Aaron Alpeter describes supply chain as, “The intersection between ideas and ambitions in the physical world. Supply chain is not one thing. It’s not even a singular thing for an industry or company. It’s a unique set of circumstances.”
After having spent years experiencing, researching and developing supply chains for almost a hundred companies, the founder of Izba, Capabl and the Exchange talks about contemporary issues in supply chain as a global phenomenon.
To understand the New Frontier of supply chain, as some may call it, one has to look at the history of the concept and ideas formed at its inception. Aaron says, “The purpose of supply chain, at its core, is to balance supply and demand as efficiently as possible.”
As per Jim Hopkins, supply chain has undergone four major changes in the way it’s perceived:
The initial days of supply chain focused on efficiency in terms of costs. Everyone wanted to have the most functional, but the least expensive, supply chain that serves the purpose without problems. This resulted in a boom after 1992 as companies eventually started trading all the way to the year 2000.
This is when the East was going through economic recessions and China entered the World Trade Organization and commerce flourished, as companies from the West started producing and trading out of China, establishing global supply chains and lifting poverty in several regions.
The increasing number of competing supply chains brought about another supply chain shift that began prioritizing customer experience and satisfaction by focusing on metrics such as perfect order fulfillment.
COVID-19 brought about a change that we term as the paradigm shift of respect that was noticed as even end-consumers started to learn about the existence and the complex nature of supply chains.
And a good two years after that, events like the global chip shortage, Russia’s war on Ukraine, economic recessions and sociopolitical upheavals in various global regions have brought about the contemporary paradigm shift in supply chain, referred to as resilience.
The term ‘unique set of circumstances’ used by Aaron, holds truer than ever for the current state of affairs.
On one hand, we have unprecedented problems and supply chain catastrophes around the world. On the other hand, creative market competition and the availability of technological infrastructure to realize imagination are breaking conventions.
From the implementation of cloud software systems to real-time tracking, the competition forces companies to think twice before saying no to any innovative idea.
This is where supply chain managers can find themselves struggling to choose between repeating conventions and choosing innovations.
As Aaron puts it, “There’s nothing physically preventing you from doing anything like putting $20 bills on the back of every DSC parcel that you send out. You can do that. The question is if that is the right business decision for your particular situation.”
Quoting examples of companies like Farmer’s Dog that send out 100,000+ orders on a regular basis with each product having the name of the customer’s dog, Aaron says, “What you’re looking at is your ability to do something in a repeatable process. And that’s something the business needs to define.”
Another noteworthy example is Inspiration4 planning to serve ‘Space Beers’ that will be made from 70lbs of hops that have been sent into orbit in a rented space on a SpaceX rocket and auctioned off to breweries.
Supply chains are evolving as a concept and also as a business component. We’re going from a time when supply chains were considered a part of your business to essentially being what your business is actually based on.
To understand the present economic landscape, we’ll need to go back in time to the Second World War when American hegemony resulted in the creation of two frameworks that set the stage for modern supply chain problems and their solutions.
The first one was the mutual agreement on the risk and prevention of future wars through a forum that encourages dialogue and conversation and, thus the formation of the United Nations and the second one was the US Dollar being chosen as the reserve currency for global trade.
Manufacturing was done in the US for the most part as companies sought to profit off the post-war boom.
The Marshall Plan was implemented, a sum of $15 billion was provided by America to European countries to help with rebuilding efforts across the continent.
This eventually led to production either being set up or moved to Europe to streamline manufacturing for companies around the world.
Eventually, the need for cheaper labor paved the way for Japan to eventually become the central hub for production.
Japanese manufacturing proved to be one of the most efficient business decisions for companies everywhere, an idea that persisted all the way through to the 1990s.
In January 1995, the World Trade Organization was formed and in 2000, due to economic recessions, China joined and allowed the world to set up factories in the country to have the cheapest possible production.
Around the same time as the Soviet Union fell, trade and commerce spread across continents and American supremacy over the global market was written in stone.
The idea that you can become like America if you trade with America became the thesis proposed to all those who could trade even though the reality was a bit far off as countries struggled with their socio-political situations.
The next shift in supply chain paradigms came with COVID-19 and the Russia-Ukraine war that followed shortly after. As Aaron puts it, “This is where we’re starting to see a sharpening of the dividing lines.”
