December 1, 2021 Steel to Silk: Creating Supply Chains for the Future

The term “supply chain” conjures images of steely solidity, but the pandemic has revealed what we should have known all along.

By Christophe Bodin, Chief Revenue Officer, Tradeshift

The term “supply chain” conjures images of steely solidity, but the pandemic has revealed what we should have known all along: that a chain is only as strong as its weakest link. When even one snaps, it sends shockwaves rippling across the world.

Coronavirus has left a litter of broken links in its wake. In the global North, we’ve seen bare supermarket shelves and rising prices; in other parts of the world, farmers have been ploughing crops back into the fields for want of transportation (even in the midst of food shortages), while the number of people living in extreme poverty has risen by 50 million against pre-COVID predictions.

Spiking consumer demand has amplified issues that surfaced in the wake of lockdown restrictions, exposing the deep and structural nature of the problems facing global supply chains. Just in time manufacturing processes meant businesses lacked the inventory and capital reserves to weather sudden shocks and volatile demand cycles; similarly, single-sourcing models built around the sole imperative of cost-efficiency have reduced competition and made businesses incredibly vulnerable to a single broken link. Meanwhile, antiquated and manual processes, coupled with a lack of transparency and digital connectivity between buyers and their various tiers of suppliers, has left them blind to potential issues and incapable of taking preventative action.

Most businesses now realize we need a complete reimagining of the supply chain model, but where to start? For an answer we should look to nature; specifically, at the humble spider’s web.

Digital threads

Spiders are clever fellows. Their fragile-seeming webs bend with the breeze, holding fast even when several strands snap. But webs aren’t merely flytraps: they are sophisticated communications networks, sending signals that tell its owner precisely when and where they’ve been damaged, or when they’ve caught the spider’s lunch.

The future of robust, resilient procurement depends on moving away from fragile chains and replacing them with a web of buyer-supplier relationships, where each party is connected by several digital threads which replace paper-based and manual processes. Replacing steel chains with a fabric woven from digital threads results not just in stronger, more agile individual relationships, but the beginnings of an antifragile supply chain, one which actually grows stronger in response to shocks.

No one imagines this transformation will happen overnight. Even so, any organisation can make an immediate start on this once-in-a-generation challenge by following five key principles:

#1: Accept disruption

Covid was a warning, not a one-off. Research by McKinsey found that experts now expect a major shock to hit once every 3.7 years, thanks to factors such as climate change and the increasing interconnectedness of global business. Don’t wait for a return to normal: accept, embrace and plan for continued volatility

#2: Start spinning your web

Research by Cap Gemini found that 68% of organizations are actively investing in diversifying their supplier base. Managing such a transition requires a far more dynamic layer of multi-nodal relationships at every tier in the value chain. Rather than the hub-and-spoke paradigm of traditional enterprise software, this network model has far more in common with online communities like LinkedIn.

Instead of relying on single-source suppliers for key components, spinning a web of relationships spreads risk over multiple suppliers in different locations. This isn’t without its challenges: for example, moving away from bulk purchasing will add to the cost to raw materials. But this must be balanced with the probable costs of failing to address resilience which, after the last two years, should be all-too-easy to quantify.

#3: Support your suppliers

Building agility takes more than just increasing the number of suppliers: it also means supporting new and existing ones effectively. Most organizations accept it will be necessary to maintain higher inventory reserves to cope with future demand shocks. For practical and financial reasons buyers at the top of the supply chain want to spread the extra inventory cost across their supply chain. This adds a financial burden to suppliers, many of whom are already operating with limited cash reserves.

Longer payment terms are adding to the squeeze. Large US companies took an average of 58 days to pay suppliers in the first quarter of fiscal 2021, up 5.5% from 55 days in the same period last year, according to research from Hackett Group. Rather than building resilience, this cocktail of measures bakes fragility deep within the supply chain.

Some large buyers including Morrisons, Lockheed Martin and others, have started to pay suppliers up front. But not every buyer will be in a similar situation to offer such a solution. A new wave of digitized financing products that can help liquidity flow more quickly to suppliers offers a potential middle ground, enabling buyers to keep cash on hand for longer while incentivizing suppliers to ramp up capacity.

#4: Break down silos

De-siloisation is an ugly word but a strategic imperative. If your business is running separate tools or processes for procurement, sourcing, accounts payable, supplier and contract management, you will never achieve strategic oversight (and insight) into operations and spending across the organisation.

Digitisation isn’t simply about getting rid of paper: it is about creating connections both internally between business units and externally with suppliers so that everyone has the visibility they need to make informed, timely decisions that reduce risk, unlock value, and maximise the value of your spend.

#5: Adapt your processes to thrive in the ‘new normal’

Despite a gradual return to normality, many offices remain closed, and a growing number of businesses are exploring how a significant proportion of their workforce can work remotely. Assess whether you can operate at full capacity while working remotely long-term.

Faced with the challenge of creating a new model of worldwide supplier relationships, these steps might seem like tinkering on the margins. They are anything but. Webs aren’t spun from the centre; they are suspended from a single strong and firmly-anchored thread. Concentrate on strengthening, expanding and digitising your supplier relationships, and you’ll quickly find yourself on the right track to transforming your entire supply chain.

http://tradeshift.com

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