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A Crisis Within The Crisis

The dream of ‘ephemeralization’ whereby firms are able through productivity improvement to do ‘more and more with less and less until eventually [they] can do everything with nothing’ may mathematically become reality at infinity, but until then it is fraught with peril.

In search for efficiency, the world has systematically compromised on resiliency. The recent trends have exposed the vulnerability of many systems and policies. This is certainly true for the global supply chain which is experiencing its own crisis within the crisis.

Taking a step back, Jean-Pascal Tricoire, Chairman and CEO of Schneider Electric, identified four trends that have been shaping supply chain management strategies in recent years at a UBS expert call entitled ‘The Supply Chain of Tomorrow’ this week: (i) regionalization, (ii) customer-centric differentiation (i.e. mass customization) and (iii) sustainability with the support of (iv) digitization. At the same event, David Simchi-Levi, Professor of Engineering Systems at M.I.T. and the Director of M.I.T.’s Data Science Lab, acknowledged these trends and reminded the audience that they have been coming on top of a strong undercurrent of obsessive efficiency maximization through plant consolidation, outsourcing and offshoring driven by lean manufacturing principles.

When COVID-19 hit, the global supply chain had initiated an extended process of reinventing itself while sailing too close to the wind from an operational risk point of view. As a result, many companies failed to pass the acid test on business continuation. I learned years ago that the reason there are traffic jams on the highways is that drivers tend to systematically brake more than the cars in front of them. It creates an inevitable stop-and-go pattern. It turns out that the same phenomenon occurs in the supply chain and is called the ‘bullwhip effect.’ After a supply and demand shock like the one just experienced, a supply chain takes a lot of time to recompose itself.

As a restructuring process is engaged, both experts expect supply chains around the world to experience a massive acceleration of the four trends identified by Mr. Tricoire with an emphasis on resiliency at the expense of efficiency. The immediate consequences will lead to a decline in return on capital. In some cases, this will be enforced by a new regulatory environment: with certain industry segments such as food, technological components and healthcare labelled ‘strategic’ from a national security perspective, heightened regulation related to their supply chain, e.g. localization, inventory levels, stress tests, can be expected. Mr. Simchi-Levi made an analogy with the tightened regulatory environment for financial institutions following the Great Financial Crisis.

Whether driven by regulatory requirements or in search for excellence, firms will be compelled to embrace new automation and digitization trends on an accelerated basis to contain and eventually reverse the damage made to efficiency. The next generation of supply chain management will need to rely on a detailed mapping not only of tier-one suppliers, but also of the lower tiers – an exercise which is not common today – and on its digitization. Once a digital twin is created, managers will be able (i) to achieve full visibility on the supply chain at any point in time thanks to ‘a single source of truth’, (ii) to fix issues in a timely fashion, and (iii) to build predictive capabilities. Scenario planning is likely to become an important simulation tool helping identify the ‘hidden risk’ in the supply chain. David Simchi-Levi reminded us that it is often the small suppliers of commoditized products who represent an unexpectedly large supply chain risk.

Importantly, both Mr. Tricoire and Simchi-Levi mentioned that while regionalization and shorter supply chains may be a response to growing protectionism, customer proximity and the need to shorten the supply chain based on environmental considerations, they do not lower supply chain risk disruption risk per se.

There is no doubt that supply chain management has now become a strategic topic for companies and their stakeholders, with side implications for investor communication and M&A processes. When asked about due diligence questions to be put to Management teams, Mr. Tricoire and Simchi-Levi essentially referred to the four broad categories of regionalization, mass customization, sustainability and digitization as key topics for a thorough investigation.

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