An evolving landscape with growing dislocations

#2 of 7 articles about impacts of Covid-19 on supply chain innovation

In the short-term companies have no choice but to increase agility and adjust to the volatile environment. Adjusting requires throwing overboard what is not needed or not working. This can mean rationalization of stock keeping units (SKU) or the suspension of a planning tool. Geopolitics paired with bankruptcies of small and midsized companies impact supply. Businesses prepare ad-hoc backup plans and decide which suppliers to support and which ones to let go. They can extend credit lines, sign long-term contracts, or even enter in the capital of critical suppliers.

In the medium-term businesses will need to respond to the changing landscape. Today’s landscape is a world of interconnected systems. Navigating the systems requires to deal with powerful forces and trends that either strengthen or weaken, accelerate or decelerate, emerge or disappear. As an example, digitization is accelerating through Covid-19. Developments that were to take place over the coming five years, are happening now. We have entered the era of “Zoom”. This will benefit companies that offer digital services and respective technologies but can harm those that are more ‘analog’. Another trend is the decline of global alignment. Those pushing for more protectionism feel re-enforced through the outbreak. However, the pandemic can also amplify concerns around the catastrophic consequences of climate change which would require more international cooperation.

Covid-19 will drive people further away from the traditional way of working. While we distance ourselves from others, at least physically, we may also retreat from our organizations and institutions. New generations find the entrepreneurial and freelance economy more attractive than the corporate world. Now, with increasing work-from-home we can expect this trend to accelerate. New behaviors will emerge which lead to new supply chain designs. We can observe a rise in consumer consciousness too. In a recent Statista survey on average 65 percent of consumers indicate that a brand’s behavior during the outbreak would have a huge impact on their likelihood to buy their products in the future. This works both ways. Those that are not responding properly to today’s challenges will severely suffer. But the companies that do well can benefit big time.

States are creating mountains of fiscal debt with which we will have to deal with in years if not decades to come. Countries will default. Projects are impacted. Several developing nations along the belt and road initiative have already asked for debt relief. Companies need to protect themselves. Many will go out of business. Around the world unemployment is rising. Social tensions are mounting. Political leaders are coming under pressure. A global recession seems unavoidable. We might see the first Great Depression of our lifetime. Great change is underway, some developments have already started others are not yet visible.

Shapers of the global demand and supply network

Nobody knows what is really going to happen. But the economic, social, and environmental implications that impact the ecosystem of the global demand and supply network will be far-reaching. The forces impacting the various trends influence the seven shaping areas of the global system.

1         Technology – or digitization

2         Products – new or vanishing ones

3         Channels – mono, multi and omni channel developments

4         Demand – countries with emerging, rising, weakening, or vanishing demand for goods and service

5         Supply – opportunities and restrictions in global sourcing

6         Regulation – including the tensions between “liberalism” and “protectionism”

7         Environmental and social pressures, resulting from unwanted consequences of our life.

Covid-19 is unfolding itself beyond the human tragedy

1         Technology

In the Fourth Industrial Revolution, technology is developing at unprecedented speed. Technologies are converging into complex bundles and solutions. Powerful communication networks and the explosion of intelligent things have already created a level of connectivity and a volume of data we are hardly able to handle. Covid-19 shows the power of digitization and will drive adoption and demand for new products and services. With this comes the need for more technological innovation.

2         Products

Mixes are shifting. While demand for digital services and technology is rising, car and textile sales have dropped. The consequences of the outbreak also change the natural tension between “variety” and “efficiency”. Companies are caught between two forces. Between the wish for product diversity to please customers, and the need to rationalize stock keeping units (SKUs) to reduce costs. Now, the pendulum is swinging towards rationalization, at the detriment of diversity – at least short-term. Companies need innovative tools to understand demand and make timely and fact-based decisions about the product mix.

3         Channels

Covid-19 will accelerate the shift from offline to online. This will create opportunities for supply chains. Our homes will become more central to our life, which increases the need for online services and home deliveries. Accelerating digitization will drive omni-channel innovation, i.e. the creation and use of intelligence around online and offline products, services, and sales.

4         Demand

Supply chains follow demand. When an offer in a country or region has sufficient demand, supply chains arrive. Sometimes as a distribution channel, sometimes with in-country or in-region manufacturing. It was when demand reached a certain threshold that Amazon launched itself in the Middle East by purchasing Souq – a local online player. This brought knowledge, opportunity and probably innovation to the region. Covid-19 is shaking up the world and demand will shift.

