By Yahm Rones
Microchips, oil, and everyday goods’ prices are rising, and interest rates are increasing at the fastest rate since 1981. Until recently, it has never been cheaper, easier, and faster to ship goods across the world — so why has this changed? Since the first COVID-19 lockdowns in 2020, shipping has been anything but straightforward. The once-efficient “just-in-time” shipping method is faltering in the face of disruptions and supply chain executives around the world are scrambling for answers. However, there is a solution beyond the horizon that just may provide a clear path forwards, and allow supply chains to evolve for the better: and that is increased end-to-end digitization. Global supply chains are plagued with inefficiencies, and with more data and technological solutions surrounding their supply chain functions, organizations can increase visibility into their operations, optimize enormous volumes of data, and integrate their supply chain function’s relationship across other core departments. Notably, increased visibility and data optimization includes fuel/energy consumption and carbon emissions management, which is a paramount first step towards carbon neutrality. While the road (or perhaps, the waterway, in this case) is long and will contain many obstacles, global supply chains will emerge for the better by the end of it.
Global supply chains have already drastically evolved over the past few decades. The global shipping industry is a massive, complex operational system responsible for transporting billions of dollars each day. Shipping even the smallest item across the world is simpler than ever for consumers; and as a result, it is more complex than ever for suppliers. A company’s supply chain function sits at the intersection between logistics, production, marketing, and sales; and every related decision involves a delicate balance between countless tradeoffs. Recently, companies have embraced the “just-in-time” shipping method, which delivers products only when needed, based on consumer demand. This approach leads to extended and increasingly interlinked physical flows (i.e. more “moving parts”) and allows companies to maintain smaller inventories, freeing up capital for other purposes. Another key feature of the just-in-time system is that it enables production and delivery of products based on demand by closely monitoring and forecasting customer needs and adjusting production schedules accordingly. However, while the system has large cost, capital, and efficiency benefits, it also comes with a key weakness: its lack of flexibility and resiliency.
The just-in-time method is especially susceptible to disruptions in the face of rapid and drastic changes in conditions, and interference in one component of a company’s supply chain can quickly spread throughout the system’s entirety. As such, in early 2020 when the COVID-19 outbreak caused worker shortages and large increases in consumer demand for online goods, it triggered a bullwhip effect throughout the global supply chains. The delay in one component’s performance (or in this case, several) is enough to throw the entire system into misalignment, causing massive inefficiencies and causing significant delays in delivery and production of products. Therefore, although COVID-19 was the initial trigger, the disruptions were the result of a complicated system’s response to rapid and major changes in conditions. While the “just-in-time” system excels during regular times, the lack of digitization throughout the entire supply chain’s various and interlinked components prevents the method from responding quickly and effectively to rapidly changing conditions.
One potential long-term solution companies are pursuing is increased regionalization. According to a McKinsey survey, almost 90% of respondents from all sectors are expected to pursue some degree of regionalization during the next three years. Companies like Samsung and Intel have recently pledged tens of billions of dollars to open manufacturing facilities in Texas and Ohio respectively in order to answer the increasing demand and limited supply of microchips. Regionalization reduces risk and time to market since there are less obstacles, and gives companies more control over their operations. Increased efficiency also means less energy consumption and CO2 emissions. However, we will not see how this plays out any time in the near future; it can take years to invest and build new capacity, let alone find suitable suppliers to support their localization or near-shoring plans. Additionally, this method may not be sustainable for many industries since certain countries have inherent competitive advantages when it comes to certain goods. Factors like natural resources, labor costs, expertise, and infrastructure can make it more advantageous for certain industries to continue operating globally rather than focusing solely on regionalization.
However, there is another solution companies are increasingly pursuing in the near future — the increased use of end-to-end digitization. The implementation of innovative end-to-end technology will allow companies to gain more visibility into their operations, and more accurately align operations with consumer demand. According to the same survey conducted by McKinsey, “just under half of the companies in their survey say they understand the location of their tier-one suppliers and the key risks those suppliers face. But only 2 percent can make the same claim about suppliers in the third tier and beyond, which are responsible for the transit over the Atlantic.” Naturally, many of today’s most pressing supply shortages, such as semiconductors, are directly linked to these deeper supply-chain tiers. Following the implementation of increased digitization, companies can use their historic data to create short-term demand-forecasting models and use their increased visibility to better predict ETA of cargo vessels.
Many entrepreneurs and corporations alike have already begun addressing the challenges ahead. According to PitchBook, a private capital analytics company, the value of M&A activity of venture-backed logistics startups in the U.S. reached $2.7 billion in both 2021 and 2020, a nearly 69% increase from 2019. Furthermore, large shipping and logistics players that have been around for hundreds of years are increasingly turning their attention to innovative early-stage startups seeking to bring disruptive technologies into the digitally transforming maritime and logistics world. One example includes NYK Shipping Line, the seventh largest shipping and logistics players globally, adopting an Israeli startup Orca-AI’s autonomous tech onboard their vessels: “Orca AI demonstrated that the safety of shipping operations can be improved by automating the task of target detection in low visibility in congested waters.” Early adopters who have effectively implemented AI-enabled tech into their supply functions, “have reduced logistics costs by 15 percent, inventory levels by 35 percent, and service levels by 65 percent, compared with slower-moving competitors.”
Global supply chain executives are faced with a difficult path forward that will require innovation, compromise, and complete renewal of many core systems within their respective organizations. However, just as other business industry leaders have responded during the pandemic, supply chain executives across the world are taking decisive action and using innovative high-tech to adapt to new challenges. One thing is clear: the current supply chain is outdated and cannot compensate for drastic changes in conditions due to its logistical constraints. Additionally, countries have no hope of meeting their carbon emissions goals without changing how their global supply chains operate. Some will continue to build upon the changes made during the pandemic, shifting to a “just in case” approach, and invest in modernized technologies for increased risk supervision. When supply and demand begin to balance out, others may not be able to resist the cost savings of their old ways, only to fall short to their competitor’s more flexible and resilient supply chain processes in the long run– not to mention risk facing their complete downfalls in the face of another disaster. However, one thing is clear: just as companies have integrated data-driven decisions into many other departments, it is time for supply chain management to become a key part of the core business function.