Global organisations must rethink supply chain management to cope with the aggravated supply chain challenges resulting from all sorts of disruptions, such as geopolitical instability, pandemic, and trade disputes. No organisation is exempt. In this article, I present my views on the need for organisations to adequately prepare for disruptions before they occur.
Even since the trade war between the US and China broke out in 2019, few would have expected our globe to become so restless, even up to the present, amid a sequence of major crises such as COVID-19 and the Russia-Ukraine war. Gartner is a UK-based research and advisory institute. It interviewed almost a thousand professionals in supply chain management after the trade war began. The survey1 revealed that foreign entities were fleeing from China, while countries in South East Asia and South America were clearly benefiting from the outflow of job opportunities. The recent “dynamic clearing” mandate by the central government of China in response to COVID-19 has only made this wave of job migration even worse.
One of the most visible consequences of the disruptions is the shortage of supplies. For instance, the US has pioneered the development of a range of medical equipment and supplies. Yet it took the pandemic to alert US nationals to the fact that most of the necessities for surviving the pandemic, such as masks, testing kits, and ventilators, are manufactured offshore. In retrospect, ex-president Donald Trump was correct to give preference to domestic manufacturing before the outbreak of COVID-19, only to include items such as masks and nasal swabs in his list!
A survey released by Gartner in 20202 also reflected the fact that the pandemic and the shortage of critical supplies were the top two supply chain risks, ahead of cybersecurity and trade war. Therefore, it is imperative that global organisations give thought to how to move forward with their supply chains.
Configuring the Supply Chain
Whether it’s the trade war or the COVID-19 pandemic, the scope and time span of the crises are unprecedented. Unless a company has prepared proactively before a major disruption occurs, it will surely find the going tough. Certainly, even if a company had fulfilled all its due diligence in planning for contingencies in the event of a major disruption, no one would have predicted a pandemic of such a scale and time duration as COVID-19. However, in this regard, a handful of companies have demonstrated much more flexibility and agility in dealing with unforeseeable disruptions. As a result, their supply chains function more smoothly and seamlessly, allowing them to offer a better service than their rivals.
In order to diversify or mitigate risk, whether market- or supply-oriented, a company should design and configure its supply chain with some built-in hedging capabilities. One realisation is the need to own and operate a fast and responsive supply chain, while at the same time having another, cost-conscious supply chain relying more on sea freight and shipment consolidation. This dual-supply-chains approach not only allows the company to optimise based on cost and performance; geographically, having plants and distribution centres located across continents is a way to hedge against geopolitical and pandemic risk. Regional supply chains are more expensive to set up and to run, but a more decentralised configuration of supply chains also enables the company to have multiple sources of supply, should a disruption occur.
More than a decade ago, HP already practised and advocated using portfolios of supply chains. Portfolios may include low-cost, lean supply chains, as well as agile and responsive supply chains at the other end of the spectrum. As described by Olavson et al.3, “Portfolios also allow supply chains to adapt over both the long term and short term, with or without changing supply chain designs. In the short term, portfolios allow companies to re-optimise tactics to shift the mix between supply chains to adjust to macroeconomic volatility and new competitive threats to both price and responsiveness.”
A garment manufacturer that I am acquainted with became a victim of the Sino-US tension. It was blacklisted by the US Department of Commerce, and shipments were consequently detained by US Customs. In responding to the crisis, it quickly redirected market focus from the US to Asia, but that also implied redesigning new products and reconfiguring, scaling down, and even closing some of its garment factories in countries such as Malaysia and Mauritius. The sooner the company was able to enact, the smaller the loss that was incurred.
In a survey conducted by Gartner, advanced robotics and robotic process automation were ranked numbers 5 and 6, respectively, among the top disruptive and important digital technologies of today. Although they ranked immediately behind artificial intelligence, big data analytics, machine learning, and the internet of things, advanced robotics and robotic process automation proved to be smart investments. It is well known that e-commerce titans like Amazon and Alibaba invested heavily in warehouse and distribution automation, such as in picking and packing orders. During the pandemic, prolonged lockdown periods due to tightened social distancing policies led to exceedingly high levels of absenteeism. Shortage of labour can be seen everywhere. A global logistics company revealed to me that its absenteeism rate in Hong Kong reached 50 per cent at its peak. I anticipate more investment in robotics and process automation as a future trend, not just in the short term but also the long term, driven by the pandemic.
On the other hand, the past years have seen more companies emphasising the importance of omni-channels. Having both online and offline channels in place, as in the case O2O, allows a company to effectively hedge against any disruption that might cripple one of the two channels. It is evident that e-commerce companies running an end-to-end channel from retailing to delivery are the winners in this wave of pandemic. Many customers switched to placing orders online at home and having these orders delivered right to their doors. Traditional bricks-and-mortar retailers who do not have an online channel clearly lack the flexibility to take in orders, especially during the peaks of the pandemic, when most customers refrain from leaving home to go shopping.
Big Data Analytics
As importantly as putting the physical supply chain in place, information, or more specifically market intelligence, is the next focus for a company in order to cope effectively with changes due to unanticipated disruptions. The technique of big data analytics facilitates quickly detecting any market abnormalities, so that a company can take action to rectify the situation. A seamlessly managed supply chain does not come into existence by chance. Today, most companies and their supply chains manage a large number of stock keeping units. The behaviour of a SKU is dynamic, given that the pandemic has triggered significant changes in the buying behaviour of customers. For instance, Walmart, the largest retailer in the world, processes more than one million retail transactions per hour. To process and interpret the data so that is quickly converted to market intelligence is a formidable task. Even with the best physical supply chain in place, all actions to be taken with regard to the supply chain are initiated after the data becomes intelligence, and intelligence triggers decisions, something that cannot be achieved without sound data analytics capabilities in today’s digital society.
We have experienced some of the most challenging times of market disruption in decades. Risk exists in different realms, such as geopolitical tension, climate change, and pandemic, and they all end up making supply chain management erratic and formidable. Certainly, there is no quick fix here, but a company that is always thinking ahead before a crisis occurs is more prepared to build proactive mechanisms into its supply chains. The rewards can be tremendous.
About the Author
Ki Ling Cheung is an Associate Professor in the Department of Information Systems, Business Statistics and Operations Management, at the Hong Kong University of Science and Technology. He received a BS degree in Mathematics from University of Wisconsin, Madison, and an MS degree and a PhD degree in Industrial Engineering, both from Stanford University. Prior to joining HKUST, he was a management consultant at Teknekron Corporation, USA. His primary research interest is in inventory management and supply chain management.
- Gartner (2018). Future of Supply Chain: Reshaping the Profession.
- Gartner (2020). Weathering the Supply Chain Storm Survey.
- Thomas Olavson, Hau Lee and Gavin DeNyse “A Portfolio Approach to Supply Chain Design,” Supply Chain Management Review, July/August 2010, P. 20-27.