In Episode 33 of the SAP Experts Podcast, Martin Barkman, Senior Vice President & Global Head of Solution Management for Digital Supply Chain at SAP, outlines the supply chain agenda in the age of COVID-19. This post looks at the current state of the discussion among consultancies, SAP experts, and customers about which trends will accelerate throughout the current crisis.
In a situation like the current crisis, it is easy to forget where the economy came from. As Hans Thalbauer, then SAP SVP of Digital Supply Chain and Industry 4.0, pointed out in an episode of the SAP Experts Podcast recorded in late 2019, volatile political and social environments were some of the most pressing issues supply chain leaders were facing even before COVID-19 entered the stage. After all, the pre-coronavirus times were those of Brexit, the Sino-American trade wars, and widespread social unrest.
The bad news is: COVID-19 does not replace these types of disruptions, and instead is likely to even exacerbate them. First, the evolving “dance” phase is playing out at different speeds in different countries. Each country is at the constant peril of a second wave necessitating a return of harsh interferences with businesses’ operations (and, as a result, with the supply chains crossing their territory). Second, the crisis is heating up the dynamic of preexisting crises – just take US-China relations or the widening political cleavages within the EU as examples. The good news is: The business world has already learned a great deal about how to handle these types of uncertainties and upheavals. The food supply, for example, has remained stable in most markets even throughout the toughest lockdowns.
This is in part thanks to the visibility into stock levels, demand development, and supply chain constraints afforded by modern business technology. Consultancies like BCG and McKinsey are therefore united in prescribing one concept for handling the uncertainties at hand: A “nerve center” or “control tower” that has visibility over the entire supply chain, rendering the future in alternative scenarios and respective reaction protocols. The phase of volatility and uncertainty ahead, it thus seems, will be a major argument for reinforcing “insight-to-action” capabilities in supply chain management: The ability to act quickly, on the basis of real-time data and predictions.
Even before COVID-19 entered the scene, automation was high up on the agenda of supply chain leaders, as the promise of producing in a more agile manner with higher transparency and lower costs is a convincing case in itself. Now, reports of consultancies like Kearney and EY highlight that this case was further reinforced by the epidemic.
First, having fewer humans crowded around a given production line reduces the risk of viral transmission among them. This not only serves to protect the workforce but also the continuity of the operations themselves: Regulators keen on enforcing physical distancing rules will have fewer concerns about factories with fewer humans in them, and sick leaves will not have as much of an impact on production plans.
Second, the traumatic experience of the West’s inability to adequately equip its healthcare system with protection equipment and testing kits is reinforcing the political desire to repatriate manufacturing. If this pressure persists (and is perhaps intensified by consumer and/or shareholder preferences), manufacturers could see a paradigmatic shift in the way they operate. As BCG points out, “(artificial intelligence) also allows (manufacturers) to operate a larger number of small, efficient facilities nearer to customers – rather than a few massive factories in low-wage nations – by deploying advanced manufacturing technologies such as 3D printing and autonomous robots that require few workers.”
A recession boosting the adoption of such automation technologies would not be without historical precedent. In fact, it would rather be the norm. According to the Economist Intelligence Unit, it has been in recessions that the adoption of automated processes has really spiked alongside the pressure to lower costs. It would not be a surprise if this historical pattern repeats itself in this crisis.
New business models
Until there is a vaccine against the coronavirus, the economy will be held in an artificially suppressed state – a condition the Economist aptly terms the “90% economy.” As consumers are deprived of income and spending options, a drought in revenue will eat its way up the value chain, creating a shortfall in cash flow on all levels. When it comes to spending and investments, businesses will have to find ways to do more with less. For suppliers, this implies that being able to service increasingly cash-strapped customers will become a competitive advantage.
In the short term, this usually takes the form of more generous payment terms – offering the option to defer payments or to pay in installments, for example. But as the economy will likely persist in dire straits for an extensive period of time, new business models could emerge that more closely align spending and consumption.
Take what KAESER KOMPRESSOREN has been doing for quite some time as an example: Instead of selling its compressors (which would require a considerable upfront investment on the part of its clients), it installs the compressors on clients’ sites while retaining ownership. Then, they charge for the compressed air – a classic pay-per-use model. This allows KAESER KOMPRESSOREN’s customers to upgrade their compressors while aligning their cash outflows with their cash inflows, alleviating their liquidity situation. Another variant on the same theme is the addition of services to an existing product.
Hoval, for example, sells predictive maintenance as a value-added service on top of its heating systems. This adds a revenue stream to Hoval’s business that ensures customer loyalty while not requiring too high of a startup investment.
Imagine supply chains once this crisis has abated: There is a good chance that future companies will have deeper insight into their operations thanks to increased transparency, they will do more with less, thanks to a higher level of automation, and they will deliver value to their customers in entirely new ways.
Regardless of how bad the recession is going to play out, the companies that master these three points will be more resilient and more profitable down the line. Yes, the future may be uncertain, but we will surely see some interesting times ahead in supply chain management.