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A Supply Chain in Disaster or Recovery Mode?

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Martin Sundblad

2021-12-24 81
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It is difficult to avoid the disaster scenarios painted in the press – Volvo Cars, Scania, Apple, have all reported on serious shortages and consequences for the microchip supply chain. If you look beyond semiconductors, containers have been stacked in ports across the globe. Components and spare parts that arrived just-in-time for years were suddenly a bottleneck and a major cause for concern. The value chains carefully crafted and developed over decades became fragile and non-resilient.

85% of respondents in the 2020 IDC global supply chain survey say that the COVID-19 pandemic has significantly affected, or is expected to impact supply chain significantly. No surprise – and it is also clear that for many organizations, the impact has led to far-reaching consequences. "Resiliency" seems to be the answer, it was the most important remedy in our survey – 24% of the respondents agreed, but it became much less clear when we asked what investments (if any) were to be made to achieve this "supply chain resiliency".

There is a wide variety across industries and size of organization, and the natural answer to the "how" question is: "it depends". Even when determination to achieve supply chain resiliency is firm, there is uncertainty to the measures and investment areas. Many expect the current disruption to blow over and expect things to return to normal already in 2022, but especially large manufacturing organizations are already taking measures. It is not difficult to predict that there will be winners and losers in the current battle for supplies and logistics, and that enterprises will emerge very soon that have supply chain resiliency and delivery capability as a differentiator. In that sense, supply chain disruption is already here, and most organizations need to face the reality that their competitors can see the opportunity and are rushing to it. Small and medium sized businesses will suffer as logistical negotiation power may come to determine business success.

Much of the imbalance in the supply chain has been a function of huge demand increases. The use of intelligence in most products and services has increased demand for microchip and for logistics. Prior to the pandemic, supply generally exceeded demand, and if demand exceeded owned factory capacity, there were generally available contract manufacturing options. While driver shortages have occurred in the past, the global economy managed to pull out additional capacity.

The current remedy to supply chain fragility that our research shows companies are considering, and the current steps towards supply chain resiliency lie spells visibility and risk reduction.

Increased Visibility means additional investments in data analysis and the development of data exchange to improve end-to-end traceability and analysis of potential weaknesses. The IDC 2020 SaaSPath survey revealed that more than 50% of companies still use spreadsheets either exclusively or predominantly. It also means a tendency to choose larger suppliers, both for microchip and for logistics, suppliers with enough strength to have, in turn, visibility and analysis in their supply chain.

Risk Reduction means increased diversity in sourcing and greater agility in the supply chains. Geo-diversification is already happening, we have already seen semiconductor manufacturers announce plans to build new factories in other regions than the traditional, and we have already seen logistics companies initiate logistics hubs in new locations and regions. Both customers and suppliers are looking at risk reduction. The larger suppliers are already increasing transparency across their supply value chain, and are diversifying and increasing control to find alternatives to ensure stable delivery. Another important ingredient in risk reduction that one should always consider is process automation. It has become a standard way to reduce cost, increase service availability and service reliability. I believe the time has come to introduce automation also in supply chain management, and this time also beyond supply chain planning.

We used to live in a world where supply exceeded demand. It is time to prepare for a time of constant supply chain disruption, where supply chain becomes a differentiator. Beyond what was discussed above, you need to do what you normally do when demand exceeds supply. You need to

• Identify your bottlenecks. Without doubt you have long value chains. Identify potential bottlenecks and work your way through your suppliers, your suppliers' suppliers etc.

• Nurture your suppliers, both for semiconductors and for logistics. Never starve your bottlenecks for work, even smaller suppliers will be needed to achieve agility and reduce risk.

• Amend your strategy. Unless you believe that the current shortages is a mere bump in the road, you identify the potential weaknesses in your current strategy – in visibility and in risk reduction. Visibility does not only spell improved data analysis in supply chain planning, but more an improvement in transparency in all the steps in your value chain before the components reach your door. Risk reduction does not only mean improved diversity in suppliers and logistics, but also to work with your suppliers to reduce risk in every link and every handover in the chain.

As part of your strategy, what balance did you take between your own production and development (regardless of whether it is product or service you develop and distribute) and outsourcing? Are there elements that can be insourced again? That can be insourced with the help of automation? That can be geo-diversified? You can safely expect an inflation in supply chain costs, and that structural inflation should be considered when amending your strategy.

The next big trend in supply chain is sustainability. As you are overseeing your strategy, and as we can safely expect that the current legislation in Europe regarding circular economy will gain strength, you should take the opportunity to move your sustainability strategy within supply chain from pure CO2 reduction to an involvement of circular elements. The return channel and recycling also involve a supply chain, albeit of a different kind, but this "circular supply chain" needs to made part of the logistics flow in a near future.

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