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.
NTT DATA Services, Remodelling Supply Chains for Resilience
Joey Dean, the man with the coolest name ever and Managing Director in the healthcare consulting practice for NTT DATA and is focused on delivering workplace transformation and enabling the future workforce for healthcare providers. Dean also leads client innovation programs to enhance service delivery and business outcomes for clients.
The pandemic has shifted priorities and created opportunities to do things differently, and companies are now looking to build more resilient supply chains, none needed more urgently than those within the healthcare system. Dean shares with us how he feels they can get there.
A Multi-Vendor Sourcing Approach
“Healthcare systems cannot afford delays in the supply chain when there are lives at stake. Healthcare procurement teams are looking at multi-vendor sourcing strategies, stockpiling more inventory, and ways to use data and AI to have a predictive view into the future and drive greater efficiency.
“The priority should be to shore up procurement channels and re-evaluate inventory management norms, i.e. stockpiling for assurance. Health systems should take the opportunity to renegotiate with their current vendors and broaden the supplier channel. Through those efforts, work with suppliers that have greater geographic diversity and transparency around manufacturing data, process, and continuity plans,” says Dean.
But here ensues the never-ending battle of domestic vs global supply chains. As I see it, domestic sourcing limits the high-risk exposure related to offshore sourcing— Canada’s issue with importing the vaccine is a good example of that. So, of course, I had to ask, for lifesaving products, is building domestic capabilities an option that is being considered?
“Domestic supply chains are sparse or have a high dependence on overseas centres for parts and raw materials. There are measures being discussed from a legislative perspective to drive more domestic sourcing, and there will need to be a concerted effort by Western countries through a mix of investments and financial incentives,” Dean explains.
Wielding Big Tech for Better Outcomes
So, that’s a long way off. In the meantime, leveraging technology is another way to mitigate the risks that lie within global supply chains while decreasing costs and improving quality. Dean expands on the potential of blockchain and AI in the industry.
“Blockchain is particularly interesting in creating more transparency and visibility across all supply chain activities. Organisations can create a decentralised record of all transactions to track assets from production to delivery or use by end-user. This increased supply chain transparency provides more visibility to both buyers and suppliers to resolve disputes and build more trusting relationships. Another benefit is that the validation of data is more efficient to prioritise time on the delivery of goods and services to reduce cost and improve quality.
“Artificial Intelligence and Machine Learning (AI/ML) is another area where there’s incredible value in processing massive amounts of data to aggregate and normalise the data to produce proactive recommendations on actions to improve the speed and cost-efficiency of the supply chain.”
Evolving Procurement Models
From asking more of suppliers to beefing up stocks, Dean believes procurement models should be remodelled to favour resilience, mitigate risk and ensure the needs of the customer are kept in view.
“The bottom line is that healthcare systems are expecting more from their suppliers. While transactional approaches focused solely on price and transactions have been the norm, collaborative relationships, where the buyer and supplier establish mutual objectives and outcomes, drives a trusting and transparent relationship. Healthcare systems are also looking to multi-vendor strategies to mitigate risk, so it is imperative for suppliers to stand out and embrace evolving procurement models.
“Healthcare systems are looking at partners that can establish domestic centres for supplies to mitigate the risks of having ‘all of their eggs’ in overseas locations. Suppliers should look to perform a strategic evaluation review that includes a distribution network analysis and distribution footprint review to understand cost, service, flexibility, and risks. Included in that strategy should be a “voice of the customer” assessment to understand current pain points and needs of customers.”
“Healthcare supply chain leaders are re-evaluating the Just In Time (JIT) model with supplies delivered on a regular basis. The approach does not require an investment in infrastructure but leaves organisations open to risk of disruption. Having domestic centres and warehousing from suppliers gives healthcare systems the ability to have inventory on hand without having to invest in their own infrastructure. Also, in the spirit of transparency, having predictive views into inventory levels can help enable better decision making from both sides.”
But, again, I had to ask, what about the risks and associated costs that come with higher inventory levels, such as expired product if there isn’t fast enough turnover, tying up cash flow, warehousing and inventory management costs?
“In the current supply chain environment, it is advisable for buyers to carry an in-house inventory on a just-in-time basis, while suppliers take a just-in-case approach, preserving capacity for surges, retaining safety stock, and building rapid replenishment channels for restock. But the risk of expired product is very real. This could be curbed with better data intelligence and improved technology that could forecast surges and predictively automate future supply needs. In this way, ordering would be more data-driven and rationalised to align with anticipated surges. Further adoption of data and intelligence and will be crucial for modernised buying in the new normal.
These are tough tasks, so I asked Dean to speak to some of the challenges. Luckily, he’s a patient guy with a lot to say.
On managing stakeholders and ensuring alignment on priorities and objectives, Dean says, “In order for managing stakeholders to stay aligned on priorities, they’ll need more transparency and collaborative win-win business relationships in which both healthcare systems and medical device manufacturers are equally committed to each other’s success. On the healthcare side, they need to understand where parts and products are manufactured to perform more predictive data and analytics for forecasting and planning efforts. And the manufacturers should offer more data transparency which will result in better planning and forecasting to navigate the ebbs and flows and enable better decision-making by healthcare systems.
Due to the sensitive nature of the information being requested, the effort to increase visibility is typically met with a lot of reluctance and push back. Dean essentially puts the onus back on suppliers to get with the times. “Traditionally, the relationships between buyers and suppliers are transactional, based only on the transaction between the two parties: what is the supplier providing, at what cost, and for what length of time. The relationship begins and ends there. The tide is shifting, and buyers expect more from their suppliers, especially given what the pandemic exposed around the fragility of the supply chain. The suppliers that get ahead of this will not only reap the benefits of improved relationships, but they will be able to take action on insights derived from greater visibility to manage risks more effectively.”
He offers a final tip. “A first step in enabling a supply chain data exchange is to make sure partners and buyers are aware of the conditions throughout the supply chain based on real-time data to enable predictive views into delays and disruptions. With well understand data sets, both parties can respond more effectively and work together when disruptions occur.”
As for where supply chain is heading, Dean says, “Moving forward, we’ll continue to see a shift toward Robotic Process Automation (RPA), Artificial Intelligence (AI), and advanced analytics to optimise the supply chain. The pandemic, as it has done in many other industries, will accelerate the move to digital, with the benefits of improving efficiency, visibility, and error rate. AI can consume enormous amounts of data to drive real-time pattern detection and mitigate risk from global disruptive events.”