In a globalised economy, supply chains have become a complex, clunky, opaque and rather inefficient network to shift goods to support people and businesses.
However, the pressure placed on supply chains during the COVID-19 pandemic has highlighted the vulnerabilities of these networks, and showed how urgent it is to make them more efficient and resilient to global shocks. Supply chains include not only the traditional arrangements of a manufacturer with supplier and buyer networks, but also the financial supply chain impacting on companies.
Diverse sourcing and digitization will be the key to building stronger, smarter supply chains and ensuring a lasting recovery.
Unprepared and not resilient enough
Before the COVID-19 crisis even started, there were concerns about the vulnerability of global supply chains. A 2019 survey of industrial manufacturing leaders by Deloitte revealed that 92 per cent thought manufacturers were “minimally prepared” to handle long-term trade volatility.
“The COVID-19 pandemic has hit global trade and investment at an unprecedented speed and scale,” the World Economic Forum said in a report. “Multinational companies faced an initial supply shock, then a demand shock as more and more countries ordered people to stay at home.
“Governments, businesses and individual consumers suddenly struggled to procure basic products and materials and were forced to confront the fragility of the modern supply chain. The urgent need to design smarter, stronger and more diverse supply chains has been one of the main lessons of this crisis.”
The crisis highlighted the requirement for flexibility and transparency of suppliers and the risk of concentrated vendors/suppliers/outsourced activities. As a result, companies may look to stock up and move towards decentralisation of manufacturing capacity. And with governments and businesses looking to bring production home or near-shoring, there is a need for diversifications of suppliers even if it will cost more.
This may open new trade corridors within and outside the country.
“This trend grew with the likes of automation and small batch production, which had become so cheap that a number of countries started moving portions of their supply chain back home,” the WEF report adds. “Policymakers may be increasingly pressured to consider whether certain products need to be manufactured in the country or the region.”
A good example of this is the #VocalForLocal campaign launched by India. “The transition to a new model for supply chains will be underpinned by a rapid and wholesale digitisation of the paperwork that accompanies global trade,” the report says.
COVID-19 was a catalyst for change and the need to accelerate digital transformation. This is no different to supply chain management, as it will be the most efficient approach to reduce trade costs and support a rebound for the economy.
Indeed, despite the huge development of the Internet since the ‘90s and the rise of mobile technologies in the past decade, the interactions between buyers and suppliers remain predominantly paper-based. Digitising their relationship is therefore of a fundamental element for building solid and transparent supply chains.
Modernising outdated processes by using technology, especially promising ones, like the Internet of Things (IoT), Artificial Intelligence (AI) and blockchain could turn supply chains into proactive, smart and nimble networks able to quickly adapt to rapid changes in a volatile environment to future-proof global trade and investment network.
The results speak for themselves: data from Boston Consulting Group (BCG) reveal that companies that have adopted digital supply chain technologies are 25 per cent better prepared to respond to the crisis than those lagging in digitisation.
Digitisation offers a unique opportunity to seize new markets: the industrial leaders surveyed by Deloitte said they expected 30 per cent of new revenue for manufacturers to come from digital revenue streams – either “products” or “outcomes/solutions”. This is actually also a matter of survival.
These industrial manufacturing firms believed that almost a third of today’s industrial companies could be out of business or significantly changed in the next decade if they do not embrace digitisation.
According to Mckinsey, even before COVID-19 hit, 92 per cent of companies thought their business models would need to change given digitisation. The companies listed on the S&P 500 Index have an average age of 22 years, down from 61 years in 1958. Despite herculean efforts and significant accomplishments at many businesses, the pandemic has brought into sharp focus how vulnerable companies really are.
One consumer packaged goods (CPG) company saw its online orders go through the roof, only to have its operations descend into chaos in an effort to process and fulfil the surge. Tech-enabled businesses, on the other hand, were able to move at speed, such as food-tech business Zomato, which used its platform to work with grocery start-ups to meet surging online-order demand.
Supply chain transactions currently are mostly a paper-based, manual process, slowed further by the need for stringent Know Your Customer (KYC) checks. There again, global trade cooperation, innovation and increasing digitisation is key... and banks are playing a key role in this field. It’s never too late, or too early to map out your transformation journey and future-proof your business.
The worst thing to do in today’s turbulent times is to do nothing.
- A.D. Ganesh is Regional Head of Commercial Banking, Africa & Middle East and Head of Commercial Banking for the UAE at Standard Chartered.