Businesses are diversifying supplier bases and moving production closer to home, says Marne Martin of IFS.
Businesses are diversifying supplier bases and moving production closer to home, says Marne Martin of IFS.
The last three years have put the supply chain in the spotlight like never before.
A series of shocks led to delayed and canceled orders for goods getting to shelves. This left many brands and retailers scrambling to obtain products to meet demand, while being faced with skyrocketing prices for shipping containers.
Heading into the holiday season, there are fewer visible signs of these shocks such as ships being backed up off the coast of West Coast ports, the global system that transports goods still faces challenges. Shocks continue in many industries, as items from semiconductors to tomatoes continue to face shortages.
Yet it’s a moment to take stock: Will the world learn from this chaotic period, and will there be change as a result?
The answer may lie in looking at what these shocks exposed.
While the events that coincided with the spread of COVID-19 brought their own unique challenges, the issues that arose were not a result of individual events alone. Rather, they traced to how the supply chains were constructed, said Marne Martin, president of service management for EAM & Global Industries at enterprise software solution provider IFS, shared insights about the
“The ‘just-in-time’ supply chain worked perfectly and brought about unprecedented global
prosperity in the late 20th and early 21st century,” Martin said. “But now these weak links are exposed and highlighted by geopolitical tensions, climate change, and lingering ripple effects from the pandemic, creating a domino effect that will wreak havoc to the stretched supply chain network.”
Martin shared insights with The Current about how companies are taking steps to move away from that model. In particular, they are exploring how to build more resilience and sustainability, and applying software to make sense of the data.
For decades, businesses built supply chains with a common goal: working with the cheapest suppliers. This system helped goods move from one side of the globe to the other. Yet it was one that was built with a focus on keeping down costs. Excess inventory, for example, meant extra costs, and therefore they weren’t necessarily justifiable.
“When everything worked, the global supply chain, even if reliant on China, was efficient and cheaper,” Martin said. “Together, manufacturers, retailers, and logistics companies had created a system that perfectly leverages the ‘just in time’ principle, where products arrive just when needed, from the cheapest vendor or ecosystem of vendors.”
But the last several years have brought a shift. First, there was a US-China trade war that challenged a relationship that brought goods from manufacturers to market. Then came the global pandemic, which brought skyrocketing demand for goods and worker shortages. This year, the war in Ukraine arrived in the breadbasket of Europe. In the meantime, the effects of climate change are becoming more pronounced. Both consumers and shareholders are emphasizing environmental, social and governance (ESG) programs, and they are expecting show real impact, not greenwashing.
“With no redundancy in the system, and fraught with single points of failure – ports, rails, canals – this system of ‘just in time’ manufacturing and logistics has proven incredibly fragile, and not very sustainable either,” Martin said, adding that it is “reliant on extraction of rare earth minerals and environmental pollution in China and elsewhere.”
Transportation networks also proved fragile and congested, and choke points were exposed. For instance, when the massive Ever Given container ship ran aground in the Suez Canal in 2021, it became a meme. But there was no glee to be found in the bottleneck of ships behind it and resulting scramble for alternative supplies by those left waiting for goods. Elsewhere, COVID-related factory shutdowns in China resulted in less manufacturing, while the war in Ukraine caused grain and fertilizer shortages. At the same time, building tensions between China and Taiwan, as well as Russia and Europe injected uncertainty. In the US, recent shutdown threats that have emerged from labor negotiations with workers at ports and freight rail yards were a reminder not to take the supply chain for granted.
Seeing this play out, businesses have adjusted. There is a growing recognition that supply chains must be built differently, with more failsafe plans and less use of resources.
This is playing out in a few ways. One is a push to move supply chains in closer proximity to the points where goods ultimately need to end up. This is reflected in a growing embrace of nearshoring and reshoring, which describes moving manufacturing and supply activities back to the country where products are sold. There’s also a desire to extend the life of all that is used and moved in the supply chain, so more does not need to be created. When it comes to goods, manufacturers are exploring circular economy operations such as remanufacturing and reverse logistics capabilities. When it comes to equipment, many are looking at condition-based maintenance and after-market service.
Others are stockpiling more inventory to cushion possible delays or inflation impacts. To be sure, these moves come with risk. In this example, there’s a cost to holding excess inventory, and inventory may be obsolete by the time it hits shelves.
But the bigger point is that ideas that were merely considered are now being put into action.
“Diversifying away from relying on a single foreign supplier and a single input source are among some of the key measures businesses are taking to address the supply chain challenges,” Martin said. “This was something that has long been discussed, but the scale of the challenges and ongoing lack of resilience in the existing supply chains is now forcing the matter to be top of mind.”
