply chain resilience critical: a heavy reliance on imports, dependence on a small number of global suppliers, and reliance on legacy systems.
“All of those things lead us to believe that being able to respond in an uncertain world will remain important,” Russell said.
The report, titled “Digital supply chains build resilience for companies in the post-COVID world,” argues that an over-reliance on lean ‘just-in-time’ operating models and a massive underinvestment in digital supply chain technologies left Australian supply chains vulnerable during the crisis.
“The just-in-time model has been a really rational response to the pressure that organisations are under in terms of cost efficiency and service levels,” said Russell.
“When earnings per share every quarter is how you are held to account, then a really lean supply chain is a big part of that.”
The ultra-efficient supply chain management technique reduces inventory, delays and costs, meaning there’s no fat or flexibility in the system to withstand a sudden shock.
Local supply chains are also highly manual. According to Swinburne Australian Supply Chain Technology Survey, 70–90 per cent of Australian companies do not use common supply chain technologies.
“When COVID-19 hit, companies without digital supply chains had to undertake urgent, manual assessments of their critical inventory to understand their business continuity risks.”
The report argues, “True supply chain resilience comes from strengthening the strategic view of supply chains and investing in digital supply chain technologies.”
Previously the business case for a digital supply chain favoured operational performance, but is now also being considered from the perspective of risk management.
“That investment case just hasn’t been strong enough for a number of Australian companies up until now, when this crisis has highlighted the business continuity risks, missed revenue and the need to prioritise this type of investment,” Russell said.
Digital Supply Chain
Preparing for future shocks requires a number of adaptive approaches to how you manage your operation and ensure business continuity, Russell said.
“As an executive, if you know that uncertainty is here for your particular business you need to understand how you will handle it.”
That could mean stockpiling products or finding multiple suppliers to guard against shortages. But the key is being able to make an informed decision and choosing where to invest.
Digital supply chain technologies enable better decision-making and a greater awareness of risks.
BCG has identified three key benefits for investing in a digital supply chain: end-to-end visibility, using real-time data to predict demand, and the ability to simulate ‘what if’ scenarios.
- Visibility Data from multiple sources can be integrated to increase visibility, identify underperformance and improve coordination. A control tower formalises the decision-making processes needed to respond to volatility, and improve security and performance. Companies that have implemented supply chain control towers have reduced their downstream costs by 10–15 per cent and their work centre costs by 3–5 per cent, according to BCG.
- Prediction AI and dynamic solution algorithms can be used to predict demand and improve supply chain efficiency, including over- and under-ordering.
- Planning Scenario planning and digital twins can be used to identify and plan for potential shocks. When things are running smoothly, the technology can be used to simulate what impact a large capital investment, like a warehouse, will have on the business.
The report argues building for resilience is a design choice. And, like any design choice, it will involve making trade-offs.
“These trade-offs are seeing new supply chain models emerge, including migrated supply chains (global supply chains shifting to new geographies to reduce geopolitical risk exposure), and regionalised supply chains (global supply chains moving closer to end-markets because of government incentives and/or risk mitigation).
“For companies in Australia, improving supply chain resilience and making the right trade-offs is even more important given the makeup of our economy, which depends heavily on imports for value-added goods.”