COVID-19 has exposed long-standing weaknesses in how we make and sell goods. The solution is digitization and automation, in four steps.
- The global supply chain, in its current form, is incapable of withstanding the disruptive forces of tomorrow.
- Fast-changing consumer preference, environmental disruptions and intrinsic changes to the global order are key drivers of change.
- There are four imperatives for digitizing and automating the supply chain: intelligence, architecture, operational excellence and planning, and resilience.
The global supply chain is a creation from the past, ill-suited to today’s fast-changing world. It was designed with linearity in mind: a singular focus on minimizing transport costs through building high-capacity, point-to-point distribution infrastructure. These existing infrastructures can be repurposed even as newer, faster alternatives have been and will continue to be developed. And as global trade has accelerated in recent decades, greater levels of investment and manpower have been dedicated to expanding capacity to achieve cost efficiencies.
Yet the disruption of COVID-19 has been a wake-up call: the global supply chain is increasingly ill-equipped for today’s world and needs to become digital and autonomous if it’s to be able to automatically identify and respond to external events.
The case for modernizing the global supply chain
Three factors are driving the obsolescence of the global supply chain. First, change in consumer demand is accelerating. EY’s Future Consumer Index, launched at the beginning of the pandemic, revealed that consumers around the world are progressively shifting their expectation toward products and services that are digital, local and sustainable. The vision of truly universal, lightning-fast internet access is being realized thanks to continued smartphone adoption, the emergence of Internet of Things devices, and next-generation telecom infrastructure such as 5G and low-earth orbit satellite constellations. The future envisioned in Megatrends 2018 expects consumer purchases and decisions will increasingly be voice-driven and machine-augmented, with companies’ relationship with customers machine-to-machine, values-based and digital-first.
EY Future Consumer Index, October 2020
of global consumers will shop more online for products they previously bought in stores.
EY Future Consumer Index, October 2020
of global consumers say the environment and climate change will be a top priority for them in how they live and what products they buy.
Second, environmental factors are starting to exert greater influence. According to International Air Transport Association (IATA), COVID-19 has contributed to a forecasted decline of 66% in air traffic in 2020. Additionally, climate change is fueling increased frequency and severity of extreme weather events. One peer-reviewed scientific study estimated the frequency of intense floods and storms could double within 13 years and, this year alone, we’ve already seen severe flooding in China and India, wildfires in California, typhoon-induced extreme flooding in Japan, and Hurricane Laura, the 16th costliest hurricane on record. In the longer term, rising sea-levels could potentially wreak havoc on many seaports and airports located at sea level. Businesses – especially those with large physical footprints – should expect climate-related disruptions as the norm for decades to come.
Finally, the global order is fundamentally reshaping. The impact of the rebalanced global system, which we discussed in Megatrends 2018, outlined the increasing likelihood that multipolarity will be the end state, as China tries to establish its own sphere of influence in opposition to the West, led by the United States. Escalating tensions around trade, technological innovation and healthcare suggest it’s highly unlikely we’ll revert to the cooperative past that characterized the period following China’s 2001 admission to the World Trade Organization. Yet cooperation will be key. Parag Khanna, Managing Partner of Futuremap, predicts an increased emphasis on regionalism, where economies in close proximity will be more inclined to coordinate.
Four imperatives for digitizing and automating your supply chain
So, how do you future-proof your supply chain? Start by comparing prevailing consumer preferences with your supply chain’s performance dimensions: cost, quality and delivery.
The linear global supply chain, designed with little flexibility in mind, has sought to meet consumer demands by lowering cost through scale, minimizing delivery time through inventory build-up and logistics capacity expansion, and upholding quality with stringent procurement processes. Yet the strain is apparent. These approaches are not scalable and run in counter to the flexibility needed for today’s consumers, while the severity and frequency of climate events and the ever-changing trade regulatory landscape is making the linear global supply chain untenable.
The answer? Applying modern technologies to enable greater levels of automation. Consider the history of telecommunications. The burgeoning cost of manually routing each call, coupled with growth in demand, prompted the invention of the Strowger switch, an automatic Private Branch eXchange (PBX) capable of mechanically route phone calls with minimal human facilitation.
The global supply chain today stands where the telecommunications industry did 60 years ago. Its only sustainable transformation strategy is to become fully digital and autonomous, able to not only automatically identify and respond to events brought on by natural disasters and geopolitics, but also to enable real-time activities, traceability and responses to customers by seamlessly communicating between assets, systems, and the front and back ends. Real-time information sharing will enable an autonomous supply chain that minimizes human involvement – just as the arrival of the automatic PBX made the job of the human telephone operator redundant.
Don’t expect any buzzy emerging technology – blockchain, artificial intelligence, 3D printing, cloud-based data lake, digital twins, warehouse automation, delivery drones – to be a supply chain panacea. The EY supply chain reinvention framework recommends four imperatives to enable an organization’s supply chain to transform into one where decisions are more data-driven.
- Supply chain intelligence: Siloed departmental data is common, so the start of any supply chain reinvention journey is to invest in the right mix of infrastructure and trained talent to enable end-to-end, real-time visibility. That allows the identification of company-specific, industry-specific and geographic-specific pain points.
- Supply chain architecture: Visibility allows the design of an optimal supply chain operating model, from structure to governance and processes. This intelligence also assists in weighing pros and cons to determine the optimal mix among local, regional, and global sourcing and manufacturing capability.
- Integrated operational excellence and supply chain planning: This is often the most arduous and continuous step: individually examining key elements such as procurement, manufacturing, logistics and fulfillment while adopting a systems mindset to develop all-horizon implementation plans employing technologies such as smart factory, digital fulfillment and integrated digital planning.
- Supply chain sustainability and resilience: Once supply chain excellence is achieved, the next evolutionary step is adopting future business models to sustain competitive advantage. For fresh produce, for example, vertical farming promises to enable production at the point of consumption, dramatically reducing carbon footprints. In fashion, where hyper-personalization could be key differentiator, 3D printing facilities close to customers and smart factories in near-shore locations may prove to be viable options. And in sectors where disposal of polluting batteries has been a notorious and persistent issue, adopting a circular supply chain operation by repurposing and recycling could a positive step toward meeting environmental, social and governance (ESG) targets.Enterprises are faced with increasing stakeholder pressure to build sustainable businesses. According to our latest supply chain reinvention survey, supply chain executives rank sustainability as their second highest priority in the next three years, close behind their number one priority supply chain efficiency.
A chance for competitive advantage
We’re not suggesting transforming supply chains is easy: it’s an arduous and individualized journey where success is contingent upon the commitment of employees, as well as its affiliated partners and suppliers. As these efforts are taken by more and more firms around the world, the global supply chain will morph into a network-based, digitized and autonomous supply chain that embraces the 3Rs: Responsiveness, Reconfiguration and Resilience. Companies that move early with intent will gain sustained competitive advantage for years to come.
The COVID-19 pandemic has exposed long-standing weaknesses in the global supply chain, an integral part of trade and commerce globally. Fast-changing consumer preference in the products and services, heightened frequency in environmental disruptions, along with intrinsic change to the global order, are key drivers for supply chain transformation. By addressing the four imperatives for supply chain reinvention, companies will reap the benefit of decisions based on data not guess work.