Three ways to foster resilient supply chains
It has become routine to read headlines warning of the severities of the supply chain shock that coronavirus has unleashed. The problem is compounded in those sectors that rely on global supply chains. However, although coronavirus may threaten global supply chains on an unprecedented scale, many were already gearing up to respond to systemic shocks.
Investment in digitalization is one of the vital ingredients in improving supply chain resilience and flexibility. While some media talk of digitalization may contain overstatements, there is undoubtedly good evidence to suggest that digitalization offers real benefits and real costs-savings to those who make the leap. In fact, a recent survey by PWC Global showed that those ‘Digital Champions’, the companies who were furthest ahead in the digitalization of their supply chains, reported a in supply chain costs and a 7.7 per cent increase in revenue for the last year.
Digitalization for supply chains is enabling transparency across the entire value chain. This means visibility all the way from product origin to the customer and product lifecycle. Alongside this data, the use of artificial intelligence is allowing businesses to spot relevant patterns and adopt a more proactive approach to managing risk.
For example, one way this can be achieved is through the creation of a digital twin. This is effectively a virtual replica of a company’s supply chain using data analytics and artificial intelligence. It can model the entire supply chain, including all the assets, warehouses, logistics and material flows. The concept itself is not exactly new. What is new is the use of Internet of Things (IoT) technology to continually feed data into the digital twin in real time. This not a static model.
Having a virtual replica of your supply chain allows you to carry out accurate testing of different scenarios, such as how switching a supplier might help you mitigate the possible impact of a global pandemic. With the ability for the model to respond to new real time data, companies that are able to exploit this technology spend less time in crisis mode and can instead develop mitigative strategies. The digital twin allows them see risks early and adjust inventory levels accordingly.
According to research by Boston Consulting Group, use of a digital twin can lead to sustainable inventory reductions of five percent and reductions in capital expenditure of for those companies that have been early implementers. For those companies using IoT technologies, the use of digital twins is already becoming more common. A survey by Gartner revealed that of companies using IoT already use digital twins and a further 62 percent plan to within a year.
Diversification and collaboration
For smaller and medium sized enterprises, whose adoption of digitalization and Industry 4.0 technologies is likely to be slower and phased, there are still plenty of sound ways to improve supply chain resilience. A sensible strategy would be to diversify supply, both in terms of company and location.
In many places, the idea that countries or businesses should reduce their reliance on global supply chains has gained some traction. In the Asia Pacific region for instance, there is some talk in Australia of the need to grow the domestic manufacturing sector to reduce the risk that stems from an overreliance on imports. However, at just under six percent of GDP, the manufacturing sector in Australia, as a percentage of the overall economy, is about a fifth of the size it was in the middle of the last century. Macro-level factors like these will not change quickly.
In the meantime, many manufacturers will continue to rely on global supply chains, whether that is for tier one or tier two suppliers. The risk of this reliance on imports can be mitigated, in part, through building the right kind of relationships with suppliers. Manufacturers should consider looking for alternative sources of supply for key materials and components, but they should also look to work with suppliers who can offer collaborative partnerships.
This goes back to the point about transparency. If manufacturers are to develop more effective supply chain risk management strategies, they need transparency across the entire value chain, including tier one and tier two suppliers. Manufacturers should challenge their suppliers to provide reliable information and data on future supply and demand and they should look to work together to mitigate risks.
Many manufacturers will be assessing the ways they can strengthen their supply chains in the wake of the disruption caused by coronavirus. Yet this is not just about firefighting during a crisis period. It is essential that businesses emerge from this phase better prepared for the next shock to the system. Investing in digitalization, diversifying supply and building collaborative relationships with suppliers are three key ways that goal can be achieved. That is the opportunity.