From supply chains to a supply networks | Enterprise, Technology and Performance | Deloitte Netherlands

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From supply-chains to supply networks

Multiple events of the past years drive companies to reconsider the design of their global supply networks

Initially, the pandemic has revealed how vulnerable global supply-chains are and companies have scrambled to increase supply-chain resilience and ensure capacity and availability. In the aftermath of COVID as well as through the invasion in Ukraine, we see a ripple effect of events that disrupt these same supply-chains in new ways. on top of this comes a fundamental change in customer expectations, which caused supply-chains to shift from business enablers into differentiators. This perfect storm has moved supply-chain to the top of the priority list, trying to figure out how to best configure winning supply networks..

At the beginning of the pandemic, crisis management occupied much of the day-to-day focus of supply-chain professionals. Daily business transitioned into a search for alternative supply, as borders closed and shipments from the Far East were cut-off. When eventually the Far East opened up again, there was a global container imbalance, limited port capacity and increasing oil prices. This has dramatically increased the price of sea transport. By February 2022, the price of shipping a container from Shanghai to Rotterdam has gone up to a staggering €13.600, where the pre-pandemic cost was around €2.500 on the same route. With few viable alternative modes of transport, this puts significant pressure on the global networks that rely on production in the far East and creates additional challenges in peak periods that would already stress the supply-chains in a normal situation. Even though the imbalance is foreseen to be temporary, container rates are expected to settle at a significantly higher level with rates twice as high as the pre-pandemic price. All of this is occurring in a situation where global raw material supplies are limited and sold at premium prices.

It is clear that the events of the past years have revealed how vulnerable global supply-chains are, and how much they depend on stability, a balanced network and predictability. As it is becoming apparent that some of these effects are here to stay, we see the focus is shifting to the longer-term horizon and the question on how to best deal with these challenges. Topics at the top of the supply-chain agenda have persisted, but their relative priority has changed, compared to the pre-COVID situation.

Supply-chain resilience has evolved from an undervalued capability to a key capability of a high-performing supply network. To that end, shortening supply-chains has now become a logical option – as has diversifying your multi-tier supplier base, in terms of quantity and geographic location. Other reprioritised efforts include omnichannel fulfilment, supply-chain control tower and supplier risk evaluation.

Global shifts

Traditionally, supply-chains were considered cost centres that existed only to deliver goods to customers. They were designed based on minimising the key cost factors: manufacturing, logistics, tax and inventory cost. However, the balance has been gradually changing in the past two decades, as a consequence of two global shifts taking place: one political and one economic.

A changing geo-political landscape and recent trade wars have made operating global supply-chains difficult. The movement to a more internal, national political focus of the world’s great powers has slowed down global trade. Imposed tariffs have increased the cost of running global businesses and complicated international trade in general. On top of this, the trade agreements between the UK and EU due to BREXIT have added complexity and cost to global trade. A clear example of these consequences are the current labour shortages in the UK due to workers having or wanting to leave the UK. Even though the frequency of this type of changes is not that high, it can be a significant risk to a business case when investing in supply-chain assets with a 5-15 year life cyclc and needs to be considered in any network configuration.

Whilst the UK is facing labour issues, Asia is facing increasing labour costs which are changing the value of offshore production. The role of emerging countries – such as China and surrounding Asian countries, India and Brazil – continues to shift. For decades, the paradigm for any globally operating company has been to direct production offshore, and tap these low-cost economies for other labour-intensive activities. But as these countries’ standards of living continue to rise, so do local wages, affecting the value of offshore production. This will likely open the discussion on when global network configurations run out of date, as shifting production closer to home could become a viable option.

Another recent disruption impacting supply-chain cost is the global energy transition. The global oil prices are rising and European prices for gas peaked at 600% higher in October 2021 compared to a year earlier. In February 2022, these prices started to rise again significantly due to restrictions imposed on Russia. This amplifies the cost increase for transport as a result of imbalanced networks. It has also led to an energy crisis in China with a risk of disrupting supply-chain and capacity availability. On the one hand, this crisis might limit the speed with which countries can transition to renewable energy, but on the other it creates an opportunity for companies to make the transition to (renewable) energy a fundamental component of transforming their supply-chains and mitigate part of this risk.

Supply-chains as differentiators

But actually, another key shift has taken place that has been impacting the role of supply-chains within companies even more. During the past ten years, customer expectations have undergone a crucial transformation. Personalised products; a one-click, couch-based buying experience; and next-day or same-day delivery have become the norm. These expectations have caused the role of supply-chains to change from a mere business enabler into a differentiator and revenue driver.

As a result, we now see a new set of considerations driving the design of supply-chains globally:

  • Sustainability of products and services, both societal and environmental, must now be proven (or will be obliged to report on it from 2023 onwards as part of the EU’s Corporate Sustainability Reporting Directive); companies must actively consider the societal cost of CO2 production, as well as excessive use of plastics in packaging. Brands that do not comply face the risk of a bad reputation in the public eye
  • Quality, which used to be a technical product specification, is now of paramount importance; companies can no longer afford mistakes, under the pressure of social media
  • Flexibility in supply-chains has become key, as new delivery propositions, shifting demand and e-commerce cause consumers to expect immediate, accurate and flexible product delivery in unstable circumstances
  • Resilience has been reprioritised as COVID-19, container rates, energy prices and labour shortages have clearly exposed the risks of operating a global supply network.

These developments have fundamentally changed the position of the supply-chain, designating it a key differentiator in customer propositions.

From a supply-chain to a supply network

The upsets to many companies’ priority lists have rendered at least parts of their supply-chains out of date. What is needed is a rebalancing exercise, to adjust the configuration of supply-chains accordingly.

In contrast to the supply-chain configurations of previous decades, a one-size-fits-all model will not do the trick anymore. Various customer segments will now have varying needs, which the supply-chains need to fulfil. What this means is a future supply network that consists of different supply-chains with diverging configurations.

Industry leaders have started to investigate what their future global supply networks should look like. The best starting point is to evaluate what differentiating role your organisation’s supply-chain should play as part of the customer propositions.

Key questions they are addressing:

  1. Which supply-chain priorities will be the most important drivers in my business?
  2. Which propositions are in need of different supply-chain configurations?
  3. Which discrete supply-chains should be part of my global supply network?
  4. How does my organisation make the shift from operating a supply-chain to operating a supply network?
  5. Which supply-chain analytics and data capabilities must be in place to support this shift?

Asking these questions will drive you to take a holistic view on your supply-chain, both when considering the tradeoff between customer propositions and the differentiating role the supply-chain should play, as well as in resetting the priorities within your supply-chain. This should be the starting point to reconfigure your (global) supply-chain network to be able to deal with the increased complexity and contradicting set of supply-chain priorities.

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