In a World of Digitized Supply Chains, Global Businesses Must be Agile and Optimize Risk

“Everybody has a plan until they get punched in the mouth.” – Mike Tyson

As logistics and supply chain management increasingly become digital, there is a growing reliance on the global internet and associated IT infrastructure.

Whether it is the 400 submarine cables or 5G Wifi base stations, access to these data highways is vital for smart platform development. However, access is increasingly being made more difficult. As
international tensions with China wane, concerns are now being raised as to what IoT technology standards are to be used, as well of questions relating to data storage and ownership. There is now a significant geo-political debate around the protocols that need to be in place before data can be shared. Countries are aligning either with Western standards or China’s Belt and Road Initiative (BRI) standards, creating two different supply-chain eco-systems. Additionally, the data that drives decision-making in supply-chain has now been completely disrupted.

All pre-COVID19 consumer data that was used to create tremendous supply chain efficiencies was not useful during COVID19. Additionally, consumer data from the past few months with COVID-19 represent an anomalous data set that cannot be used to accurately predict future consumer behavior when it comes to supply-chain decision making. Instead, future agility will rely on consumer data along with data on suppliers and disruptions. One key takeaway from COVID-19 is that the relentless drive toward supply-chain efficiencies created long-tail risks, leaving companies very vulnerable.

Given this information and the ongoing uncertainty over COVID-19’s progression over the next year, what should U.S. firms do to effectively deal with these new realities and risks?  How can they capitalize on new opportunities?

Here are a few approaches that might help:

Identify and prioritize risks. As companies pivot during COVID-19, it is essential they choose both standards and a risk framework carefully, as this will determine the larger eco-system options and help them to ultimately make better risk decisions. Taking a risk-based approach now will enable companies to optimize, rather than minimize risk by putting in place a process of continuous evaluation and calibration that includes both cyber and physical components. Setting up systems of provenance, such as blockchain, and implementing cyber-physical risk standards will help position companies for entering new markets and building trust in existing ones. This approach enables companies to navigate supply-chain issues regardless of how international relations evolve and borders open or close up.

Diversify the supply-base and focus on local. One way to reduce heavy dependence on a medium- or high-risk source (such as relying on a single supplier) is to add more sources in locations with different vulnerabilities to help spread out risk. Some firms have shifted to a “China plus one” strategy, sourcing from both China and another country in Southeast Asia. The challenge with this strategy is that there tend to be regional risks, including infrastructure. Shifting suppliers to locations closer to the consumers served both reduces risks and oftentimes, logistics costs. Building new supplier infrastructure takes both time and money, but builds in agility and adaptability. This will help navigate the continued turbulence of a bifurcated and volatile global marketplace.

Leverage process innovations. New technologies allow companies to flexibly switch between products they manufacture. They can also lower costs and in some cases, make factories more environmentally sustainable. These new technologies do come with trade-offs, which should be evaluated as part of the risk analysis process mentioned above. For example:
Automation. The pandemic has accelerated the adoption of automation with robots and humans working side-by-side in an increasing number of manufacturing and service environments. These include robot palletizing systems and optic inspection systems that reduce the cost of labor. The trade-off is that not as many jobs are gained in the new regional environment.

Additive Manufacturing. 3D printing can reduce the number of steps required to make complex metal shapes and lesson dependence on machinery in different locations.

Continuous-flow manufacturing and new process technologies. In biopharmaceuticals, rapid innovation in response to COVID-19 includes the generation of compact bioreactors that enable smaller batch sizes of vaccines to be produced economically. This involves chemical equipment which uses less energy, produces less waste, and is sometimes less expensive to operate. In addition, continuous-flow manufacturing enables producers to be less dependent on imported active pharmaceutical ingredients by using miniaturized manufacturing platforms and other methods for producing shelf-stable items for medical uses.

Many companies have spent decades trying to get their supply chains to flow smoothly. However, these ultra-lean strategies have significant risks in a turbulent economic and political system. Businesses can succeed with agile supply chain management, particularly by leveraging customer relationship management and other related technologies to influence customer choice. However, ultimately companies must learn to deploy different and diversified strategies. For years, firms have been playing a supply chain management game akin to basketball, where investment is made in strong-players producing predictable results that enable their team to win. Now, however, firms must consider the reality that they are playing something more akin to soccer, a game where investment in the weakest link and constantly evaluating their risk to the overall team has tremendous pay-offs.

The two defining terms for success in the short and medium-term of the post-pandemic world will be:  Risk and Agility.

Editor’s Note: Dr. Charla Griffy-Brown is the Professor of Information Systems and Technology Management, and Associate Dean of Executive & Part-Time Programs at Pepperdine Graziadio Business School.