Trend identification is a tricky business. Supply chain trends make it yet more complex because they represent the intersections of so many different domains. What is a supply chain trend-spotter to do? Some pick out particular statistics to make precise, but meaningless forecasts. Others wave their hands and announce sweeping megatrends that sound impressive, but that lack supporting data.
We take a different approach here. We explore six overall business and economic trends that have been progressing steadily and measurably over the last few years. Then we look at what might happen to supply chains if these trends now accelerated, perhaps exponentially. Given that the world in general is moving faster and faster, ‘hockey stick’ curves in trends are something all organisations should look out for. Corporations have been caught on the hop before by rapidly developing trends, as the arrival of the Internet and the resulting redistribution of business power have demonstrated.
With this in mind, we draw one possible short-term game-changing conclusion for each trend, if it were to speed up dramatically, yet remain within the bounds of realism. You can then see for yourself how your own organisation with its strengths and weaknesses might fare in the light of these six trends and their accompanying ‘what if’ scenarios.
1. Software is Eating Supply Chains
According to venture capitalist Marc Andreessen, “software is eating the world” and therefore eating supply chains with it. Business around the planet is increasingly dependent on IT and software applications. More and more transactions, operations and processes are conducted within IT servers and data centres.
However, there is also a more fundamental change at work. Many former products have turned into services. This has already dramatically transformed the IT industry itself, as packaged software sold with one-time licences has become cloud-based services sold with a renewable monthly subscription.
In other fields, IT is being used to sell end-customers results, yet another step beyond products and even services. One of the most notable examples is in agriculture, where equipment, fertiliser and seed vendors are working together to sell farmers guaranteed crop yields. John Deere, DuPont and Monsanto use big data on climates and related conditions to make commitments accordingly to their customers.
Shock possibility: You will have to rejig your supply chain to deliver results, not products or services.
2. Goodbye Lean, Hello Agile
Companies that went overboard on stripping out waste, redundancy and cushioning of any kind have suffered all the more when one of the links in the supply chain snapped. Streamlining, rationalising and reengineering all have their place in supply chains, but too much lean leads to brittleness and sclerosis. Supply chains that are too optimised leave no room for error or change, and thus lack resilience. Their excellence in maintaining a given performance depends on a constant and unchanging situation of supply and demand.
If upstream partners fail, as in the case of Thai computer disk drive manufacturers (factories hit by flooding) or Japanese semi-conductor producers (the 2011 tsunami), supply chains running too lean may not have an alternative to turn to. If downstream demand changes, they may not have any other retail outlet options either. The most efficient supply chains are not necessarily the most effective.
The new mantra is ‘agility everywhere’. Where lean came from more from manufacturing, agility came largely from software development. The basic principle is to run projects or project phases in much shorter cycles than before. Continual incremental change trumps long drawn-out schedules in which enterprises often found themselves at a tangent to market needs by the time the project deliverables finally arrived.
Keeping a supply chain close to market needs means that organisations will indeed need to be nimble in order to jump ship (or plane, train or unmanned aerial vehicle) as and when required, in order to gain or maintain business advantage. More than this however, agility will need to be coordinated throughout the supply chain. In rigid lean supply chains, companies could sometimes fool themselves into thinking old compartmentalised management ways were acceptable. This will not work in agile supply chains, where no action is without a reaction, either in the same link or in a different one.
Shock possibility: Silo thinking in supply chains will not longer just be uncompetitive, but fatal.
3. BRICs Are Moving to Buying, Not Just Making
How long will offshoring last? While local knowhow or colocation of raw materials and early-stage manufacturing may make sense, the cost advantages that many enterprises expected may now be drying up.
Offshoring cost advantages were often a delicate matter anyway: lower worker wages had to be balanced against increased freight charges, duties, taxes, and damages during transit. Now differentials in workers’ pay are disappearing as countries like Brazil, Russia, India and China (the BRIC countries) grow richer and develop into consumer giants.
Nearshoring is an alternative, but not for everyone. Companies in the United States can outsource to lower cost manufacturing resources in Mexico, but Australia is seeing IT and high-tech jobs, higher value employment it wants to keep, now higher value migrating to ‘nearshorer’ New Zealand. Elsewhere, business playing fields continue to be levelled as new products and technologies are ever more rapidly copied or rivalled. Companies will need to improve their supply chain performance in terms of customer satisfaction and profitability in other ways than relying on cost reduction through cheaper production, whether in BRIC countries or others.
Shock possibility: Your suppliers will be your customers. Now you will really have to be nice to them.
4. The End-Customer Is Not Going To Let Up
The end-customer has power, knows it and enjoys it. Pampered by extraordinary choice in consumer goods, customers expect the same quality and devotion from their business suppliers too. IT is a case in point. Consumer-grade products like tablets and smartphones have been outstripping professional ones in almost every category, including power, user-friendliness and price.