As apparent with global microchip shortages, every country, like the US, is strategically reevaluating its trade diplomacies.
The most prominent example in this regard is Germany, a country now facing the consequences of over relying on Russian oil and natural gas.
Aaron says, “This was a decision that seemed like a great deal 5-10 years ago. Europe was integrated and this was something that could never happen again. But now, everybody’s asking where their friends are.”
It’s clear that all countries recognize the benefits of trading and are willing to cooperate but as political situations escalate in each region, companies are likely to wonder what’ll happen if another conflict breaks out.
It’s imperative for all countries to now understand the significance of their markets and the industries they care about. For example, several countries like the US are trying to prioritize keeping some factories such as microchip productions at home rather than risking having them in another region.
Geopolitical uncertainties have rendered supply chains vulnerable and companies are wondering with whom they should ally themselves next.
The past is proof that we preferred geographic localization of production for certain commodities, for example, TSMC in Taiwan produces 65% of the world’s total semiconductors and 90% of all advanced chips.
With profits soaring high due to low labor and shipment costs, companies like Walmart and Amazon made the most of the situation by having most of their products in China. In fact, 63% of all Amazon sellers are still Chinese. “We’ve created this global economy where the lowest cost rules in most cases.”
However, all this is witnessing a significant change as the world faces new challenges.
“One of the side effects of this shrinking of the markets is that costs are going to go up. We won’t have the absolute lowest prices that we have much longer.”
Pointing out the changing situation in China, Aaron states that “China has an aging population. Estimates tell us that the majority of the population will be at retirement age in the next couple of decades, meaning the country won’t have a growing economy based on cheap labor.”
Talking about what the future looks like, Aaron says that we’re likely to witness the country making the transition to robotics and automation. “They’re going to move up the food chain. As a result of the cost going up, labor wages are going up pretty quickly.”
Even before the Trump tariffs of 2017-18, costs were already on the rise in China, prompting companies to consider moving to Vietnam, Indonesia or other places in Southeast Asia where they can still have a manufacturing base.
The production of electronics such as the assembling of mobile devices and gadgets is already being carried out in these countries, improving economic conditions in the region. However, it’s no secret that socio-political factors often impede progress in these countries.
Another noteworthy trend in this regard is the nearshoring back to North America. “The pandemic really exposed the fact that there’s a high price to pay for being away.”
Having a supply chain that spans half or the whole globe has proved significantly risky. The distance from end-consumers has reignited old debates about setting up shop near home, preferably in Northern Mexico.
Aaron says that the product that is moving back to the continent is probably not going to bring about the same amount of work as we saw before. This time, there’s going to be a lot of automation with robotics involved, nullifying the need for costly labor.
Startups that are looking at locations to choose for their factories are narrowing down possible options in Northern Mexico, if not in the US itself, to have a reliable and reactive supply chain in place.
Microsoft’s Xbox is one of the companies that really assessed the situation in this regard long before.
Since it wasn’t clear if the Xbox was going to beat its rival, Sony’s PlayStation, in areas like NY, LA or KS, the company still ran scenarios and research to ascertain the possibility of having the supply chain closest to its target consumers.
Microsoft based its production factories for the Xbox series in Mexico, shifting it to China later on to make the most of the margin points.
Highlighting the shift, Aaron says, “Another big trend we’re going to witness is that companies that are going to launch physical devices in the US will now keep production in Mexico to test the validity as well as the product market fit before thinking where they’re going to eventually move.”
A company like Peloton that decided to start producing its bikes in Asia eventually had to face difficulties shipping their product to their target countries as shipping costs rose from $3,000 to almost $25,000 and port congestion made it impossible for companies willing to pay the higher costs to have a feasible deadline.
“I think the next change that we’re witnessing for domestic supply chains, especially with bigger companies like Walmart is a reorientation of who their customers are and how they sell.”
Recounting his experience in Unilever at the time it reigned as the Master in Gartner’s supply chain for seven years, Aaron states, “They were masters at shipping full pallets to Walmart. Nobody could do it better. We would optimize the trucks down to the last pound or square inch. But what’s shifted is that while they’re still shipping pallets to Walmart, most companies now have to worry about shipping cases to CVS and eaches to individuals.”
