Why are global supply chains becoming more fragile?
General Motors recently recalled nearly 4.3 million vehicles with defective...
Supply chains keep making headlines around the world for the wrong reasons.
General Motors recently recalled nearly 4.3 million vehicles with defective software. The bankruptcy of Hanjin Shipping, one of the world’s largest ocean carriers, left half a million containers with $14 billion worth of goods stranded at sea.
Fiat Chrysler recalled 1.9 million vehicles worldwide for possible airbag and seat belt failures. Samsung had to recall a million of its newly launched Galaxy Note 7 smartphones after some devices burst into flames. And in Europe, Volkswagen was forced to shut down production of nearly 10,000 vehicles after a supplier refused to deliver key components.
These examples all point to two worrying questions: are global supply chains becoming more fragile and if so, why?
The above Volkswagen example is a good place to start to find answers and begin to address this issue begins it soon becomes apparent this fragility is itself, the first signs of a major shift for global supply chains.
Inherent imbalances - from single company to ecosystem
The automotive industry has come a long way since Henry Ford’s Motor Company mke everything that went into its product in-house. Today, 75 percent of automotive parts are not designed or built by car manufactures themselves but by their suppliers.
That means that manufacturing a car is no longer the job of a single enterprise. It’s the job of a complex ecosystem of supply chain partners. And VW is no exception. Indeed, any manufacturer of a complex product such as a car, hi-tech consumer electronics or even clothing relies upon its ecosystem of suppliers far more than the manufacturer may realize.
The VW supplier debacle highlighted how dependent the health of the entire ecosystem has become on the health of each individual partner. And how vulnerable theses complex systems have become to any imbalances.
All ecosystems contain conflict and friction. A simple example is the cost of components. Aligning cost distributions across the ecosystem with the actual value creation is a delicate balancing act. What’s the share of value that a superior car seat contributes to the final product? Or a new screen for a phone? Hence, how much should a supplier be able to charge the OEM for it?
Across many industries, suppliers are being asked to make substantial long-term investments in R&D to increase the share of value their components contribute to the mix. But if they can’t recover those investments because they are getting squeezed by the OEMs, an imbalance will occur.
This issue will only become more pressing as the value contributions of many new technologies entering into various ecosystems will need to be negotiated for the first time.
What, for example, is the value of a proprietary vision system developed by a small Israeli startup that could enable an automotive company to be first-to-market with a self-driving car?
Or the sensor technology for new wearables that can spot early signs of heart trouble? Or haptics capabilities that create a totally immersive entertainment experience?
For these complex manufacturers, companies will soon no longer compete company against company but ecosystem against ecosystem. As a result, in order to mitigate the vulnerabilities of their global supply chains, companies need to embrace a supply chain ecosystem view.
Relationships with ecosystem partners will change. We will continue to see long-term, reliable, stable supplier relationships. But also casual, experimental ones, with enough tolerance to fail, fail fast and to move on. Gartner calls this the bimodal supply chain approach.
There is no way back. Complex systems are already too complex for any single company to master in its entirety. Only organisations that master the switch from single-company focus to ‘ecosystem view’ will survive. This isn’t just semantics. It’s a profound shift in perspective that makes supply chain partners just as important as the OEM and each other.
Imbalances aren’t going to go away. They are an inherent part of the system.
Once imbalances occur, there is a second condition that can compound this fragility and risk: agility.
One factor that played a large role in the recent VW supplier disruption, is single-sourcing. From VW’s perspective, it’s a risky strategy to rely on a single supplier for any key component. For Prevent Group, the supplier involved, having so much ride on a single large customer turned out to be an equally costly mistake.
Single-sourcing and single-customer strategies would not be as risky if there was enough agility in the system that would make it possible to quickly move from one ecosystem setup to another.
But the truth is that most OEMs and suppliers can’t switch partners on a short notice because they lack the necessary agility in their IT systems to execute such a switch.
Most complex manufacturers still rely on traditional ERP systems that were designed to manage processes and data inside the four walls of a single organization. But this is drastically different from the needs of an ecosystem that demands interoperability and the real-time sharing of relevant data.
Automotive logistics is a great example. Not a single car company in the world can take care of all of its transportation needs so they all rely on logistics providers. There is no ‘one-size-fits-all’ approach either as logistics must cover inbound components and sub-assemblies, outbound finished vehicles and high volume spare parts And that is without the advent of 3D printing, set to complicate things even further.
Given this complexity it is clear that successful companies in the future will need to run on cloud platforms that can account for the diversity of partners in the system.
These platforms provide the ability to share data on inventory, shipments and documents with any partner across the ecosystem as needed and in real-time. That ability alone can boost the agility of the entire system dramatically.
The idea is not to replace existing ERP systems, but to build upon the investments that have already been made in this area and to extend those investments beyond the four walls of a single enterprise.
Boris Felgendreher is Senior Marketing Director, EMEA, at GT Nexus, an Infor Company
Follow @SupplyChainD on Twitter.
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.”