After years of being a vague and little-mentioned part of global business, supply chains are fast becoming a symbol of disruption, insecurity and shortages, infrastructure shortcomings, ineffective trade policies, and more. In order to “fix” the problem, much has been written recently about the need for supply chains to transform. It sounds like a great idea, but transformation is a major undertaking and a rather broad concept. A better term might be restructure, integration, revamp or revision. Still, transformation is the buzzword, so this article will use that term.
Types of supply chain transformation
Supply chain transformation is not one-dimensional. There are at least three areas of concern:
1. Digitization: Supply chain transformation is the addition and integration of technology to improve performance. There are two main elements of the digitization of supply chains: digital investments and transformation management. Digital investments include the technology and equipment assets — such as the internet of things, control towers, artificial intelligence and robotics — to be adopted in the transformation. Transformation management refers to the use and implementation of digital assets. Digitization also involves effectively linking the parent company with all other suppliers and customers to assure the accurate and timely flow of information.
2. Supplier alignment: Equally important is the need to restructure the alignment of suppliers to increase the supply chain’s resilience. While low costs still are important, many companies are finding that the reliability of deliveries is even more important. Many deliveries were so late during the COVID-19 pandemic that retailers didn’t have merchandise available during peak demand time frames. As a result, reshoring and nearshoring movements have gained added interest in recent months.
3. Cultures: It also is important to reorient the culture of companies within supply chains to foster better collaboration. In an article for IndustryWeek, Richard Kunst explains this as the need to convert vendors to suppliers. In his opinion, a vendor is a transactional provider, while a supplier has a personal relationship with you. To develop personal relationships requires that the company reorient employees who deal with suppliers to develop these more durable relationships that lead to improved product quality and delivery reliability.
There are even more reasons why a company would want to commit to any of these transformation types. Some of the perennial business reasons are to keep pace with the evolving world of business, achieve financial and competitive benefits, and deliver better customer service.
For example, the gradual changeover to electric vehicles requires automotive manufacturers to transform their production lines and expand their supply chains to procure the different parts and materials needed to produce electric vehicles. Similarly, the e-commerce boom brought with it an influx of returns. This required retailers to transform their returns processes to move unopened, undamaged items back to store shelves or resell like-new items to fill inventory voids left by supply chain disruptions. And in response to climate change, many companies are transitioning to circular supply chains to reduce their carbon footprints.
Current events at any given point in time also push companies to transform quickly. For example, Russia’s invasion of Ukraine has caused ripple effects for supply chains around the globe. Ukraine and neighboring countries have raced to set up supply chains to move people out of Ukraine and deliver supplies and aid to the battered country. Embargoes on Russian oil in retaliation for the attacks have raised the price of oil around the world, thus increasing the cost of transportation. Companies in turn have had to scramble to figure out how they can mitigate these additional costs. Industries that rely on Russia and Ukraine for materials such as nickel, neon and agricultural products have had to pause operations, find alternate sources of supply or even shift production to facilities that already have relationships with suppliers in other areas.
The COVID-19 pandemic was the source of many of the other supply chain disruptions. Outbreaks at production facilities slow or halt production, which means orders are not fulfilled downstream. Demand patterns also changed. Because consumers were encouraged to stay home, they could not spend their money on services, dining out, in-person entertainment and travel. Instead, they switched to spending on goods, which created supply-demand imbalances that companies were not anticipating. Then, when production sped up to meet demand, transportation supply chains were overwhelmed and struggled with bottlenecks. In some cases, seasonal products missed their demand opportunities and had to be held until the next year. In addition, consumers shifted their shopping more to e-commerce to avoid having to go to the store and be exposed to the virus. This put more pressure on e-commerce supply chains. The pressure burned out employees, who would quit or change jobs and leave companies shorthanded, creating more supply chain problems. Businesses had to keep updating their operations to stay afloat.
Industries being pushed toward transformation
Some industries are being more affected by all of these changes and interruptions than others. When the flow of agricultural products from Ukraine dried up, food supply chains in the region were disrupted. Fertilizer shortages also jeopardized future harvests, which could cause ongoing disruptions in the year ahead.