Implementing such a plan can prove difficult, especially when the competition cuts short the luxury of time. Amid circumstances like labor shortages, setting up shop may prove challenging.
Highlighting the difficulties in the process, Aaron continues, “This overall shift in how you do things will effectively require three different supply chains or three different processes inside your existing supply chain in order to become omnichannel.”
You’ll need to come up with a manual process for each channel and define how your automations are going to work from there, meaning there’s substantial work to be done to get things streamlined.
The dividing lines, as per Aaron, have also been drawn across the internet, where we now have the US or a Western-centric internet dominated by companies like Amazon, Google, Facebook and the like, as well as the Chinese internet with sites like Alibaba, Baidu, etc.
“It’s very rare for US sites to penetrate into the Chinese internet and the other way around. However, there are exceptions like Sheen, a Chinese company dominating in the US right behind Amazon. So, there are breakthroughs even though it’s extremely difficult for average DTC companies from Europe or the US to get into China.”
You need to have more than just the right partnerships, legal framework and authorizations to get into China; you also need marketing expertise.
Aaron says, “It’s a friendly rivalry that is probably not going to be confrontational but it will compel companies to change how they market themselves. This can be difficult and can result in businesses seeking out partners to license their brands out.”
The increasingly complex nature of supply chains has made it impossible for reactive supply chain management to be enough for the future. That is to say, the rise of supply chain leadership is another noticeable change in the current scenario.
A concept that applies to individuals, as well as organizations, supply chain leadership, is the proactive approach that supplements the reactive strategies of supply chain management.
The trend has been noticed in companies around the world as the preference for CEOs has turned from CFOs in the 1980s and CMOs in the 1990-2000s to COOs in the current era. This highlights the change in industrial attitudes as supply chain has moved from being centered around costs and then being considered somewhat strategic to becoming a moat for how companies are defending themselves against the competition.
“This doesn’t mean that they need to know how to optimize trucks or OT schedules. It’s about understanding the role of supply chain.”
The change from supply chain management to supply chain leadership is characterized by the ability to synthesize all the information that is coming in from different channels and going for the best course of action for every member of the supply chain.
Since it’s a proactive approach, supply chain leaders need to be aware of the geopolitical circumstances while having ample industry knowledge as well as being able to look at their organization at a macro-level to identify points for improvement.
A supply chain leader has two core responsibilities. One, as stated above, is to be well aware of circumstances, both internal and external that affect business performance. The second responsibility of a supply chain leader is that of a translator.
The leader is expected to present key highlights of the information they’ve come across for the whole supply chain and highlight key decisions that need to be made. While a leader may not necessarily make the decisions, it’s their job to present the most urgent problems and suggest the best decisions for them.
Today, COOs are being promoted to CEOs due to their understanding of the supply chain as a whole since it’s the most important component of any business.
The result is businesses experiencing rapid shifts from owning everything to a preference for outsourcing operations such as manufacturing and distribution as well as expertise. All industries have realized the importance of supply chain and therefore, are actively seeking consultants to join them.
In a nutshell, the circumstances that all businesses and industries are likely to face in the coming 10-15 years include:
· Preference for production near countries of origin
· Increased demand and short supply of supply chain leadership
· Increased attention toward supply chain innovation
· Businesses choosing between Chinese or Western internet markets
· Increased costs all around due to geopolitical, economic and macroeconomic factors
· Segmentation of demand and production
· Competition will evolve to company versus multiple companies as their supply chains compete
In response to the above, organizations are experiencing a paradigm shift that is diverting the attention of many to choose supply chain leadership over management. As situations progress and more challenges come up, companies will have to change strategies and prioritize innovation.
While some may have to adopt new technologies, others may have to completely reconfigure their supply chains and seek out partnerships that can help reduce the burden and increase efficiency.
Supply chain resiliency, efficiency and effectiveness are all prerequisites for today’s competitive market. Make sure that you’re not lagging behind.
The time to seek out viable partnerships is now. Get in touch with consultants at Izba to discuss your business needs and let us help you become a supply chain leader in your industry. Our job is to help you optimize any and every aspect of your supply chain that has room for improvement.
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