Marne Martin. (Courtesy photo)
Significant numbers of leaders are taking these steps. According to research commissioned by IFS, which polled over 1,450 senior decision-makers at large enterprises across Europe, North America, and the Middle East, 70% of respondents said they had increased the number of suppliers they use in response to recent supply chain issues. Moreover, nearly three-quarters said they grew the proportion of materials or products they source from domestic suppliers because of these issues.
Meanwhile, two-thirds of large enterprises globally are keeping more stock on hand than the pre-pandemic period, with nearly one-fifth saying they had “significantly more stock.” It’s a sign of divergence from the “just in time” model, where the lowest-cost provider and the leanest possible stock were the priorities.
“It is evident that, whether or not businesses believe the changes in global trade will stay, they are taking proactive measures to address and prevent disruptions along the supply chain, even if those adaptations are more costly for them and therefore also for customers,” Martin said.
There are also sustainability benefits from near-shoring or reshoring. Environmental protections in these countries are more robust, and it is easier to implement many of the practices such as asset management and reverse logistics.
“By moving production closer to customers, businesses are also reducing the need for long distance transport, thus lowering their carbon footprints, and most often, increasing asset longevity with efficient maintenance and service processes has the lowest impact to the environment compared to other ways of working,” Martin said. “At the same time, as our survey has shown, businesses are also increasingly embracing the circular economy due to difficulties in sourcing raw materials, providing an added incentive and business value to recycle and harvest needed rare earth minerals or components from what was previously manufactured, including refurbishing where possible. It all adds up to helping reduce a product’s carbon footprint.”
Heading into another holiday shipping season, the shocks aren’t yet over. Many are taking that as a reminder on a couple of levels. For one, it’s a warning that these moments of unexpected interruption could continue. It’s also a sign that they must build for continued change.
Resilience comes from the proactive measures taken now, Martin offered a couple of concrete steps brands and retailers can take to build systems accordingly.
For one, having clear visibility on what’s core and what’s optional for business operations is key.
“To fix a problem, you need to first know there is one and to prioritize what is most impactful to business continuity and increasing resiliency where it matters,” Martin said.
With distribution networks growing and evolving, it’s also important to have a single view across an entire business. It can help drive efficiency and manage costs, especially during a time when materials and labor are rising during an inflationary period such as this. An enterprise resource planning tool can offer a view on projects, facilities, supply chain, service, assets and equipment and more.
“Having an ERP platform allows retailers to streamline high frequency transactions, manage inventory and returns more easily, and, more importantly, adjust quickly to supply chain threats like weather issues or changing trade policies. They can, for instance, use supplier schedules to facilitate forecasts and call-offs in repetitive environments,” Martin said. “ERP tools empower decision-makers with a birds-eye view into their operations in real-time, providing full visibility into transactions, stock, and inventory, to help them identify where any potential troubles may lie.”
Another step businesses can take is to diversify input sources.
“It’s never a good idea to put all your eggs in the same basket – the same is true with relying on a single supplier,” Martin said. “Even for suppliers that have a good reputation and have never failed to deliver on time, there is nothing guaranteed in today’s business environment. Any failure in the global supply network, even in parts that do not directly affect your own supply chain, spells trouble and creates cascading effects felt across the board as companies scramble for alternative supplies. Managing two suppliers simultaneously can be costly, especially since order sizes are not as big as they would be if they were from just one supplier. When disruptions along the supply chain hit, the business will benefit massively since it can maintain operations while others cannot.”
There is also room to apply advanced technologies. Artificial intelligence can ingest information and provide analysis quickly. The value, said Martin, is “immense” when data is structured and can be correlated to outcomes.
“AI can digest multiple sources of information at once, calculate the probability of possible outcomes, and make recommendations accordingly in these cases,” Martin said. “With an abundance of information so readily available, from the millions of cameras and sensors mounted on satellites in space to those on land, underwater and underground, the volume of data and the need for fast processing of it is creating incentives to adopt and utilize AI more than ever where the accuracy and confidence is there.”
AI can be built into an ERP tool, yielding a multitude of capabilities. Retailers can look at demand predictors, predict customer health, automate key billing or payment, forecast supply chain needs, or access data at the asset and equipment levels.
“AI adds both significant value to a business, but also has become a necessity given the shortage of talent and amount of data being generated in a typical business,” Martin said.
It may result in new ways of doing business. But in a period of change, that’s the point.