Digitalising the world's supply chains
In late April 2022, a California technology giant warned that it could sustain a hit of up to $8bn in the following quarter from supply-chain challenges and other headwinds that were making for a tough environment. “Supply constraints caused by Covid-related disruptions and industry-wide silicon shortages are impacting our ability to meet customer demand for our products,” the company’s Chief Financial Officer told analysts. The message from a company renowned for the sophistication of its global supply chains was not lost on investors: supply-chain disruption was now default, and any hopes of a return to normality should be put on hold.
The last few years have brought unprecedented disruption to global supply chains, sparked by the pandemic and exacerbated by the war in Ukraine, which has fed into higher inflation and caused a food and fuel crisis.
Meanwhile, the Federal Reserve Bank of New York’s Global Supply Chain Pressure Index (GSCPI), a relatively new tool designed to chart the demand for, and availability of, goods, suggests that global supply-chain pressures are starting to stabilise “at historically high levels". All this has shaken the very nature of global business to its core, raising deep questions about finding manufacturing centres beyond China, the relative merits of increasing inventories and how to respond to continuing labour shortages.
“The world that was built on the global supply chains that defined the international economy during the past 20 years doesn’t exist anymore,” says Alexandre Tavazzi, Head of CIO Office & Macro Research. “Today, if you depend too much on one source, you are at risk – and it is an operational risk that you cannot afford.”
The crisis is now forcing companies around the world to reassess their business models and invest in innovation that can help prevent further disruption. Tavazzi says this next-generation technology also has the potential to provide longer-term productivity gains.
“We are at a new dawn of automation and technology processes that will be applied all the way along the supply chain,” he says. “Crises typically create opportunity, and companies are realising that they have to embrace it.”
One aspect of this new technology wave is robotics. In China, for example, where lockdowns and the resulting labour shortages have shaken supply chains, manufacturers are investing heavily in automation technology – and specifically robots – to fill the gap.
In 2021, one of the country’s largest producers of home appliances began a three-year investment programme to increase technology in its production facilities. Company officials said that using more sensors and robots would improve efficiency on the factory floor by 15–20 per cent.
Automation on factory floors is on a steep increase globally, with estimates suggesting that industrial robot shipments will reach 518,000 by 2024, up from 384,000 in 2020. According to one study, the value of the industrial automation market will reach $233.9bn by 2028 compared with just $140.4bn in 2021.
Meanwhile, more robots joined the US workforce in 2021 than ever before, with companies spending more than $2bn on almost 40,000 robots – a 28 per cent jump over 2020, according to the Association for Advancing Automation. The majority of industrial robots in the US have traditionally been used in the automotive sector. But in 2021, 58 per cent of US robot sales went to non-automotive industries – a sign of their growing use and application across industry.
Shipping is another area of supply chain management undergoing a technological shift. An estimated 90 per cent of all goods by volume travel to destination markets by sea – a once-routine journey that has been severely disrupted in recent years. With continuing congestion in global ports as well as a shortage of workers and containers, delays in expected arrival times have lengthened this year to a global average of just over six days in May 2022 compared with closer to four days for 2018 and 2019.
That causes problems for industry in the form of higher costs and greater uncertainty given that importers typically have little visibility on their shipments until the vessel arrives in the port.
Tavazzi says shipping companies can use technology such as blockchain to smooth some of the resulting bumps for their clients, improve visibility and therefore increase efficiency.
One of the world’s biggest shipping firms is doing just that. Partnering with a technology corporation, it has created a blockchain-powered open industry platform that enables companies and their suppliers and customers to receive real-time shipping data, enabling better communication along the supply chain and improved management of every shipment.
Complementing robotics and blockchain, artificial intelligence (AI) is set to become a cornerstone of the new supply-chain model. In the healthcare sector, where pandemic-related disruption has forced companies to spend more on building up inventories, AI is helping to lower inventory-management costs by establishing the optimum allocation of stock for entire product ranges across multiple distribution centres.
Gartner predicts that 50 per cent of global eCommerce enterprises will invest in real-time supply chain solutions, AI, and advanced analytics capabilities by 2023.
Tavazzi says this shift presents big opportunities for investors as new and dynamic tech companies emerge to help ease the supply-chain crisis. But he warns this will not take place overnight.
“Rethinking supply chains is not an event, it’s a process that will take time,” he says. “The direction of travel is not an easy one at the corporate level, but at least we now know where we are headed.”
This article has been written in partnership with the Financial Times.