Any supply chains that rely on semiconductors and microchips are struggling amid disruptions. Semiconductor shortages have been happening for years, but they have been exacerbated by COVID-19 and the Great Supply Chain Disruption as well as increased demand as increasingly digital cars and other items require more microchips. U.S. companies’ dependence on foreign suppliers for these components has put them in a bind. But there might finally be some relief on the horizon. Businesses have recently been focusing supply chain transformation plans to reshore or nearshore semiconductor and microchip production. Intel has announced the construction of a series of eight plants on a 1,000 acre site in Ohio, at a cost of $100 billion, to manufacture semiconductors. However, a further complication is the availability of raw materials. Ukraine supplies more than 90% of the United States’ semiconductor-grade neon, a gas integral to the lasers used in the chipmaking process. In addition, Russia supplies 35% of the United States’ palladium, a rare metal for producing semiconductors. Replacing these sources will take time.
Electric automobiles also have a supply problem. Much of the battery production is done in other countries. General Motors, Volkswagen and Tesla all have announced plans to make their own batteries to ensure quality and availability. In addition, Volkswagen and Stellantis NV announced deals to lock up supplies of lithium, the metal whose electrochemical properties make it ideal for electric vehicles' powerful batteries. Furthermore the industry’s growth is limited by civic infrastructure. More electric vehicle charging stations are needed to power these vehicles. The transformation here will require the cooperation and collaboration of both public and private industries.
Shifting mindsets and attitudes
To achieve transformation, companies also have to make internal changes. For starters, management will need to reorient the strategic direction of their organizations to reflect the need for supply chain resilience, not just low costs and profitability. This goes hand-in-hand with increased digitization. Companies must have visibility throughout their networks to identify problems and modify weak spots to improve overall performance. Furthermore, artificial intelligence can optimize the flow of goods and operations, and robotics and other automation can reduce costs, helping to achieve those more traditional management goals.
There also need to be culture changes with regard to how staff members are acknowledged. In this era of the Great Resignation, employers need to recognize employees as individuals and treat them like the important assets they are. This means ensuring that they are compensated appropriately and have adequate work-life balance to meet their needs and in turn energize them to support the organization.
Additionally, the teams of importance will shift. Procurement and supply chain management will become more critical as companies prioritize supply chain resilience. These key practices can enable companies to reach environmental, social and governance goals by identifying and leveraging ethical and eco-friendly suppliers.
Of course, all of these changes are much easier said than done, which means that transformational success does not come easily. Supply chain transformation requires actions not only throughout the originating organization, but also by all participants in the supply chain. McKinsey surveys over a 15-year period indicate the success rate of transformational efforts is about 30%.
However, this research also has uncovered three critical actions that successful companies pursue:
1. Complete a comprehensive, fact-based assessment of the business to identify opportunities for improvement.
2. Adapt goals for employees at all levels.
3. Allocate high performers to the highest-value initiatives.
Put another way, companies must develop a well-thought-out transformation plan, involve employees throughout the organization in achieving the objectives, and assign the best people to the highest-value projects. Again, although this might sound straightforward, many businesses fail on these points.
One hurdle is that most organizations have the capability to manage supply chains but lack the skill to transform them, and that comes down to attracting the right talent. According to research by MHI and Deloitte, for the past nine years, hiring and retaining qualified workers has consistently been the top supply chain challenge. This year, supply chain disruptions caused by the pandemic claimed the top spot on the list, but talent issues were a close second. Again, this goes back to creating a good company culture to attract the best employees. But also, it’s important to remember that supply chain transformation still is a relatively new area, so few people have expertise or even experience in this area. Companies must be willing to train employees throughout the transformation process and, for lack of a better strategy, figure it out as they go along.
When a company completes its version of supply chain transformation, can it finally rest? Not likely. There will always be future changes to prepare for, and organizations will need to pivot to perform better in each new reality.
For example, on the geopolitical front, what if Russia continues trying to occupy neighboring territories? What if China increases its pressure to bring Taiwan under the control of the mainland? What if North Korea tests longer-range missiles that could reach the mainland of the United States? What if a country in Africa erupts in a civil war that could affect the availability of cocoa or some other exotic material? What if China’s lockdown to limit the spread of the COVID0-19 virus significantly limits the flow of goods out of and into China?
On the technology front, what will be the impact of advances in autonomous trucking to move goods, additive manufacturing to increase localized manufacturing, robotics to enhance warehouse picking and packing, or artificial intelligence to optimize supply chain design? What if the conversions to electric vehicles and renewable energy sources don’t come along fast enough to offset the effects of climate change? And what if a new contagious virus emerges that resists currently available vaccines and forces drastic changes in workplace practices and individual behaviors?
Supply chain transformations are not a one-and-done effort. Organizations must be consistently on alert to detect what is necessary to meet both short- and long-term challenges.