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By Nathasha Peiris · Nov 20, 2022
Visible stability through invisible means: Managing supply chain fragility through tech
In September this year, Ford revealed that it would spend about USD 1 billion more than it anticipated for the quarter because of ongoing supply chain problems and inflation. An efficient supply chain hinges on sourcing raw materials on time at the lowest cost and predicting consumer demand accurately. However, supply chain operations are vulnerable to unforeseen events like natural disasters, pandemics, and political instability—a state referred to as supply chain fragility.
The Covid-19 pandemic exposed this fragility; the sudden shifts in demand caused product shortages (from baby formula to paper towels and semiconductor chips), travel restrictions led to delays in logistical tasks, and rising operating costs resulted in business closures. The political unrest in Russia and Ukraine further disrupted global supply chain operations, driving up global commodity prices on the back of oil and natural gas price hikes.
As companies had to make supply chain operations more resilient, new tech solutions including AI and machine learning, blockchain, process automation, geofencing, and digital twin were harnessed to improve productivity and strengthen security, visibility, and traceability across supply chain operations. Incidentally, these combative solutions have raised almost USD 2 billion in funding in 2022 (as of October), with companies like Project44 and Flexport leading the way.
In this Insight, we look at how incumbents and startups offer solutions to overcome supply chain challenges across four broad areas: visibility, traceability, automation, and security.
What is supply chain fragility?
A supply chain is a network of manufacturers, suppliers, distribution centers, and delivery partners that perform a range of activities from sourcing materials, manufacturing products, and working capital management, to deliver goods to the end user.
A fragile supply chain is vulnerable to change at any stage of the process, whether it’s in product demand or logistics operations. This is mainly down to poor coordination within a heavily interdependent dynamic of a supply chain.
For example, the global chip industry has faced a chip shortage since 2018. Initially, it was collectively impacted by 5G being rolled out and the US regulatory bans on selling to the Chinese tech company, Huawei. The latter meant having to source the material from outside the US, but this urgent need couldn’t be met by chip suppliers outside the country. The tension between Russia and Ukraine worsened the semiconductor shortage, as Ukraine provides around 50% of the global requirement of neon (a material required for semiconductors). On the demand side, companies started stockpiling because work-from-home norms increased the need for electronics. The sudden shifts in demand impacted transportation costs; for instance, in 2021, sending a 40 ft container from Asia to Europe cost USD 17,000—more than 10x higher than in 2020.
A single interruption within a supply chain could destabilize many operations, resulting in higher costs, dissatisfied customers, and even business closure. However, several technological developments have evolved to provide companies with the building blocks to manage these challenges.
How can supply chain-related issues be managed?
What are the tech enablers?
1. Blockchain facilitates data transparency and reliability
Blockchain technology is conducive because it allows data sharing among many parties while retaining its reliability; once registered in a ledger, it is difficult to alter, and this characteristic allows secure sharing of data like prices, location, certifications, dates, and quality of goods. The ledger can also be automated to trigger transactions, and the blockchain’s secure data transmission capabilities mean data security is not compromised.
Shown below is the information flow of a blockchain-based beef supply chain. In a blockchain-based system, any party can access the information including customers, whereas information in a traditional supply chain flows one way and often only to the next participant.
Flow of information: Blockchain-based supply chain
Source: Created by SPEEDA Edge based on various sources
Possible use cases of blockchain in supply chain management
Source: Created by SPEEDA Edge based on information from Disruptor Daily
Please see Appendix I for a list of examples of blockchain solutions offered by incumbents and startups.
2. Advances in AI, IoT, and digital twin to predict future outcomes instantly
According to McKinsey, early adopters of AI in the supply chain have been able to improve logistics costs by 15%, inventory levels by 35%, and service levels by 65% compared to slower-moving competitors.
For instance, scenario planning is critical to understand how supply chains can change and evolve on the fly. While traditional predictive methods use statistical analysis and human queries, AI-driven predictive analysis can generate numerous scenarios and insights based on large volumes of data, produce more accurate forecasts of demand and prices, optimize raw material purchases, allow for integrated planning, and support end-to-end transparency.
