Finding opportunity in supply chain resilience
Global supply chains have seen a number of shocks in recent years. The COVID-19 pandemic brought lockdowns and border restrictions that affected manufacturing, transportation and distribution. Geopolitical conflict has disrupted exports while sending the wider costs of critical inputs such as energy soaring. At the same time, the sustainability revolution is reshaping the way companies do business.
Yet many countries’ supply chains have demonstrated resilience, allowing them to counter headwinds and bottlenecks seen elsewhere. These can offer a lesson: that modernised strategies, technological innovation and efforts to improve sustainability can equip corporates with the tools they need to adapt to disruption.
“The current environment presents opportunities for investors wanting to benefit from this corporate technological innovation and efforts to improve sustainability,” says Cheuk Wan Fan, Chief Investment Officer, Asia, at HSBC Global Private Banking and Wealth. “Investors are searching for quality, and companies that take steps to increase the resilience and efficiency of their supply chains will be able to navigate the current uncertainty and position themselves for future competitiveness.”
Fit for the future
For some companies and industries, a focus on supply chains will represent a sharp change in priorities, not least because severe supply-chain disruptions had been relatively infrequent leading up to the pandemic.
“Many organisations were lulled into a false sense of security,” says Richard Wilding, Professor of Supply Chain Strategy at Cranfield University in the UK.
While there had been some major incidents, such as the Eyjafjallajokull volcano eruption in Iceland in 2010 that caused enormous disruption to European air traffic, supply chains rarely contended with ‘black swan events’. That has now changed. “At the moment, we are in a world of multiple black swans. The supply chains we had were not designed to cope,” Wilding notes.
Some regions have fared better than others.
“Asia is less directly exposed to the current geopolitical conflict in Europe – that’s true,” Fan says. “But, more broadly, manufacturing supply chains in the region are highly diversified. As a result, manufacturers in Asia have not seen the same magnitude of supply chain bottlenecks.
“The just-in-time business model that depends on a small number of far-away suppliers is becoming obsolete. This doesn’t mean that everything needs to be produced at home, but diversification and regional integration makes sense for geopolitical reasons and because the carbon cost of transportation is likely to increase.”
And while building greater resilience into supply chains may appear costly, not doing so could be far more expensive. In some sectors, a single prolonged shock to production could wipe out 30-50 per cent of one year’s operating profit, according to a study by consultants at McKinsey.1
This means that supply chain strategy is shifting from a focus on the costs incurred – such as logistics and warehousing – towards the potential impact of shocks, such as lost sales.
The role of technology and digitisation
“Technology will play a key role in improving supply chains,” says Fan. A survey by HSBC earlier this year found that 76 per cent of companies in Asia were planning to increase the level of digitisation across supply chains.2
And a recent survey by Rockwell Automation found that smart-manufacturing adoption accelerated by 50 per cent globally in 2021, but views on automation were most positive in Asia: 93 per cent of surveyed organisations saw smart manufacturing as important to future success and many had short timeframes – averaging 7-11 months for adopting these solutions.3
“In Asia, the challenges brought about by lockdowns and other restrictions provided a key catalyst to accelerate innovation in digitalisation and automation,” notes Fan. “Globally, digitisation is now a top strategic priority for corporate supply chains. It allows better reporting and risk management, as well as greater speed.”
“Take the crucial requirement of having full transparency across the supply chain – an understanding of the flows and potential chokepoints,” says Wilding. “Some of the most interesting ways in which businesses are using technology to improve resilience is through data analytics.”
This could involve tools that pull in data from multiple business-information sources to provide transparency of the extended supply chain. “You are then able to see is who are the key nodes in the supply chain.”
Digitisation can also help with continuous monitoring. “That’s where some of the clever technologies that we’ve seen coming into play in the last few years really become important,” says Wilding. “Using big data analytics, you can pull in information from sources such as social media. That could, for example, provide advance warning of a likely disruption in a port due to industrial action, allowing shipments to be rerouted.”
“Building a more resilient supply chain is not purely a matter of technology. Companies must develop an overall supply chain strategy, covering the supply-chain process, the infrastructure and network, the information systems, and the people,” says Wilding.
Developing the right culture is crucial. Organisations need to be agile and flexible in adapting to problems. And they must approach supply chains as a collaborative process with suppliers.
“When people make a decision, they need to think about how it changes the risk profile of the supply chain,” Wilding adds. “Risks should be considered at every stage, including project design. You lock in a lot of the risk profile of a supply chain at the design stage.”
For example, a product designed to use a specific alloy only available from one country potentially creates a lot of risk. Risk can be reduced by using inputs that are available from multiple sources globally.
Towards a new way of working
Global businesses that have coped well during the supply chain crisis have typically already implemented “supply chain towers” – a dashboard of data, key metrics and events that help organisations to understand, prioritise and resolve critical issues.
“If your supply chain is the same as it was in the old normal of 2019, you’re doing something wrong,” Wilding notes. “What customers want and value has completely changed. You need to think end to end. You’ve got to think about your customers and your customers’ customers. You’ve got to think about your suppliers and your suppliers’ suppliers. That’s why we’re in the growing pains of a new way of working.”
As emerging technologies change what’s possible and the world moves towards a more sustainable and innovative value chain, investors will find opportunities. Fan concludes: “There are opportunities for investment in companies that implement automation, robotics and digital supply chain tools, or in countries and regions that benefit from the geographical diversification of supply chains.”
At the same time, companies that fail to implement resilient supply chains will be leaving themselves vulnerable to future shocks. “This may start to be seen as a risk factor by markets, especially given the close links between supply chains and other important investment themes such as environment, social and governance (ESG) standards, sustainability and progress towards net zero.”
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1 Supply chains: To build resilience, manage proactively, McKinsey & Co, May 2022 ↩
2 Digital priorities for Asia’s supply chains, HSBC Global Banking and Markets, March 2022 ↩
3 Asia-Pacific Organizations Are Most Receptive to Smart Manufacturing Usage, Rockwell Automation, July 2022 ↩