Looking back at the Covid response, the industry will have a wealth of recommendations and lessons to offer on how to avoid future failures in crises of this magnitude. But will companies also address the root cause of the problem: that supply chains themselves are no longer fit for purpose?
In recent decades, manufacturers created supply chain networks based on “just-in-time” that proved very effective. They optimized cost efficiency and helped keep prices low for consumers. Covid shows how vulnerable these models are to rapidly changing global crises. Supplier relationships may be considered stable and reliable. However, if a single link in this finely tuned supply chain breaks, it triggers a domino effect that paralyzes all activity.
Like almost every industry, manufacturing is experiencing a digital transformation. One lesson from the pandemic is this: any digital initiative that leaves the supply chain as it is currently structured will not achieve the desired result in the long run. What is needed instead is a rethink, a restructuring of supply chain networks – and this with the help of efficient digital platforms.
Upswing further threatened by bottlenecks
A look at earlier predictions shows: Optimistic economists believed in a V-shaped upswing. Those who took a more gloomy view assumed that the advanced economies would have an L-shaped recovery. However, the real “V” of the recovery is volatility. The initial boom in demand for manufactured goods after the lockdown quickly ran into production problems. These ranged from difficulties in obtaining raw materials and components such as computer chips, to logistics problems such as shortages of truck drivers and shipping containers, to payment delays. Problems that significantly affected the supply chain.
Most of these factors are beyond the control of manufacturers – at least within their existing supply chains. So what needs to be done to create a global supplier network that is more reliable, efficient and free of bottlenecks? That’s where digital tools come in, which, when used properly, facilitate collaboration between buyers and suppliers. They are also the basis for new, more flexible procurement models.
Connections that hold
Digitalization also plays a role, above all, in building stronger and more valuable relationships – not just with existing suppliers and customers, but with a broad and ever-growing network around the world. Manufacturers who want to avoid production barriers know: Just-in-time supply chains worked smoothly in good times. Because this was the case for a long time, there was no reason for either manufacturers or suppliers to question their relationships. Through Covid, however, the importance of continuing to build on new and existing relationships and adding effective, real-time communication is becoming clear.
To avoid a repeat of the last two years, there needs to be closer business relationships between manufacturers and suppliers based on digital tools. These will enable both parties to access real-time data regarding materials, shipping and payment. No longer will only first-tier suppliers be mapped, but all suppliers down to the origin of the raw materials.
Improved visibility not only helps identify potential problems before they bring the supply chain to a halt. It is also invaluable when it comes to informing customers about potential delays in a timely and transparent manner. Furthermore, companies have visibility into the origin of raw materials and supplies, as well as every component in their supply chain. This enables them to fully comply with their CSR policies and meet the requirements of the new Supply Chain Act.
When using digital platforms, all orders and the current status can be viewed by all parties involved in real time. This strengthens trust and mutual understanding of each other. The result is a supply chain that is more collaborative.
Building tomorrow’s supply networks today
Two key lessons can be drawn from the past two years:
- The manufacturing industry needs a shift in thinking away from “supply chains” and towards building an agile supplier network.
- A strong, collaborative and resilient supplier ecosystem requires a digital foundation.
This cannot be achieved overnight. Manufacturers don’t have to achieve these goals alone. They can leverage a number of digital tools and platforms to help them work more closely with their suppliers. Below are the features companies should look for when evaluating digital tools or platforms to transform their supply chain:
1) Networking and communication capabilities.
Effective digital platforms and tools help connect with other suppliers and buyers and consistently expand business relationships. In addition, a strong digital platform consolidates communication channels and enables companies to store and reference information more accurately.
2) Automation capabilities
The digital tools and platforms manufacturers invest in should have automation capabilities to relieve them of completing repetitive and time-consuming tasks. They should be holistically adaptable to individual business needs and allow for classifications of automation – from light automation to medium automation to full automation of entire processes and workflows. It is also important to check whether the newly implemented tools are fully suitable for the desired processes and whether they add predictable value to the company and successfully relieve employees.
3) Early payment plans
One of the biggest challenges for businesses is ensuring timely payment for their goods and services. Manufacturers should therefore look for a digital platform that not only supports early payment strategies, but also rewards buyers for paying faster.
Conclusion on crisis-proof supply chains.
Like any crisis, Covid is a learning opportunity. To minimize the factors that contribute to stalling supply chains and delaying economic recovery, a shift in thinking is needed. Digitizing business relationships is the start of making the supply chain fit for the future: moving away from the fragility of just-in-time processes to new networks based on automation, agility, and end-to-end visibility that can handle the next global crisis.
Author: Jonathan Laverentz, Head of Digital Innovation, Tradeshift