Part II: Implementing a 21st-century supply chain - now
So far
In the last blog post, we looked at reasons (cost, revenue, resilience, sustainability) to consider a more local or regional supply chain setup, harnessing 21st-century agile and digital principles. If you missed part I, you can find it here. To make it more real for your own company, feel free to check out the nine questions I distilled over the last years, whether you even have a vulnerable supply chain.
Today, I write about the size of the prize to re-design a global supply chain and how such a project could be set up.
Size of the prize
Any change in a capitalistic market environment needs to make financial sense to the stakeholders. We can assume that, similar to when we moved into global supply chains, the next step of regional, agile & digital supply chains will have to yield double-digit per cent improvements. Let’s consider the following list and extrapolate it to our companies’ bottom line.
Reduced lead times by 50% or more: Re-shored, agile production to a regionally based facility can help a firm reduce lead times by eliminating the need for long-distance transportation of goods. You respond more quickly to market changes and customer demands.
Improved product quality: By producing goods closer to the point of consumption, you can improve quality control by having better oversight of the production process and responding more quickly to any issues that arise.
Excellent sales & operation planning: Re-shoring production to a regionally based facility helps you to increase agility by allowing faster and digital communication and collaboration between different departments and functions.
Enhanced Supply Chain Resilience: Re-shoring production closer to home reduces dependency on long distant suppliers and logistics. This can help a firm mitigate risks associated with supply chain disruptions and increase resilience to supply chain disruptions.
Improved cost-of-sales: Re-shoring production to a regionally based facility saves transportation, logistics, tariffs and other import-export related costs. Additionally, it can help a firm to reduce labour costs through digitalization and automation rather than continuing error-prone low-cost labour.
Positive impact on the local economy: Re-shoring production to a regionally based facility can have a positive impact on the local economy by creating jobs, increasing tax revenue, and promoting economic development.
Improved working capital by reduced inventory costs: Implementing an agile and digitalized supply chain can help a firm reduce inventory costs by allowing for more accurate demand forecasting, better inventory management, and just-in-time delivery.
Increased operational efficiency: By digitizing processes and automating workflows, a firm can increase operational efficiency and reduce the need for manual intervention, leading to cost savings and improved productivity.
Improved visibility and traceability: Digitalization of the supply chain can provide greater visibility and traceability of goods, which can help improve decision-making, reduce errors, and increase transparency and accountability. This can benefit the company in case of any issues or recalls.
Carbon offset revenue: A firm can also generate revenue by selling carbon offsets. Carbon offsets are credits that organizations or individuals can purchase to offset their carbon emissions.
Attracting investments: A commitment to reducing GHG emissions can also attract investments from socially responsible investors and could lead to a positive impact on your stock price.
Tax incentives: Some governments may offer tax breaks or subsidies for your company that reduce emissions, which can help to offset the cost of implementing sustainable practices.
These are just some initial points; add as you see fit. Next comes the setting of targets for growth, margins, working capital, and Earnings per Share (EPS) - besides the massive improvement of your sustainability agenda and the impact on employment in your region. In the context of this blog, a region is more like a continent than a sovereign state (like Europe, Indian Peninsula, south-east Asia, and Oceania).
To design a regional, agile & digital supply chain fit for the foreseeable future, consider the following steps:
As we have seen, the size of the prize is right for most companies. To achieve these benefits, it is vital to have a clear project plan in place. Here are some of the needed steps:
A timeline of 24-36 months should be set, depending on the gap between the current state and the desired state.
The CEO or COO should be assigned as the board sponsor, with the Head of Supply Chain/Procurement as the lead.
A board session should bring the current state to the cold light of day and run "what-if" scenarios using visualization software (there is a lot in the supply chain world - I recommend animated scenario visualization to grasp the audience). External experts can be invited to help set stretched but realistic targets and define a blueprint for the new supply chain.
A full-time project team (3-5 people, the rest should work on this as part of their normal job content) should be set up to redesign supplier selection, onboarding, outsourcing, and qualification processes.
IT must play an essential role in supporting the definition of supply chain digitalization. Since many IT organizations, however, have a very limited understanding of the true needs of supply chains today, the final decision needs to reside with the board sponsor of the project.
Digitalization and automation offer high opportunities, particularly in big data and AI insights.
The board requires quarterly updates, and so does the supervisory board.
Supply chain risks need to be evaluated annually, from sub-suppliers to customers, and standards for supply chain design for each product should be set.
Implementation costs will be medium, including setting up an internal task force for one year and potential capital expenditure for re-tooling and engineering. However, costs will be higher if a simple lift & shift is done without rethinking each material grouping in the context of agile and digital.
Conclusion
The intense globalization of trade, and hence, supply chains, has been a phenomenon for the last 30 years, based on the opening and incredible development of regions such as China, India, Africa, etc.
Supply provided a stable flow of goods globally, generating higher profits, better living standards, and contributing to exponentially higher GHG emissions.
Today, due to the increasing volatility of man-made and environmental disruptions, companies face increased costs and lead times, slowly eradicating the financial benefits they got used to. Suppose they consider more regional set-up of their supply chains to improve resilience financially and otherwise. Re-shoring their supply chains finally requires using modern agile and digital principles of the 21st century. They can rely on change processes long tested in production and R&D and now apply them to their supply chain function.
In 1’000 days (or about three years), this change can be concluded for 90% of a firm’s supply chain, with significant benefits for the customers and shareholders.
This change will establish a new milestone in the advancement of global trade, allowing us to reap regional benefits from end-to-end manufacturing and global gains from exporting designs and intellectual property rather than merely emission-intensive physical materials. I will delve deeper into this topic in a subsequent blog post.
In this context, quality guru Edward Deming said: "You don't need to change – your survival is not mandatory."
Stay safe. Be bold.
Daniel
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