Black Swan events are not a rarity in the history of humankind, but they are unprecedented. The global supply chain disruptions of 2020 reiterate that setting up robust supply chains cannot be limited to only handling natural calamities. We need to leverage the critical data derived from events like these to build resilient supply chains.
These events don't directly impact the supply chain. The disruptions caused due to COVID-19 were mainly secondary reactions to the primary source of concern, i.e., the virus itself. The pandemic forced governments worldwide to ensure their citizens' safety through lockdowns, closing international borders, stalling the sale of non-essentials, and other such measures. Therefore, for a business, estimating the impact of probable black swan events becomes more critical. The pandemic has paved the way for many significant shifts and changes in industries globally. Here's a roundup of what the future may look like for businesses from our perspective:
The industry is witnessing a paradigm shift from cost-optimized supply chains to more resilient supply chains. Resilience in supply chains can mean more flexibility, visibility, and control in business processes. Digitalization, strategic sourcing decisions, technological advancements, sustainability are few drivers of building resilience.
The shifting focus towards building resilience can require structural adjustments to the supply chain that comes with a price. The prices of commodities are likely going to soar up in the coming days when cost optimization and better response levels alone are no longer the sole objectives for businesses.
Companies must devise robust mechanisms to increase visibility, monitor, and set-up alert to predict a threat along with a contingency plan to manage it.
Companies will continue to focus on the rapid adoption of digitalization initiatives to survive and thrive in current times. The transformation towards a Digital Supply Chain is a precursor to building resilience.
We predict an increased need for TM/EWM to effectively manage the physical movement of goods across a supply chain on the digital platform. SAP Cloud Platform will augment the rising demand for cloud-based applications, especially for turnkey supply chain solutions. There should be rapid development and increased marketing of these cloud-based solutions in the near future. SAP LBN or Ariba integration with supply chain players will most likely drive building efficient supply chain processes. The SAP App Store will cater to the need for custom, cost-effective and unique solutions for smaller issues not determined during business implementation.
There will be an enhanced focus on real-time communication, collaborative integrations, automation, and smart analytics. With predictive analytics, businesses can devise ways to react to and mitigate disruptions more effectively. Integration of Partner Key Technologies such as Project44 and ClearMetal will help gather critical supply chain visibility data to improve transparency across the supply chain.
Supply chains were mostly attuned to Optimization rather than resilience. Over the last decade, businesses increasingly focused on cost optimization and enhanced response times to meet customer demands for faster and cheaper goods delivery. Omni-channel integrations, customized product availability, and 'same day free delivery' ruled the B2C front. Globalization led the B2B end of the US and European supply chains to reduce costs. Cost-efficient sourcing methods at acceptable quality levels influenced businesses to procure from China or other parts of Asia.
The pandemic has reshuffled sourcing dynamics. Businesses are rethinking their network strategies, including sourcing, manufacturing, storing, and distribution framework. The US-China trade war caused many companies to move away from China for their sourcing needs.
Additionally, nearshoring or domestic sourcing are some strategies businesses will emphasize in the coming times. In a PwC comparative analysis of alternative offshoring countries for the US, 47% of CFOs across industries stressed the need to develop additional alternate sourcing options to ensure supply chain resilience. It further states that US manufacturers can reduce operational costs by 23% if production shifts to Mexico and further reduce it by 24% if moved to other south-east Asian countries. Therefore, there must be a healthy mix of strategies to leverage the best of all sourcing scenarios. A quota allocation system via a digitally managed platform that allows the right blend and flexibility to make proactive shifts rapidly before any disruption can help facilitate more strategic sourcing decisions.
Risk Management is now a core competency. Companies must identify their risk profile based on their respective industries. Businesses with a more specific global supply chain network and strict vendor preferences are likely to have higher risk profiles and exposure to possible disruptions. Defining risk tolerance levels, the maximum Time to Recovery, and overall financial impact will determine how well they futureproof their businesses.
