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The Bumpy, New World of Supply Chains

By Dr. Madhav Durbha  September 20, 2019

The Economist magazine recently issued a very comprehensive special report on how global supply chains are undergoing a fundamental shift. I will summarize the key takeaways from the report.

1. Shorter, smarter, faster… and more vulnerable supply chains

With the ongoing trade war and the rise in economic nationalism, global trade is undergoing major shift and supply chains are shrinking. Global trade growth has fallen from 5.5% in 2017 to 2.1% this year, by the Organization for Economic Co-operation and Development’s (OECD) estimates. But it is not all attributable to trade wars. Growth in automation, customer’s desire for fast responsiveness, rise in 3D printing are some other factors. With the communications giant Huawei at the center of a raging battle between US and China for 5G dominance, a “splinternet of things” in which America followed one standard and China followed another, is emerging which can lead to further barriers in global trade. While these factors are causing supply chains to get shorter, smarter and faster, increasing cyber security attacks compounded by proliferation in Internet of things (IoT) devices make supply chains increasingly vulnerable. While shorter supply chains ideally reduce risks, cyber risks act as a counterbalancing force.

2. Three industries in transition as regionalization takes hold

McKinsey Global Institute (MGI) finds that global value chains (GVCs) in 16 of 17 big industries it studied have been contracting since the global financial crisis. Clothing, cars and electronics saw the biggest declines in trade intensity.  In case of clothing, hotspots – such as Ethiopia with labor costs of just $26/month – are rising to counter China’s dominance. The automotive industry has been coalescing around three regional hub-and-spoke networks. Mexico is the low-cost spoke for the United States; Eastern Europe and Morocco support Western Europe; and Southeast Asia and China support the greater Asia market. As for electronics, while several companies have been moving parts of their sourcing out of China, a trend that is picking up in light of political risks as highlighted by Huawei, organizations are finding it harder to leave China as the hardware innovation is outpacing even that of Silicon Valley. The data furnished by LLamasoft for this article further illustrates the nature of shifts organizations in these industries are preparing for and implementing in light of trade wars resulting in further shortening of supply chains.

3. Speeding up the supply chains

Amazon continues to dictate the pace for the retail industry by announcing in April that it will spend $800 million to upgrade its supply chain infrastructure to speed up free delivery worldwide from two days to one. Walmart fired back by launching one-day delivery for over 200,000 items from its online store for orders over $35. The article cites how Walmart is moving away from “one size fits all” approaches by letting certain products such as fresh produce “flow” directly to retail stores. Upon reaching stores, fresh items are sent directly to shelves, bypassing the backroom. These strategies further accelerate the pace of supply chains.

4. Drones, robots, and flying groceries

Frugal engineering practices by the Chinese firms prioritize speed and efficiency over smarts. Contrary to AI powered robots with complex navigation, Chinese firm Libiao’s dumb robots follow centrally calculated trajectories. Retailers facing seasonal spikes can lease such low complexity robots that work in a “plug and play” mode. Hema Xiansheng, a supermarket chain (in which Alibaba has a stake) has invested in the technologies wherein in-store shoppers can pay using facial-recognition and flying groceries go to waiting couriers, who deliver online orders free within a 3km radius within 30 minutes. To speed up last mile delivery, Amazon unveiled Prime Air delivery drone in June.

5. Harnessing the power of automation

MGI estimates that 40% of all procurement tasks (e.g., vendor management, order placement and invoice processing) can be automated today and 80% soon. This could produce 3-10% in annual cost savings. It estimates applying AI to supply chain management and manufacturing can create $2 trillion in value. IoT devices take track and trace to the next level by providing real time visibility into crate orientation, temperature, humidity, etc. Flex is practicing “data democracy” by tracking 92 supply chain variables in real-time and sharing this information with its employees, suppliers and clients. This data democracy is resulting in decentralization of decisions and significant speeding up of product flows. Ford is using 3D prototyping, shortening the development of new Mustang GT500 by 18 months.

All in all, as the report highlights, amidst increased protectionism, a confluence of factors such as speeding up the retail delivery models, increased use of automation in the physical and cognitive realms and increased cyber risks make this as one of the most challenging yet exciting time to be a supply chain professional!