Over the last two decades, we’ve seen the hyper-globalization of supply chains, enabled by advancements in IT, affordable communications and lean manufacturing. However, nearly a year ago, this model was utterly disrupted in just a few short weeks by COVID-19.
This has prompted some deep reflection. Do our supply chains fit the world we now live in? To answer this, Orange Business Services commissioned Longitude to conduct a study of 320 of the world’s largest companies in 18 countries and interviews with six leading supply chain executives. The report, Real-time intelligence and the future of supply chains, looks at how multinationals are accelerating their AI, data analytics and digitization programs to solve the key challenges they face.
Crisis fuels supply chain disruption
Last year was undoubtedly a wake-up call for firms with interruptions to the flow of raw materials and goods for weeks or even months. The vast majority of respondents we questioned (83%) said they are more aware of supply chain risks than they were a year ago. Such events occur more often than you might think. As a sudden shock event, the pandemic follows on from the Eyjafjallajökull volcano eruptions in Iceland in 2010, the tsunami and floods in Japan and Thailand in 2011, and global NotPetya cyberattacks in 2017. Indeed, disruptions lasting a month or longer now happen every 3.7 years on average, according to McKinsey.
Building supply chain resilience
As a result, 83% of organizations surveyed by Longitude believe they need greater speed and agility to cope with change. A range of strategies is being pursued to mitigate risk. For example, 64% of organizations said they plan to transform their on-, near- and off-shore manufacturing to reduce supply chain risk. Assessments of extended supply chains are already underway by over half of respondents. A further 38% said they are considering doing such an audit within the next two years.
“Yet many things are not going to change,” according to Willy Shih, Professor of Management Practice at Harvard Business School. “Consumers will continue to want low prices (especially in a recession), and firms won’t be able to charge more just because they manufacture in higher-cost home markets.”
Even before the pandemic, the idea of a “China Plus One” or “China Plus Two” supply chain strategy had already gained momentum. Firms have been adding secondary Southeast Asian locations (such as Vietnam or Indonesia) to their manufacturing base due to the U.S.-China trade war. But as Shih notes, “Region-wide problems, like the 1997 Asian financial crisis or the 2004 tsunami, argue for broader diversification. Managers should consider a regional strategy of producing a substantial portion of goods where they are consumed.”
Shih suggests that firms that predominantly serve consumers in North America might shift some production to near-shore locations in Mexico and Central America, whereas Eastern Europe, Turkey and Ukraine are seen as highly attractive locations to supply Western Europe. There are also initiatives underway to repatriate the manufacturing of goods of strategic importance, such as active pharmaceutical ingredients and vaccines, to domestic factories.
Technologies to strengthen the supply chain
Digitization is seen as key to enabling this geographic rebalancing of global trade in cost-efficient ways. Relocating production lines to near- or on-shore locations is an opportunity to make major process improvements with Industry 4.0 technologies. For example, smart factories enable “batch production” of a wider range of rapidly changing goods in more cost-effective ways.
The research carried out by Orange shows that digital twins (virtual replicas of real-world objects and systems) can be invaluable to accelerate the production of new products by quickly redesigning the production processes. They can also support condition monitoring, predictive maintenance and automated quality control, enabling issues to be identified and addressed earlier to reduce waste.
At the same time, consumers in emerging markets will buy up close to two-thirds of global manufactured goods by 2025, according to McKinsey. Cost-effective production in proximity to this demand will be key. Under its Made in China 2025 policy, the country is shifting away from being the “world’s factory” to focus on high-tech products and services. Chinese firms are already diversifying their manufacturing bases across Egypt, Ethiopia, Kenya, Myanmar and Sri Lanka.
In short, supply chains are becoming more complex and geo-diversified. They are becoming supply networks or ecosystems. This makes advanced digitization and the tracking of raw materials, components and finished goods across a wide range of locations a vital part of a digital risk management strategy. Indeed, the World Bank’s biannual Logistics Performance Index measures the attractiveness of countries around the world as supplies of raw ingredients and goods. It ranks their “track and trace” capabilities as one of six key strength indicators.
Smart asset tracking can help firms pinpoint supplies that get stuck in transit at customs or transport hubs across geo-diverse supply chains. With their exceptionally long battery lives, IoT tags can enable firms to track the position, speed and temperature of assets for many months as they are shipped by sea around the world. These capabilities will also be vital for the rapid distribution of COVID-19 vaccines that need to be stored at ultra-cold temperatures.
Real-time data: driving new efficiencies
Real-time data can provide details on inventory levels, the efficiency of transport modality handovers, carbon emissions and costs to synchronize supply and demand and spot any issues early. However, just 45% of organizations say they are using real-time data insights for better decision-making. Our research shows this figure is set to double to 90% within the next two years.
“There is a need to be able to share real-time data with ecosystem partners and employees in frontline roles in ways that make sense for them,” says Frank de Jong, Senior Business Consultant at Orange Business Services. “Physically producing and moving goods around the world is still very much a people business. AI-enabled supply chain planning and execution systems take real-time data and turn it into insights and action, enabled by digital work instructions, virtual reality and Robotic Process Automation (RPA) for employees in frontline roles.”
Achieving cost, carbon and customer co-benefits
The need to drive profitable growth has never been so great. Some 64% of organizations in our survey highlighted the need to cut costs significantly in light of the pandemic. As we accelerate out of the crisis, digitization and real-time data collection have become primary enablers of cost reduction, sustainability and innovation initiatives. In fact, 85% of survey respondents believe becoming more sustainable can help them save costs as well as help the planet.
Around 80% are investing in digital technologies to become more sustainable, a factor that is becoming ever more important in consumers’ purchasing decisions. More specifically, 59% use digitization to manage and control sustainability factors (such as energy, fuel and water usage), and 38% are considering using this approach in the next two years.
COVID-19 has created a sense of urgency for change. A range of health, environmental, geopolitical and economic forces is converging to reshape the world we live in. Successful manufacturing, transport and logistics firms are looking to invest in the right capabilities for the long term. It’s clear that the supply chains of tomorrow will be geo-diverse, green, agile and resilient through real-time data and digital innovation.
We are undoubtedly in a period of significant change. As Yoram Wijngaarde, Founder of Dealroom, points out, “Industrial tech is at a similar inflection point as enterprise tech/cloud was in 2010.”
He continues: “Digital adoption is accelerating. The pandemic, political climate and climate change have accelerated the sense of urgency around themes like decentralization, cybersecurity, customization, sustainability and more — all of which contribute to the snowballing momentum of Industry 4.0.” We are moving into an exciting and brave new world.
Find out how you can optimize your global supply chain by using real-time data to create a more agile and responsive ecosystem.