Rethinking supply chains in a post-COVID-19 world

The need to address the inefficiency of intercompany transactions has been large and obvious for a long time. After all, traditional message-oriented systems — be they Electronic Data Interchange (EDI), or simply fax, email, or phone calls — led to overly manual processes, data reconciliation problems, disputes, and a lack of visibility which, according to some estimates, cost businesses as much as $140 billion USD per year.

For many decades, companies focused on supply chain optimization to drive down costs, minimize inventories, and improve asset utilization. The unfortunate consequence of this strategy is that the world’s supply chains lack the flexibility and buffers needed to react and adapt to disruptions. The lack of transparency across the supply chain makes it incredibly difficult for customers to really understand the value of products. It is also extremely difficult to discover waste and illegal or unethical practices.

Global supply chains have been under pressure for a while because of energy cost fluctuations, regional instability, and a changing regulatory and tariff landscape. However, the COVID-19 crisis has brought about a completely new reality as big parts of supply chains completely shut down, borders closed, workforces scattered, and airplanes were grounded. The worldwide pandemic has shown us just how fragile our production and supply chains are, and how little connectivity and data exchange are built into them. This is a real problem, after all it takes 30,000 parts to make a car but it only takes one part to not make a car.

It takes 30,000 parts to make a car but it only takes one part to not make a car.

The post-COVID-19 world will look very different. Production systems and supply chains will have to be much more resilient and adaptive. Existing supply chains and production systems will need to be overhauled and redesigned, and the systems on which they run will need to be rearchitected and rewritten.

These new systems will have some notable characteristics:

1. Visibility

Today, supply chain participants typically have only limited visibility into their top-tier suppliers. They don’t have any visibility into their secondary or tertiary suppliers, and may not even know who they are. As a result, they don’t see when bad things are headed their way, and have trouble figuring out what to do when things don’t go to plan. This makes it very difficult to assess risk and and the impact of disruption, and to plan and implement alternative strategies.

New supply chain architecture must allow participants to understand the status of all their parts and other inputs to production, and understand the status of the supply chain behind those parts and inputs. They will need to have visibility into alternatives and the inventory, capacity, and credentials of the companies behind those alternatives.

Visibility also allows for provenance tracking. This can be essential for food safety and insuring that sub-quality, fraudulent parts don’t get into the supply chain for critical machinery. It also becomes important as companies strive to understand the discrete cost of inputs to better understand the real cost of complexity, to tack climate change impact, and to insure that human rights and worker conditions are being adhered to.

2. Digitization

Transactions throughout the world’s production and supply chains have traditionally been conducted through forms, packing lists, and bills of lading which are commonly paper based. Some customs documentation has to be on paper by law. The reliance on paper documents has been largely due to the fact that shippers have not seen enough economic or security rationale to make a change. This will now change quickly.

Digitization isn’t simply a matter of cost reduction anymore; it is a matter of enabling visibility and risk management. Over the next 24 months we will see increased focus on the digitization of paperwork in supply chains throughout shipping, ports of entry, and government agencies.

3. Privacy

One of the biggest reasons that visibility in supply chains has been such a challenge is that participants make it challenging. They don’t want to expose information about their suppliers because they fear losing their competitive advantage and pricing power if their customers know the details about their commercial relationships. Privacy controls are therefore essential. Supply chain participants need to be able to control who can see what information and independently verify that privacy controls are in place and are effective.

Today, supply chains in general, and shipping in particular, often rely on forms and spreadsheets moved across EDI and File Transfer Protocol, or sent by fax or email. This collection of somewhat ad-hoc systems presents many security and privacy challenges, and really only works between two parties. Existing supply chain management systems don’t have the capability to grant discrete and auditable access control to parties that need it.

This issue must be addressed for supply chains to be properly modernized.

4. Incentivization

It is extraordinarily difficult to perfectly align the interests of stakeholders on a continual basis. As such, it is useful to have a mechanism which incentivizes behaviors where such non-alignment exists.

Some supply chain participants will be willing to pay for some information in the supply chain. For example, as supply chains become more instrumented with IoT sensors, insurance agents may be willing to compensate the data owner for access to that data, or a buyer may be willing to purchase data from other supply chain participants in order to prove a low level of risk and secure better financing conditions.

5. Automation

As data gets digitized, and records and business logic become shared with a common agreed to truth, there is a huge opportunity to improve efficiency through automation. The potential value of automation will be further accelerated as technologies such as IoT, 5G, and artificial intelligence are integrated into supply chains.

A new kind of system

“If there were any lingering doubts over the value of blockchain platforms to improve the transparency of businesses that depend on the seamless integration of disparate networks, COVID-19 has all but wiped them away.” –World Economic Forum

While blockchain platforms have demonstrated great potential, they have, to date, failed to gain a strong foothold in supply chain management. This is owing to two factors:

• The urgency to change wasn’t acute enough
• Blockchain technology was too complex and immature

Things have changed. The urgency and the demand for supply chain modernization will be strong and enduring, and next-generation born-in-the-cloud digital ledger technology (DLT) platforms like Insolar are emerging.

The convergence of need and technical capability will drive rapid progress to a new, more resilient and adaptive supply chain model.

The use of a common ledger and common business logic will allow supply chain participants to:

• Know the status and track the provenance of parts and products
• Cooperate, collaborate and automate their interactions with customers, suppliers, and partners
• Interact efficiently with third parties such as financiers, insurance companies, and regulators
• Have confidence in the veracity of data and the quality of process to properly assess risk and apply policy
• Selectively adjust privacy to strike the most appropriate balance between maintaining competitive advantage and contributing value to the welfare of the overall system
• Impose a chain of command and track the chain of custody

Next generation DLT platforms will impact everything from warehousing to delivery and payment. As a result, next generation supply chains will be more efficient, more resilient, and much better able to adapt to the next major disruption.