Posted: 01 Jul. 2020 5 min.

The dependence on trade with China calls for a brand new digital supply chain model

Topic: Supply Chain

Managing the immediate supply chain risks following COVID-19 is the priority now. In the longer term, companies need to refine their overall supply chain strategy with a more holistic view. The good news is that new digital tools can finally provide visibility to multi-tier supply chain risks – something that was previously unattainable.

There is no doubt that China’s role and importance to global trade has grown significantly over the last few years – also for Danish and Nordic companies. Today, China is a producer of high value products and components, it is also a large customer of global commodities and industrial products, not to mention a very attractive consumer marketplace with its rising middle class.

Wuhan specifically is very important to many global supply chains. While it has been a traditional base for manufacturing for decades, it has also become an area of modern industrial change. Major industries include high technology (opto-electronic technology, pharmaceuticals, biology engineering and environmental protection) and modern manufacturing such as automotive, steel and iron manufacturing.

Just to give you an idea, let’s take a look at the actual numbers:

  • Over 200 of the Fortune Global 500 firms have a presence directly in Wuhan.
  • More than 150 of the Fortune 1000 have Tier 1 suppliers (those they do direct business with) in the impacted areas.
  • And more than 900 of Fortune 1000 have one or more Tier 2 suppliers (which feed the first tier) in this same impacted area.
  • Add to this, that very few organisations today can trace their supply chain beyond tier 1 suppliers, and advanced digital solutions are generally required to trace supply networks reliably across the multiple tiers of suppliers that are required to fully understand supply-side risk.
  • Visibility into or having no direct exposure to tier 1 suppliers in China does not mean that a company is safe from disruption. The domino effect of plant closures and supply shortages across the extended supply network can quickly lead to significant supply chain disruption.

Even for those companies that are not directly reliant for production or suppliers in Wuhan and surrounding impacted areas, logistics within China has been affected. As the transportation hub for many industries, Wuhan is home to the largest inland port in the country, and has a well-developed infrastructure in water, land and air traffic. Important industrial cities such as Beijing, Shanghai, Guangzhou, Chengdu and Xi’an are also all within 1,200 km of Wuhan.

The imperative for a new supply chain model
What it all comes down to, in my view, is a clear call for companies to start the process of refining their overall supply chain and risk management strategy as soon as they have mitigated the short-term supply chain risks following COVID-19.

Supply chains have surely become highly sophisticated over the last few years, but their interlinked, global nature also makes them increasingly vulnerable to a range of risks, with more potential points of failure and less margin of error for absorbing delays and disruptions. A decades-long focus on supply chain optimisation to minimise costs, reduce inventories and drive up asset utilisation has removed buffers and flexibility to absorb delays and disruptions. COVID-19 illustrates how many companies may not fully appreciate their vulnerability to global shocks through their supply chain relationships.

Fortunately, new supply chain technologies are emerging that can dramatically improve visibility across the end-to-end supply chain. Doing this, they support much more agility and resilience without the traditional overhead associated with risk management techniques.

 

What is happening right now is that the traditional view of a linear supply chain is transforming into digital supply networks where functional silos are broken down to enable end-to-end visibility, collaboration, responsiveness, agility and optimisation. Increasingly, these digital supply networks are being built and designed to anticipate disruptions and reconfigure themselves appropriately to mitigate their respective impacts.

Technologies such as IoT, cloud computing, 5G, AI, 3D printing and robotics are all critical to enabling the digital supply network of the future. With these and other technologies it is finally possible to incorporate structured and unstructured data to truly provide the visibility and transparency to multi-tier supply chain risk that was previously not attainable.

Whether it is a black swan type event like COVID-19, a trade war, an act of war or terrorism, regulatory change, labour dispute, a spike in demand for a particular product in a specific region or supplier bankruptcy, companies are learning to count on the unexpected.

There are undoubtedly many things we have learned – and are still learning – from the current crisis. Having worked 20 years with global supply chains, from my perspective, one of the most important lessons is the need to build a resilient supply chain that not only seeks to reduce risks, minimise costs and reduce inventories, but also is prepared to quickly adjust and recover from whatever supply chain disruptions we might find ourselves facing in the future.

That kind of flexibility and transparency is still a dream for many companies, but each day I see how we are making progress together.

Wishing you all a wonderful summer.

Source: https://www2.deloitte.com/global/en/pages/risk/articles/covid-19-managing-supply-chain-risk-and-disruption.html

More about the author

Tore Christian Jensen

Tore Christian Jensen

Partner

As a part of the Strategy & Operations practice Tore has worked with analysis, development and implementation of operational strategies. Tore has deep experience with aligning business models to changing market demands through optimisation of business processes and aligning systems, organisation and governance accordingly. He has industry experience from manufacturing, transportation, consumer products and energy. His main focus is on on the operational core processes but he also covers administrative support processes. As a program manager Tore has been leading transformation projects for international clients heading multiple parallel projects and reporting directly to executive committee members. His responsibilities cover everything from initiating assessments, identifying opportunities for improvement to building business cases and following up by designing solutions and driving teams through implementation.