Dynamic pricing is essential for tackling short-term volatility. Dynamic and long-term pricing agreements will infuse flexibility in pricing arrangements, and this where we see players like Uber Freight successfully implementing it in transportation.
The pandemic saw many technological advancements and innovations, which are going to continue. The launch of BlockChain based Certificate of Origin for the Pharma and High-Value Consumer Products was a successful use case. Increased platform connectivity with vendors and partner systems integration through API, IDOC, Web-Service, Cloud Connector Technology Automation will boost transparency across processes. Cloud Architecture Foundation via online portals, system integrations, and Machine Learning and Artificial Intelligence will build a robust IT Cloud Backbone such as SAP S/4HANA. Telematics and IoT will capture new levels of data and improve data quality. As mentioned earlier, predictive analytics will help futureproof businesses with trusted data, precise predictions calibrated to specific scenarios, and effectively converting it into actionable insights that aid decision making.
It can be safe to estimate that large buyers will exercise greater control across global supply chains. Thus, for smaller companies, the competitive advantage lies in providing reliable and agile supply chain capabilities combined with the ability to collaborate with their customers. Additionally, with sourcing priorities shifting from low cost at acceptable quality to high-level execution reliability and data sharing, smaller businesses have many opportunities to explore.
The year 2020 has been all about rebooting supply chains, and therefore, addressing only the physical flow of goods in a supply chain doesn't suffice. A better understanding of the overall process and system architecture is crucial. Unlearning certain proven concepts such as 'Just-in-Time + Zero Inventory' can help strengthen supply chains in the present scenario. For instance, in the absence of alternative sourcing, an increase in the inventory levels of critical components in the automotive and electronics industries is inevitable. Therefore, inventory optimization and safety stock adjustments must account for inventory in transit and at airports and ports in connected supply chains is possible with access to reliable and high-fidelity data.
The pandemic has also highlighted the importance of sustainable practices in the supply chain industry. Companies are increasingly adopting responsible sourcing practices. Strict scrutiny of vendors' business protocols in sync with set sustainability standards helps measure their desirability as a supply partner. There is an increasing need for carbon footprint reduction in transportation. The IMO 2020 regulations cap the maximum permissible sulfur content in marine fuels at 0.5% globally. The move aims to effectively reduce the amount of air pollution caused due to ocean freight activities.
Additionally, practices like optimized load planning, consolidations, and combining inbound, outbound, and reverse logistics can reduce pollution caused by surface transport. The development of hybrid vehicles, electric-powered commercial vehicles can further augment the initiative. Sourcing electrical or hydroelectric power for manufacturing and warehousing via Power Purchase Agreements will go a long way in creating more sustainable systems in the future. Furthermore, emphasis on circular economy and enabling a recycling flow through reuse of materials or products and packaging are the need of the hour.
As economies recover, as vaccines become available to the masses, and as normalcy returns, we must remember that the pandemic has accelerated the initiation of a global supply chain pivot. Resilience in supply chains will come with a cost, and consumers must expect commodity prices to escalate. There may be a risk of some level of inflation hampering growth, especially during the economic recovery. However, these additional costs need correlation with the significantly higher price of disruption. The incremental cost can, therefore, be viewed as spending for a type of availability. Digitization, innovation, strategic sourcing decisions, and sustainability initiatives will go a long way in building more agile, flexible, and transparent supply chains.
At Novigo, we help businesses build equipped, agile, and smart supply chains with our expertise in actively implementing SAP Systems. We have facilitated the SAP system integrations with IoT, Telematics enabling insights and execution tracking. We've partnered with Project44 and ClearMetal to deliver better visibility solutions to our customers. In a recent collaboration with our partner UberFreight we helped configure SAP customer instances, improving and automating freight operational processes from load planning to execution. Our innovations, such as the Smart Track App, Instant TM, Chatbots for SAP Cloud Platform Portal, and On-Premise Systems, among many other developments, help businesses transform their supply chains and embrace the digital core. For more information about how Novigo can help build resilience while increasing cost-saving efficiencies in your supply chain, please contact us here.