Digital twin technology is also used to digitally recreate the supply chain environment and simulate different scenarios from information gathered through IoT devices including sensors, logistics and transportation databases, operations databases, vendor information, and user experiences. Through machine learning and AI, the data is processed to generate real-time scenarios, enabling managers to act swiftly.
Please refer to the use case map below for examples of real-world applications of these technologies.
3. Growth in real-time tracking technologies, sensors, and intelligent labeling
Advances in tracking technologies have enabled real-time tracking of goods moving through the supply chain. This technology enables faster transfers between supply chain partners, supporting more accurate scheduling by identifying possible delays, and reducing the risk of loss.
Real-time tracking is facilitated by the use of technologies and smart labels including IoT sensors, radio frequency identification readers, beacons, synthetic deoxyribonucleic acid (DNA) identity codes, and QR codes, along with GPS. A geofence can also help to automate event-based actions. For example, an alert can help prepare ports for an incoming shipment, minimizing the carrier time spent at the port.
Advanced sensors can detect everything from environmental anomalies like temperature and humidity, and tampering to send real-time alerts, enabling the tracking of vast amounts of data. Other advances like Edge Computing enable data processing and analysis at or near the source, reducing the amount of data shared between devices and the platform.
What’s driving demand?
1. Increase in disruptive and costly supply chain events
Interdependence between businesses and nations increased after more firms began outsourcing supplies and components to the global East to take advantage of lower costs. However, growing interdependence and complexity meant firms were exposed to potentially disruptive events on a global scale.
Natural disasters like fire, flood, and earthquakes can disrupt supply chain operations by pausing production and impacting transport and logistics. For example, the earthquake and tsunami in 2011 in Japan dealt a massive blow to the Japanese automotive industry, disrupting the global supply of vehicle parts, as much of production came to a halt. The Japanese economy incurred an estimated loss of around USD 350 billion due to the incident.
Pandemics also cause major disruptions to global economic activities, as seen by the Covid-19 pandemic. One example is the consumer goods industry. Demand for durable goods (like recreational products, furnishings, and motor vehicles) and non-durable goods (like food and kitchen equipment) increased to a point where suppliers could not meet the demand due to slower production of critical supplies.
Political tension between countries also results in supply chain disruptions. For example, the China–US conflict has undone three to five years’ worth of growth in the supply chains in affected countries, according to the UN. Tensions between Ukraine and Russia and the subsequent trade sanctions limiting trade with Russia also resulted in supply chain disruptions in industries like metals, gas, and food—particularly maize, wheat, rapeseed, and sunflower oil. (The Organization for Economic Co-operation and Development expects the Russia–Ukraine situation to cost the global economy USD 2.8 trillion in economic output by the end of 2023).
Other unforeseen events like the ship Ever Given getting stuck in the Suez Canal in 2021—which held up USD 9.6 billion worth of goods per day—demonstrates how extensive supply chain vulnerability can be.
2. Push for sustainable, ethical, and transparent supply chains
Despite increasing efforts to redesign supply chains to account for fair labor practices and reduce waste and environmental impacts, concerns about carbon footprint and ethical practices persist. For instance, supply chain emissions are 11.4x higher than operational emissions, according to the CDP Global Supply Chain Report 2020 (refer to our Carbon Management Software hub for more insights). Moreover, at the beginning of 2020, one in 10 children was employed in production globally, with indications that the child labor issue could worsen by the end of 2022.
Managing these supply chain challenges is becoming increasingly important due to several reasons.
- The rise of sustainability-conscious customers: In a survey conducted by 3Gem in 2021 across 27,000 global respondents, 88% stated that they prioritize buying from companies that have ethical sourcing strategies in place, and 83% were willing to spend more if they could be assured that the product was ethically sourced.
- Sustainable operations improving profitability: Using technology to improve the operations more sustainably, such as better demand planning—for both raw materials and finished goods—reduces wastage, leading to increased profits. For example, Unilever cut USD 1.5 billion in costs during 2008–2021 through sustainable sourcing.
- Regulatory bodies demanding transparency: Governments enforce the transparency of supply chain activities by making it compulsory for companies to engage in ethical and sustainable practices, potentially penalizing their failure to comply. Please see Appendix II for applicable regulations.
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