There’s more turmoil ahead, but artificial intelligence and machine learning will cut through the noise for faster solutions.
Around the world, supply chains are in the spotlight like never before. When COVID-19 struck, chaos often ensued, much of it supply chain related. Governments weren’t able to source essential medical supplies, and shoppers were left staring helplessly at empty shelves.
In 2020, countless businesses discovered they were reliant on one another in ways they had never realized. Globalization has left all of us interconnected through supply chains too complex for traditional methodologies – annual surveys and manual checklists – to manage.
Even after the pandemic subsides, there will be severe and lasting economic turmoil that will require companies to continually scrutinize their global supply chains. At the same time, it’s very likely that COVID-19 will not be the last shock of this decade, but one of many. In the 2020s, global supply chains will have to contend with everything from climate change and natural disasters, to the rise of protectionism and the threats posed by cyberwarfare and security breaches.
In recognition of the growing importance of supply chain resilience, U.S. President Joe Biden has issued an executive order to launch a 100-day review of supply chains critical to national security, public health, public safety and job creation. This is an important step toward ensuring operational resilience for both the public and private sectors, but there is more work to be done.
The sole supply chain question used to be: “Are we as cost-efficient as we can be?” Now it is: “Where in the world should I be doing business and with whom?” And, if something adverse is happening: “Where else should I be doing business so that I have some agility and operational resilience?”
Yet help is at hand: artificial intelligence (AI) and machine learning (ML) can enable companies to better understand their supply chains in weeks, rather than months or years. Often these technologies expose a matrix of previously unknown vulnerabilities. By combining the right capabilities with insight and experience, you can shockproof your supply chain now and survive the challenges ahead.
Global supply chains in the time of coronavirus
In early 2020, as the deadly virus was quietly spreading in China, the first sign that international business operations were about to take a hit came in mid-February, when Apple announced it would miss its quarterly revenue target of $63 billion–$67 billion. As China took steps to contain the virus, affecting Apple’s supply chain, the company’s stock fell 11.7 percent. Clearly when Wuhan shut down, there were ripple effects—and some affected companies were unaware of their dependency on China until that moment.
We are still feeling the ripple effects of those early COVID-driven supply chain shocks today. Early COVID outbreaks redirected consumer demand for silicon chips from automakers to consumer electronics. Now that demand has started to swing back, automakers have found themselves in the midst of a silicon shortage, with research firm IHS Markit estimating that 672,000 fewer vehicles will be produced in Q1 2021 as a result.
Businesses that relied on spreadsheets and manual checking systems to track their cross-border supply chain relationships struggled to assess their exposure to the knock-on effects of the virus. Few companies had the necessary technologies in place or knew where to get them.
Before COVID, most companies knew who their prime suppliers were and had some knowledge of their suppliers’ suppliers. But supply chains in the age of optimization are vastly more complex. With globalization have come third- and fourth-tier linkages and beyond, spanning to hundreds and thousands of intricate and complex connections that extend all over the world. The loss of a single component low down the chain can create disruption and prolonged chaos at the top.
This is how the closing of a factory in China leads to a sudden shortage of iPhones, which may be manufactured in another country, and how the fragility of the global supply chain—unnoticed for a quarter of a century—was exposed for all to see.
Looking back a few decades, the intricate interconnectedness of cross-border supply chains became systemic in the 1990s. Offshoring was a new global trend and “just-in-time” methods pioneered by Japan were adopted worldwide. As supply chains straddled more and more borders, business leaders should have been asking: “Who are we doing business with, where are we doing it, what resources are we ultimately reliant upon, and what does that mean for me and my business?”
Now’s the time to learn some lessons from the pandemic. To ensure the continuity of their operations, businesses need to make themselves aware of—and understand how to respond to—the potential shocks to come. As threats evolve and change, constant vigilance is required.
For most multinational companies, discerning supply chain risks can be as perplexing as staring at a Monet painting close up. But AI and ML can help them focus: these technologies can resolve the patterns in the many millions of dots—the intimate connections between companies in a complex supply chain. However, you still need human insight to interpret the patterns and understand how to adapt. In the uncertain years ahead, with the help of AI and business intelligence, it’s possible to turn these threats into opportunities and gain an edge on competitors
Future-proofing: a how-to guide
Supply chain threats are manifold and, as COVID has taught us, can cut deeper than anyone anticipated. Here are some of the larger global risk themes to consider for future-proofing:
Second and third waves. To date, COVID-19 has claimed over 2 million lives worldwide, caused severe economic damage, and made it harder to transport goods across borders. Many countries are now experiencing second and third waves of the virus, potentially causing a resurgence of global supply chain problems. Businesses need to put emergency planning in place now.
