Resilience has always been important to supply-chain professionals, but it has moved to the very top of the agenda in recent years as a range of extreme disruptions have shaken the global economy. COVID-19 was the first global event to have a profound effect on the structure of supply chains. The Ever Given container vessel running aground in the Suez Canal in 2021 revealed further vulnerabilities. Most recently, the invasion of Ukraine has created far-reaching supply shortages of key food products, as well as driving soaring energy prices in Europe.
While businesses are discussing options for dual sourcing and near-shoring, they have also been turning to digital solutions to enhance resilience. However, the evidence that this can offer direct benefits is limited. There is a danger that some businesses are becoming muddled about the risks they face and the role of technology in mitigating them.
If leaders are to maximize resilience against a variety of disruptions, they need to understand the nature of the risks they face, and be clear about the resilience benefits associated with just a small number of key technologies – namely artificial intelligence (AI), simulations, and system integration.
The renewed focus on resilience constitutes a radical shift in priorities for supply-chain design and management. Although supply-chain design is a complex task that must consider resiliency, sustainability, and service levels, the primary objective has typically been cost minimization. Organizations have established production bases in low-cost countries and set up “focused factories,” which concentrate intensively on a small range of products to obtain economies of scale. The same objective has also informed the selection of digital initiatives.
There is a danger that some businesses are becoming muddled about the risks they face and the role of technology in mitigating them
However, this presents a dilemma. As has been demonstrated extensively in recent times, many supply chains that are appropriately efficient for stable situations lack adaptative capability in the face of disruption and instability. Many industries would have made themselves less vulnerable to disruption over the past three years if they had reduced their reliance on low-cost manufacturing in China, for example.
The pursuit of efficiency, rather than any consideration around resiliency, has principally driven the adoption of digital technologies to date. With the exception of select key technologies, few of those adopted on the grounds of improving operational efficiency have offered any significant benefits in terms of resiliency. However, that is not to say that these tools cannot be employed in such a way as to offer such enhancement.
To understand how, it’s important to first step back and examine the threats confronting businesses.
There are essentially six types of supply chain disruption:
These may create shortages, but underlying demand remains broadly stable. This is specifically applicable to basic products and staple foods. Consider the demand for toilet paper at the start of COVID-19: despite the sudden spike driven by panic buyers, there was no fundamental change in global demand.
Under these circumstances, shortages are caused by a major increase in demand. Consider the demand for masks or ventilator machines caused by the pandemic, for example.
Here, the problem lies in the overall structure of the supply chain. A good example is the ongoing shortage of semiconductors that has led to shortfalls in car production: 3m cars in 2021 and perhaps as many as 1.3m this year. When COVID-19 struck, car companies ceased accepting deliveries. As demand fell away and margins waned, suppliers cut back on investment. While capacity is now being expanded in response to rising demand, it is still lagging owing to the self-deconstruction of the supply-chain during the pandemic.
The fourth category reflects disruption of services at global level. The Suez Canal’s pivotal role in global shipping is a prime example. The key characteristic is that the disruption causes huge shortfalls across numerous supply chains, on an overwhelming scale that precludes potential workarounds.
This is similar to the previous category but more specific to local markets. Consider the truck-driver shortages that affected the UK following Brexit and the outbreak of the pandemic. As these are on a smaller scale and will fit previous patterns of disruption with which businesses may have coped successfully, there may be continuity plans in place.
This has been typified by the war in Ukraine, which has caused shortages of staple products including cereals and sunflower oil. In 2021, such risks were widely considered very low – but the consequences of this type of disruption have been substantial, in some cases resulting in basic food products becoming unavailable.
Some of the technologies most closely associated with Industry 4.0 have had a limited impact on resilience, despite the high hopes that businesses held for them. Autonomous robots and augmented reality (AR), for example, offer few benefits. Some, like additive manufacturing (3D printing as applied to industrial production) or blockchain are generally still at prototype stage and are yet to prove themselves in relation to supply-chain resilience (note that Maersk and IBM recently announced the closure of their blockchain trading platform).
“The pursuit of efficiency, rather than any consideration around resiliency, has principally driven the adoption of digital technologies to date”
A similar point applies to cloud computing and the industrial internet of things (IIoT). Sensors in shipping containers may improve the tracking of goods through a historically opaque shipping system but, when those containers are stranded in the Suez Canal, sensors make little difference – knowing where the goods are is not the issue.
In short, many emerging technologies may help improve efficiency or speed of operations in the normal course of business, but they offer limited resilience benefits in less usual, more testing times. When it comes to resilience, just three technologies are currently of real, consistent value.
Combined with big data from across the supply chain and from external sources, AI enables companies to use predictive analytics to identify and assess the impact of emerging problems, such as localized disruptions to production sites or transport systems. For some companies, AI supported a rapid, effective response to the challenges of the pandemic.
AI is particularly useful when companies face temporary disruptions; disruption to transport or infrastructure; and shortages of products or materials. Its effectiveness is enhanced when it is used in tandem with system integration: the better the quality of operational data a business has collected, the more accurately AI can analyze the likely impact of potential next steps.
The second key technology for resilience, simulation, has been used for decades in supply-chain optimization for testing different scenarios, and it is particularly useful for understanding the implications of events for lengthy, complex supply chains. What happens if there is a temporary disruption to a key supplier or if demand soars in one of your biggest markets? Is your warehousing infrastructure able to cope with this demand? Do you have adequate transportation systems? Simulation tools such as AnyLogic can help identify problems and inform mitigations.
Today, simulation is useful for temporary disruptions, demand increases, and disruptions to transport or infrastructure. Several companies have reported that the value of simulation is enhanced when it is used alongside AI and big data, and system integration (see below).
One of the most useful approaches for the mitigation of supply-chain disruption may not be regarded as groundbreaking in the same way as AI or other Industry 4.0 tools, but it is nonetheless essential to supporting resilience.
In simple terms, system integration is about the interoperability of different software systems across the supply chain, often via a central “control tower.” This could mean, for example, bringing together purchase-order status information from suppliers’ factories; data relating to stock movement through shipping or warehouse systems; and real-time stock-taking, online or in stores, providing a clear picture of stock flow that can be used to inform mitigatory action and forward planning
Businesses have often suffered from something of a perception gap when it comes to system integration, but it is now widely considered plausible that such an approach can increase the adaptive capability – and, therefore, the resilience – of supply chains. It is helpful for temporary disruptions, disruptions to transport or infrastructure, and global shortages of products or materials.
The table below summarizes the applicability of different technologies in mitigating the six types of disruption.
There is no doubt that digital technology, appropriately applied, can improve resilience in supply chains. However, this does not apply to every digital technology and leaders should be wary of claims to the contrary.
Instead, armed with a clear view of the disruptions their companies could have to deal with, and the potential benefits of specific technologies, leaders can be more confident about the steps they can take to improve resilience and prepare for the next crisis – whatever it may be.
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