International Trade

10.07.2021

Global Organizations Must Rethink Supply Chain Management

The recent turbulent years have led to new challenges for global supply chain management, but with proactive mechanisms in place, corporates can minimize the impact and scale of disruptions.

By Professor CHEUNG Ki Ling, Department of Information Systems, Business Statistics & Operations Management at HKUST Business School

Soon after the start of the trade war between China and the US in 2019, UK research and advisory company Gartner conducted a “Future of Supply Chain Survey” with 990 corporate supply chain professionals. At that time, brand owners like Samsung and Fitbit, among many others, had ceased to operate at least some, if not all, of their factories in China. Not surprisingly, the survey indicated that China was no longer the champion of job growth. That title had passed to India and Mexico, which were also considered to be powerhouses of labor. In the midst of this massive migration of supply chain facilities such as manufacturing sites and distribution centers to India, Vietnam, Thailand, and other nearshore countries of China, COVID-19 struck.

The pandemic has created brand new challenges for societies around the globe. Across the US, there were shortages of crucial medical supplies, including face masks, testing kits, ventilators and even drugs. Until the pandemic, most Americans did not realize that most of the manufacturing activities of these essential medical supplies took place in other countries. Arguably, ex-president Donald Trump was probably right to conduce domestic manufacturing before COVID-19 occurred, although this would have been a more effective argument if face masks and nasal swabs had been on his list.

According to another survey conducted by Gartner in 2020, the pandemic and the shortage of critical raw materials and components ranked number one and number two respectively as the top supply chain risks, while the trade war was only number four on the list, immediately behind cybersecurity.

I believe global organizations must rethink supply chain management to cope with the aggravated supply chain challenges resulting from the pandemic. Below I offer my thoughts on three salient areas.

Supply chain configuration

Frustratingly, global disruptions are occurring more often than ever before. The reasons a company can survive a major market disruption boil down to its ability to handle risk in a proactive manner. No company or individual could have predicted a pandemic of such a scale and duration as COVID-19. But there are always a few companies that are able to react rapidly and effectively because they have been proactive in preparing to face unforeseeable disruptions. Such companies build flexibility and agility in their systems before the event, rather than after it.

In essence, I believe some kind of hedging should be applied to all supply chains, so that they are not disturbed by sudden disruptions such as the COVID-19 pandemic. An intuitive strategy is to have at least two types of supply chain in place. Companies should develop a rapid and super-responsive supply chain and a cost-effectively supply chain located within different continents. This kind of hedging can protect the company against changes in the business environment, whether driven by market or supply.

For example, HP has long realized the power of running what the company describes as a portfolio of supply chains across the globe. So there are multiple configurations of the supply chain instead of just one configuration. Each configuration needs to possess different operating characteristics. This approach has served well for products which are progressing through different phases of their lifecycle. It should also work better than relying on one single source of supply during periods of disruption.

Omni-channel capabilities

The Gartner survey noted that the top six disruptive and important digital technologies are reported to be:

  • Artificial Intelligence
  • Big Data Analytics
  • Machine Learning
  • Internet of Things (IoT)
  • Advanced Robotics
  • Robotic Process Automation

Although advanced robotics and robotic process automation are not on the top of the list, they have been highly significant during the pandemic. Online giants like Amazon and Alibaba have clearly beaten their offline rivals. Even before the pandemic occurred, these companies had invested aggressively in automating their warehouse and distribution operations. Intuitively, better efficiencies in handling orders present an immediate benefit of process automation in warehouses and distribution centers. But few people would have foreseen that this meant Amazon and Alibaba suffered much less due to a shortage of workers during the lockdown periods, and that automation mitigated the effects of social distancing.

In a broad sense, omni-channel fulfillment capabilities with both online and offline channels in place can be regarded as another kind of hedging strategy. What I mean by Omni-channel is that, in addition to a traditional physical channel, there exists an end-to-end online channel from retail to delivery through which customers place their orders online at home and these orders are delivered right to their door. This channel will effectively take over all the orders from the offline channel during a difficult time like a pandemic.

Big data analytics

Other than the physical dimensions of supply chains, information related to market intelligence must be considered. Big data analytics is another proactive strategy, as it allows companies to detect market abnormalities as early as possible. After all, the whole purpose of managing a supply chain is to satisfy customer demand in a seamless manner. The sooner a company can detect market abnormality, the sooner it can take action to either ramp up or turn down supply.

Only a handful of companies, such as the chewing gum manufacturer Wrigley, have remained consistently successful over a long period of time with a single product involving just a few varieties. With a narrow product line, these companies can more intensely focus their efforts and resources on managing a few inventory items. However, most retailers, distributors and manufacturers handle thousands—and sometimes many thousands—of Stock Keeping Units (SKUs). Few would notice that a typical Seven-Eleven store carries about 3,000 SKUs on average, depending upon local customer demand. As one can imagine, monitoring the demand patterns of all of the SKUs of a retail giant like Walmart is a formidable task, as the behavior of a SKU is dynamic rather than static much of the time, and perhaps even more so during a pandemic.

As the largest retailer in the world, Walmart receives more than one million transactions per hour from customers. Being able to capture, store, aggregate and analyze data so that the information quickly becomes intelligence is crucial, as the ability for managers to make decisions, not just optimal but also timely, for product assortments and inventories is key to the competitiveness of Walmart. I anticipate big data analytics will remain essential for a company like Walmart to find out whether the changes of customer behavior that take place during a pandemic are temporary or permanent.

Conclusion

The past few years have seen some of the worst market disruptions in decades. No organization is exempt, and whether one can remain on the right path must always be questioned. The views I offer in this article point to the importance of having proactive mechanisms in place in supply chains. This way, global supply chains will not become completely paralyzed during turbulent times.

Reference

Gartner (2019). Future of Supply Chain: Reshaping the Profession.

Gartner (2020). Weathering the Supply Chain Storm Survey.

CHEUNG, Ki Ling

Associate Professor
Information Systems, Business Statistics & Operations Management