End-customers also want sustainability. Being ecologically friendly is ethically good and it is also fashionable. Municipalities in many countries feed that fashion by encouraging waste sorting and offering citizens different chances to demonstrate how upstanding they are. As consumers, the collective power of these citizens is enough to not only oblige their suppliers to prove their own sustainability, but to also require that their B2B partners are active in preserving the planet too. Supply chain scandals are just around the corner for corporations that do not respond to consumer concerns, such as the use of palm oil in food products.
What additional spill-over can be expected from the consumer to the business world, where supply chains are involved? One candidate is omni-channel distribution. Today’s consumer increasingly expects to be able to order a product online, pay for it in one shop, and take it back to another shop for a refund if unsatisfied with the purchase. If companies like Amazon get up to speed on drone delivery, customers may even be able to leave unwanted products on their lawn for pickup and exchange.
Distribution channels are criss-crossing like never before, and throughout it all customers expect each supplier to offer one unified brand experience, whether by web, phone, social media or physical retail outlet. Now they can get omni-channel service for consumer goods, then like IT and sustainability above, they will pressure their B2B suppliers to do the same.
Shock possibility: Get ready to put drone ‘last mile’ networks in place or lose business customers.
5. Knowledge Emerging as Resource Number One
Supply chains have become a major source of competitive differentiation because they are difficult to copy. The complexity of a successful supply chain and the particular circumstances of the organisation deriving the benefit mean that what works for one firm fails for another. It takes knowledge of all the moving parts, including upstream supply and downstream distribution, to make these supply chains. That knowledge is often in the heads of the people managing and operating the supply chain. When these people leave the company, supply chain knowledge leaves with them.
The problem of knowledge storage and retrieval affects supply chains more than many other business areas. Rules and theories about running supply chains are at best approximate. Unlike accounting, which functions according to precisely documented principles, supply chains often depend as much on experience and judgment to work optimally as on mathematical models. To compound the difficulty, supply chain worker knowledge is in greater danger of disappearing in logistics (warehousing, transport and distribution) in particular, where the average age of workers is higher and therefore closer to retirement age.
Just storing data is not a problem. IT offers huge possibilities with one-click data retrieval into the bargain. However, data is not knowledge, and storing knowledge is a different kettle of fish. Conventional IT is not designed to handle knowhow. New IT solutions are emerging to allow people to record their knowledge in the way that they think it, rather than trying to force-fit it to standard data formats. If they work, companies may at last be able to avoid having to design supply chains from scratch when upgrading their infrastructures.
Shock possibility: Supply chain knowledge will be an asset you can store outside people’s heads.
6. Love-Hate Relationships Flourishing in Logistics
On retail or reseller shelves you both slog it out, box for box and can for can, one against the other. But in your distribution networks, you’re the best of friends, sharing facilities, reducing costs and even jointly reaching markets that neither of you could have reached on your own. The point is that systematically fighting all the way along the supply chain is wasteful, particularly in those parts that are invisible to end-customers and that offer better opportunities for joint cost reduction than for competitive advantage.
Enterprises in different sectors have reached the same conclusion. Examples range from competing pharmaceutical companies sharing expensive temperature-controlled distribution centres to white goods manufacturers jointly contracting with the same freight company. But why stop at logistics?
If an activity is not a core competence, you can outsource it or work with another company with the same need to achieve better, faster, more cost-efficient solutions. Manufacturing and hi-tech companies can source the same components (anything from spark plugs to processors). They can also design or manufacture products together that are only differentiated by trim and brand at a later stage in the supply chain. The joint ventures between automotive companies Peugeot, Citroën and Toyota for small cars or Peugeot, Citroën and Fiat for people-movers and small to medium-sized vans are examples.
Speed of change in markets and concerns about profitability could push companies into elaborate interlocking love-hate supply chain grids, in which from one end to the other they are allies or enemies at different stages. In this case, futures and destinies will be increasingly intertwined. Enterprises will need to be careful how much they try to grind competitors down for fear up upsetting a profitable symbiotic relationship at some other stage in the supply chain.
Shock possibility: Killing off competitors without due care could seriously hurt your own supply chain.
In the End, Make the Trends Your Friends
Financial traders in currencies, commodities and shares know that the trend is their friend. Statistically, they have a better chance of making money by following the trend than by going against it. Likewise, major supply chain trends are typically to be followed rather than bucked. There always exceptions of course, but when cloud computing is already nearly a $300 billion market addressing all sectors, BRIC nations are on target to fuel 40% of the world’s economy, and almost 2 billion consumers are revelling in the power of their smartphones, organisations will need good reasons indeed to pit their supply chains against such trends rather than going with them.
That is where the similarity between supply chains and finance ends. Unlike financial trading where performance is measured as a change of price, a magic one-number metric to define supply chain performance does not exist. It takes several indicators to understand how well a supply chain is doing. There is also usually a need to balance performance between them and prevent excessive success in one area from hurting performance in another. Dealing with today’s interconnected trends is a further balancing act that supply chain teams must accomplish. However, previous experience in internal supply chain ‘plate-spinning’ should give them a head start to make friends out of these external trends, rather than enemies.