The ongoing COVID-19 pandemic has brought into sharp focus just how connected the global economy is and the domino effect that it has on economic growth once an emergency occurs.
The virus, which first hit China early this year and then travelled across the world, has resulted in lockdowns and supply chain disruptions in every major country in the world. This has had a massive negative impact on global growth. While the figures are still being calculated, according to an estimate done in March, economic growth will take a hit in 2020 and this will range from between 1.9 to 7.1 percentage points across different countries.
A more granular estimate done by the Institute for Supply Management (ISM), shows that nearly 75 percent of companies reported supply chain disruptions due to coronavirus-related transportation restrictions. More than 80 percent believe that their organisation would experience some impact because of virus-related disruptions. Of these, one in six (that is 16 percent) has reported that they have adjusted revenue targets downward by an average of 5.6 percent due to COVID-19.
While the survey is US-based, given the global nature of supply chains, it is safe to assume that the findings hold across the world. The Asia-Pacific region, which is the epicentre of most global manufacturing supply chains, has also been badly affected.
Supply Chain Challenges Due to COVID-19’s Business Disruptions
According to a study by McKinsey, companies in the Asia-Pacific region have been facing five common challenges due to disruptions brought about by the pandemic. They are material shortages, drop in demand, worker shortages, cash-flow issues, and planning issues. Material shortages, especially for manufacturing industries have been primarily due to interconnected supply chains spanning multiple geographies being disrupted. Many companies are facing raw-material shortages from tier-two companies, according to the study.
The easy assumption here is that once the world moves into a post-pandemic world, economies will start to grow again with demand and production rising in a linear fashion. Unfortunately, this is unlikely to be the case. To ensure sustained growth, business leaders will have to address the 800-pound gorilla in the room that COVID-19 has exposed – there is a serious lacuna in the way current global supply chains are structured and this will need to be fixed first to ensure sustained growth that can withstand future crises.
In an environment where artificial intelligence (AI), analytics and automation are the new mantras, thanks to digital transformation, traditional supply chain management (SCM) has mostly remained a very manual process. According to a study done in 2018 by The Business Continuity Institute, around 46 percent of companies have been using Microsoft Excel to predict, monitor, record, measure, and report on performance-affecting supply chain disruptions. In normal times such manual systems work fine but fail in the face of severe disruptions.
Current supply chains still operate on what can be described as a reactive model. A sudden spike or drop in demand takes time to move through the supply chain. For example, for complex multi-tiered supply chains, like those that operate in the electronics industry, it may take months to adjust the supply chain to a new demand situation.
Cloud ERP a Must Have for Supply Chains and Industry 4.0 Post-pandemic
The way forward is to digitalise supply chains. Prior to the pandemic, Asia Pacific has been a bit of a laggard in supply chain digitalisation. This has been mainly due to the continent’s supply chain and logistics network being highly fragmented. Fortunately, this is a good time to fix the supply chain problem as there is an increasing willingness to embrace change and innovation.
A digital supply chain is more resilient and agile. It can, apart from keeping track of inventory and raw materials supply, also provide risk analysis and run simulations so that users can anticipate, understand, and mitigate supply chain shocks. This feeds directly into the requirements of Industry 4.0, which manufacturers in the region are adopting. The focus of Industry 4.0 is to change the production processes within the factory premises with AI, big data, the Internet of Things (IoT) and robotics. This cannot be done in isolation. To be successful, an Industry 4.0 manufacturing unit must also include an agile and digital supply chain that has the flexibility to ensure that production is not disrupted.
Digital supply chains, which are part of a cloud enterprise resource planning (ERP) solution, are the way forward. ABI Research forecasts that post-pandemic manufacturers will spend more on cloud ERP software to develop agile and flexible supply chains that can react to unexpected emergencies. According to the research agency, spending on cloud ERP software directly related to COVID-19 is expected to reach US$14 billion in 2024.
Cloud-based Supply Chain Management for Greater Agility
For an agile SCM solution, a cloud subscription makes better sense because such a subscription enables the SCM business to easily add services, scale up on infrastructure and continually be on the latest version of the software due to automatic updates. This can help create a superior SCM process, which includes planning, purchasing, procurement and execution, monitoring and maintenance, and measurement and assessment.
According to an Oxford Economics Study, while all supply chains are vulnerable to risks in a global economy, execution on clear strategic objectives – supported by the correct tools and tactics to mitigate risk and minimise complexity – will make such events more manageable. A highly collaborative company culture with good visibility and real-time insights into all aspects of the supply chain, including suppliers and sub-suppliers, can build resilience and agility to lessen the impact of risk events. The Oxford Economic Study recommends the following steps to help companies become supply chain leaders:
- Establish a consistent data flow from design to manufacturing, logistics, planning and maintenance functions
- Make the supply chain a key part of creating and acting on organisational strategy
- Focus on achieving visibility across the complete end-to-end supply chain, including suppliers and partners
- Leverage new technologies like machine learning, AI and IoT, and motivate employees to be part of the journey toward customer satisfaction
- Continue to break down organisational silos within the company, fostering seamless collaboration between functions
- Enact sustainability practices throughout design, manufacturing, and delivery for the long term, including supplier practices
Resilient Supply Chains to Hedge Against Future Emergencies
ERP systems like SAP Business One provide companies greater visibility into their supply chain operations. This increases speed, productivity, and efficiency within the supply chain, leading to greater customer satisfaction. It also helps to better manage and integrate business information and work processes while ensuring optimal operational efficiency. Key challenges faced in the supply chain from streamlining operations to managing complex business processes and using data to augment human decision-making are also addressed.
SAP Business One offers real-time business intelligence and data analytics tools. When these capabilities are combined on a unified software system, distributors and manufacturers can rapidly streamline and optimise operations, eliminate inefficiencies, reduce expenditures, make smarter decisions, and easily adjust to faster business growth. Real-time insights into the supply chain ensure increased resilience, customer-centricity, operational efficiency, and superior visibility into the entire supply chain. This, in turn, allows for seamless collaboration with other functions, partners, and suppliers.
As the saying goes, never waste a good crisis, as each crisis contains the seeds of new opportunities. In the new post-pandemic world, one supplier for a specific need is not going to cut it anymore. There will have to be alternatives and back-ups. As business owners retool and digitalise, creating a resilient supply chain should be top of mind. This could include appointing a Chief Risk Officer who would be tasked with the job of monitoring the supply chain risk on a continuous basis. An annual or half-yearly check-up will no longer work.
During this crisis, a lot of companies have made back-up plans, engaged new suppliers, and sourced alternative routes and material. These should not all go waste by trying to adopt a business-as-usual approach after the pandemic is over. Organisations need to ensure they set up a more agile supply chain strategy that helps to hedge against future disruptions, be it in a particular market or globally.
Many companies have already adapted to the new normal of being flexible and agile with incredible results. While global demand fell off the cliff, we have seen car companies using their stalled production facilities to manufacture ventilators. There have been reports of liquor companies using their production facilities to make hand sanitisers and apparel makers producing personal protection equipment (PPE) for healthcare and other frontline workers fighting against the pandemic.
This kind of built-in flexibility in the production process can only happen when the entire value chain, including supply chain and logistics are fully digitalised. This needs to be the rule and not an exception.