A new Supply Chains Network model
Climate Change is reported to take the world beyond the maximum target 1.5°C increase in warming around 2030. This situation will drive the use of different materials in products, new Supply Chains for businesses and new business relationships.
Therefore, a new Supply Chains Network model is likely to develop after 2030, due to increasing uncertainty concerning climate change, possible growth of the ‘platform economy’, financial markets becoming more decentralized and new production and distribution technologies emerging. Supply Chains will also be influenced by the change in outlook for business organisations, as stakeholders will be considered to have rights that are similar to shareholders.
Role for Procurement
In organisations, Procurement could take the opportunity to provide a lead role in managing the change. This will commence with the need to identify and justify the increasing risks concerned with the supply of imported finished goods and critical materials and components, especially those from a single source supplier or country.
As an indication of the risks, the consulting firm McKinsey has stated that “Areas for manufacturing in Korea, Japan, Taiwan and other hubs in the western Pacific, can expect that hurricanes sufficient to disrupt suppliers will become two to four times more likely. Some of these disruptions may last for several months. Southeast China will experience extreme precipitation events (i.e. flooding) twice as often by 2030”.
The organisation Net Zero Tracker has identified that only half of companies with net zero pledges actually have robust implementation plans. The rest are ‘greenwashing’. Regulators are starting to tighten the rules concerning what businesses can report about their steps towards Net Zero. However, Procurement will need to analyse the statements made by suppliers, to cover the future risk of buying from a supplier that could experience regulatory difficulties or penalties.
Competitors and Suppliers
Over the years, Procurement professionals in a few organisations have implemented different approaches to their supply markets. While each has merits, there has not been the urgency across businesses to trial and more generally adopt these approaches. However, the urgency has arrived, with only seven years to change from the typical cost-based approach to buying goods and services to a value-based way of thinking. Two areas that could gain more attention are:
Co-operation with competitors: While companies can be competitors in finished goods markets, they can co-operate in areas of mutual interest across inbound (or upstream) supply chains. For example, packaged food businesses are co-operating to reduce the carbon emissions in agricultural supplies:
Regenerative farming, which focusses on building soil health, is not a new concept, but is new to food manufacturing businesses and to many farmers. To de-risk the shift to this different way of farming, major consumer goods brands, together with global grain traders are co-operating with some American farmers. The US agricultural organisation Field to Market commented that “While the companies may compete for retail shelf space in certain product categories, their relationships have transformed into pre-competitive collaboration.”
Similarly, in northern France, six consumer goods brands are reported to have jointly contracted with100 farmers in a project to improve soil carbon retention. To provide confidence in this long-term co-operation between the parties, the food manufacturing companies have signed a 5-year purchase agreement for the crops generated from the project.
Another area of co-operation with competitors is replacement parts for production equipment maintenance. Although competitors in a country are likely to use the same expensive production equipment that is often imported, it is usual for each to hold high inventory of parts against the long lead times. The option, to reduce inventory holding costs, is for each company to hold the agreed inventory of selected parts. As a company uses a part, so a replacement is ordered (this is the billing address), with the elected company as the delivery address.
Collaboration with selected suppliers: This approach requires a change of attitude in many businesses, because it requires the building of trust between the parties. This requires as the first step to pay suppliers in full and on time against the contract. The selected suppliers are those that have a high risk.
Collaboration can be in joint planning. Rather than providing a forecast, then an order for items, the objective is to buy a percentage of capacity of the constraint production equipment for a period of time. In return for the guaranteed buy, suppliers can provide delivery dates (at least ex-factory) and maybe a price discount, because the commitment allows the supplier to manage capacity more effectively. For the segment of demand that cannot be committed, there can be a flexible increase contracted at a higher margin to compensate for the volatility.
Innovation and Creativity
The actions discussed carry the generic name of innovation; not be confused with Continuous Improvement – that is, doing the same things better, which is the more common activity in organisations. Innovation is thinking and implementation to achieve an objective in a new way and which provides measurable outcomes.
Unfortunately, Innovation is the term often used in business and the media to cover any improvement and too many executives and politicians think the term only refers to introducing new products.
But, prior to innovation there is creativity. As post 2030 will require a different economy and business relationships that are currently unknown, the Supply Chains group in a business will need to be creative in generating new ideas. Not all ideas will be viable, but similar to the structured ‘brainstorming’ approach (that starts with ‘what if’) of Value Engineering in the 1960s, creativity is low risk and low cost. The risk and cost are incurred at the innovation stage, when viable ideas are implemented for the use of new materials, making a new product or implementing a new process.
Even when companies have the will to pursue competitor co-operation and supplier collaboration, there are constraints. The lack of structure and capability to design the programs, staff with the range of skills required to make the programs a success and sufficient experience and capabilities to manage them. So, with seven years to a new Supply Chains strategy it is a good time to commence your creativity and innovation program.