Natural disasters and national emergencies. COVID-19 is the latest in a series of unforeseen shocks. The global financial crisis of 2008 caused havoc in the markets, the 2010 volcanic ash cloud in Iceland grounded air travel worldwide, and the Tōhoku earthquake and tsunami of 2011 caused disruption to businesses reliant on Japan. Last year, companies linked to Lebanon were affected by the explosion in Beirut and in Australia by the devastating bushfires. The list goes on.
Climate change. Rapid melting of ice caps, rising sea levels, and prolonged periods of drought may make some areas uninhabitable, prompting the movement of peoples and affecting production in industries such as food, fisheries, and agriculture.
Even before COVID-19, some governments were starting to view their reliance on China as an issue, particularly in the context of the US-China trade wars. The U.S. had vowed to bring production “back home” and introduced legislation to ban 5G technology company Huawei, affecting at least a dozen industries, including aerospace, technology, and auto manufacturing—all of which count the federal government as a customer. The new U.S. defense law encompasses all global subsidiaries and service providers deep within a firm’s supply chain.
Environmental, social, and corporate governance (ESG). Companies are being held accountable for the actions of their far-flung suppliers, of which they are often unaware. Businesses need to ensure suppliers at all levels of their supply chain align with their own values and commitments.
Cyberattacks and data theft. In the Internet age, many supply chains are digital, but this doesn’t make them any more resistant to sudden shocks. Cybercrimes such as hacking and phishing are at least as prolific now as before the pandemic, possibly more so because the attention on them has been redirected elsewhere. The global financial industry, for example, relies on thousands of card-based applications that require different access controls and are the constant target of cyberattack. It’s practically impossible to track such vulnerabilities without incorporating AI and ML into a comprehensive risk management strategy.
Managing concentration risk
An overly concentrated supply chain — one reliant on a handful of suppliers or many suppliers located in the same geographic area – exposes a business to risk. All manner of events can take place without warning, with almost overnight repercussions.
Even if you seemingly have no relationship to a particular area, your second- and third-tier connections might. The only way to track and trace potential sources of problems—and start building resilience toward them—is to make concentration risk a key part of your strategic thinking.
In some industries, such as technology, there’s now so much specialization that a supply chain could be sourcing hundreds of thousands of components produced in hundreds of different places – or even more precariously, in just a few locations. An incident in a far-flung corner of the globe you know little about could have major implications for your profit forecasts.
To determine where the potential problems are and address them, having AI capability is paramount—followed by skillful, nuanced, and complex analysis of the data. This process can help identify alternative sources of supply and begin to develop a strategic roadmap with a view to achieving uninterrupted operational resilience.
Protecting your brand and reputation
The consequences of failing to analyze, stave off, or sidestep concentration risks are hard to overstate. The short-term risks are immediately evident: customers won’t be able to buy products they need because interruptions in the supply chain mean businesses can’t produce, supply, or sell them. Long-term, there could be grave consequences for the brand and reputation.
This is why maintaining a robust supply chain must remain a top priority post-COVID for any company with a strategic mindset. The pandemic has clearly demonstrated the importance of understanding where your weaknesses lie, preparing contingency plans, and preventing supply chain breakdown. A situation that develops overnight can leave a CEO on the hook with shareholders and stakeholders the next morning, unless a plan is already in place for immediate deployment.
Now is the time to start investing in advanced technological capabilities—to uncover potential risks, to formulate the most effective coping strategies and to optimally position your company for new opportunities with competitive advantage. It’s a sort of high-tech sleuthing exercise. That said, we live in an age of unprecedented technological advancement. Human wisdom must be brought to bear in order to understand what needs to change—and that starts with a dynamic and proactive leadership mentality. “No man ever steps in the same river twice, for it’s not the same river and he’s not the same man,” wrote the Greek philosopher Heraclitus. Exactly the same can be said of businesses and their extended supply chains.
Ryan Elliott is a Partner at Kearney, a leading global management consulting partnership in more than 40 countries.
Jennifer Bisceglie is the CEO of Interos, the first and only business relationship intelligence platform to protect enterprise ecosystems from financial, operations, governance, geographic, and cyber risk in every tier of enterprise supply chains, continuously.