5         Supply

Of course, supply chains also follow supply. Supply can be generated through innovation in the form of new products – like the computer and the smartphone – or the development of infrastructure, like a road and entire business ecosystems. The belt and road initiative (BRI) is based on this belief. Since 2018, Chinese companies have refocused their efforts on the larger markets of Southeast Asia. Already today, China trades more with the Association of Southeast Asian Nations (ASEAN) than with the United States (U.S.). The regional supply networks will be further strengthened. Covid-19 and the U.S.-China trade trade tensions create new openings and countries aim at attracting new supply chains. This unlocks opportunities for eastern and western companies alike.

6         Regulation

Safety and health regulation will stay with us and impact supply chains for some while. They affect deliveries and air capacity. Regulation also includes measures launched for geopolitical reasons. Today, each geopolitical school of thought is using the crisis to reinforce its own position and agenda. We see protectionists promoting relocation and the proponents of globalization more international alignment. The pandemic exacerbates the pre-outbreak situation and, hence, aggravates geopolitical tendencies. Supply chain design and risk management tools need to live up to this reality. Also, innovation in analytics will support supply chain professionals.

7         Environmental and social pressures

We may see a new intensity of environmental and social pressures. Both areas are linked. Certain countries and parts of society will suffer more from the effects of climate change and the deterioration of the oceans than others. Islands states in the South Pacific risk to disappear, overfishing affects the lives of fishers in Africa. The poor will be hit harder than the rich. Companies have the chance to differentiate themselves through championing true climate action or take up a social challenge. Decarbonizing global logistics and supply networks is impossible without innovation. Danish firms team up to produce sustainable fuels for ocean shipping.

Disruption drives system change

I do not see that one of the above-mentioned trends or forces will cause a paradigm shift. But I strongly believe that disruptions will continue. We may even face a new era of regular pandemics. Demand and supply networks need to prepare for such a possibility. We need to be able to operate during outbreaks. It seems awfully hard to regularly shut down countries and then reboot again life and the global economy.

Another source of disruptions are trade disputes. The U.S.-China tensions will probably persist, even with a new U.S. government. Asia’s fast rise creates continuous concerns. But it has not been the U.S. that was decoupling but China. “There is currently $4.5 trillion annually traded in the Northeast Asian triangular among China, Japan, and South Korea, and trade within Asia represents more than 60% of total Asian trade. Asia today is thus becoming what Europe and North America already are: a regional system in which members have more to do with each other than with states from other regions,” writesParag Khanna.

Another disruptive factor is a technology rivalry. We risk creating two technological systems: one centered around the U.S. the other around China. This would mean that supply networks must deal with two sets of standards This will make technology more expensive which slows adoption.

The technology and trade tensions can result in security issues. The number of security incidents is rising. The economic consequences of the Covid-19 pandemic, namely the social frustrations and tensions, paired with a populist political landscape provides fertile ground for potential conflicts . Security systems need to be rethought.

Climate change is disrupting demand and supply networks. The number of natural disasters, like flooding and storms are on the rise. Banks will investigate environmental risks when assessing a project to finance. Supply chain professionals need to protect people, assets and inventories, avoid transport disruptions, ensure supply in general, and make networks more resilient. We will make demand and supply systems more intelligent and, hence, more resilient.

Finally, the exponential digitization will bring disruption too. Also, via more frequent cyberattacks. This will change the way we build systems. We will see a lot of innovation in cyber security in future.

Many expect the logistics industry to radically change. I saw containerization eating into bulk business, integrators encroaching the airfreight market, and parcel operators attacking national posts. It takes time to see the impact of changemakers. 

Over the next decade, the supply chain and logistics industry will undergo massive digitization. Everything beyond the pure movement of physical goods will be digitized. Including, documentation, freight matching, quotations, ordering, booking, monitoring, customs clearance, invoicing, and customer service and sales. Processes and assets along the logistics and manufacturing value chain will be automated, with humans in the “driving” seat. Covid-19 has shown that we cannot predict everything which means that machines need to be supervised and their outputs validated. The most powerful model is the man-machine hybrid.

Operators will use digital tools to make operations more performant and resilient. In addition, there will be services emerging that extract data from the operational platforms as well as the ecosystem and use intelligence to create new value.

With the new generation of leaders, we will see more adoption of technology and more innovation too. New ways to engage with employees, customers and citizens. We will see the emergence of low-cost cloud-based software-as-a-service (SaaS) solutions powered by intelligent engines – enabled by artificial intelligence (AI) and machine learning (ML). This development will trigger a new wave of innovation in system integration, data management, and analytics. With the new tools and services, the traditional logistics and supply chain industry will reach its next level.