Lt Cdr (R) Nitika Rai
a 6 mins read.
Structural Changes
Supply Chain Transformation or there have been shifting calls for the addition and integration of new technology to improve the supply chain performance. It involves reviewing the existing processes and implementing systems for managing supply chain demand to align a firm’s supply chain with its business goals. This includes planning, implementation, digitization, and analytics. Over the past year, many companies have made structural changes to their supply networks by implementing dual or multiple sourcing strategies for critical materials and moving from global to regional networks. And as companies shift their focus from visibility to improvements in demand and supply planning, supply chain digitization efforts are also entering a new phase.
There have been frequent disruptions in the supply chain which has also impacted the relations between countries and regional security has also been disharmonised. A common theme between these events is a conflict between nation-states and the geopolitical disputes which have prompted many firms to reconsider the design of their global supply chain entirely. The international system as we know it is not inherent or natural, but is a construct created out of the chaos and horror of the two world wars, and the existential threat of the Cold War, to maintain stability and promote prosperity. The system, with its key institutions like the United Nations, the International Monetary Fund, and the World Bank, is by no means perfect, but it has supported international development and free trade, and it is now under considerable pressure.
The strategic competition between China and the United States, including discussions of ‘decoupling’, has profound implications from the top to the bottom of the international system, including for the norms and rules for international trade.
Resilient Supply Chain Initiative
The results indicate that the impact of geopolitical disruptions can be mitigated through multiple means like Supply chain redesign including regionalization, back shoring and moving away from “Just in Time Delivery” as well as the implementation of emerging technologies such as blockchain, 3D printing and artificial intelligence to improve supply chain transparency and development of modularised manufacturing.
Supply Chain Security is the part of supply chain management that focuses on the risk management of external suppliers, vendors, logistics, and transportation. A complete supply chain security strategy requires following risk management principles and cyber defense in depth. It also takes into account protocols set by Government agencies like the Department of Homeland Security or customs regulations for international supply chains.
The most notable regional response to the repositioning of supply chains due to COVID-19 has been the announcement of the Resilient Supply Chain Initiative (RSCI). Economic ministers from Australia, India, and Japan launched the initiative on September 1, 2020, highlighting “the pressing need for regional cooperation on supply chain resilience in the Indo-Pacific.” More than ever, the business community needs to mainstream geopolitics into its supply chain analysis and planning to effectively navigate the unpredictable landscape.
Inextricably Interconnected
There are two high-level trends arising from this fracturing geopolitical landscape. The first is that bilateral and multilateral relations are becoming increasingly politicized and unpredictable. The second, and inextricably interconnected, is that domestic market dynamics may shift towards greater self-reliance. As part of the politicization of international relations, and aggravated by COVID-19, we see a shift from liberalism to protectionist tendencies. Pre-existing trade tensions are intensifying, and tariff and non-tariff barriers are being imposed, or at least threatened. There is an increased interest in ensuring the stability and continuity of domestic industries in distress. It is now commonplace for governments to be talking in terms of strategic self-sufficiency, on-shore or near-shoring, and stockpiling.
We are also seeing heightened levels of anxiety around vulnerabilities associated with over-reliance on key trading partners, in particular, concerns around slowdown or shutdown of key suppliers and critical operations, delays in getting inbound and outbound raw materials to production sites and finished goods to market, and challenges around insolvency for upstream partners and key customers. As a result, there is a renewed focus on the adequacy of contingency plans and the long-term sustainability of current strategies.
Businesses may find themselves divided between two global technology hemispheres, impinging upon the interoperability of technology systems and information flows across borders. Continued technology transformation will force businesses to consider:
- Ways to further optimise each module of their supply chains – processes, communications, and regulation – through digitisation (digitisation no longer appears optional and there will be pressure on businesses to innovate and adapt);
- The ability of existing digital infrastructure to cope with severe business disruptions, and ways to continue to uplift capability to meet demand (during COVID-19, remote working and massive service demand tested the limits of many businesses’ and governments’ ICT infrastructure); and
- How to ensure flexibility in digital infrastructure and investments, should it become increasingly necessary for businesses to adapt to, and bridge, technology divides.
Resource scarcity, including insufficient potable water supply, already threatens many countries, including Australia. Associated socio-political risks such as mass migration, displacement, health crises, and unrest – including within and across borders – are likely to follow.
Businesses need to consider how climate change impacts the operation of, and changes to, supply chains:
- extreme weather events could shut down critical supply routes and increase the costs of transport and insurance (fires in Southeast East Asia annually disrupt flights and commerce in Singapore and Malaysia., just as major storms in the South China Sea could seriously disrupt shipping);
- changing consumer preferences could drive greater demand for sustainable goods and corporate brands could suffer from failure to address climate responsibilities (the need to embrace more climate-friendly products and services could see businesses face great pressure to adapt quickly or lose value); and
- the impact of carbon pricing schemes could drive increasing business costs (this could in turn drive businesses to pivot to greener and more efficient technologies).
Some nations are focusing on safeguarding technologies with dual-use (civilian and military) implications, which could affect value chains such as semiconductors and communication equipment, particularly as 5G networks are built out.
Structural Changes
Weaknesses often stem from the structure of supplier networks in a given value chain. Complexity itself is not necessarily a weakness to the extent that it provides companies with redundancies and flexibility. But sometimes the balance can tip. Complex networks may become opaque, obscuring vulnerabilities and interdependencies. A large multinational company can have hundreds of tier-one suppliers from which it directly purchases components. Each of those tier-one suppliers in turn can rely on hundreds of tier-two suppliers.
The entire supplier ecosystem associated with a large company can encompass tens of thousands of companies around the world when the deepest tiers are included. With respect to noneconomic factors, we consider governments’ desire to bolster national security, national competitiveness, and self-sufficiency. Some nations are focusing on safeguarding technologies with dual-use (civilian and military) implications, which could affect value chains such as semiconductors and communication equipment, particularly as 5G networks are built out. This, too, has the potential to reroute value chains.
For the third year in a row, supply chains remain at the top of the corporate agenda. Mc Kinsey’s latest survey shows that companies have made significant efforts to improve supply chain resilience over the past 12 months by expanding their successful digitisation programs and implementing structural changes to their networks. With volatility and disruptions likely to continue, we expect resilience to remain a key topic for the foreseeable future. For leaders, upcoming priorities include more sophisticated approaches to planning, further adaptation of supply networks, and smarter inventory management strategies.
(Lt Cdr (R) Nitika Rai, former Indian Navy Officer. The views expressed are of the author and do not necessarily reflect the views of The News Analytics Journal.)
