Covid-19 & Necessity Accelerate Supply Chain Digitization

The onset of the coronavirus epidemic has accelerated the supply chain digital transformation that has languished on businesses’ “to-do” list for years. Covid-19 has exposed barriers to collaboration that most companies tolerate under normal circumstances.

It’s fair to say the electronics supply chain currently aspires to “normal.”

Even before Covid-19 hit, 92 percent of companies thought their business models would need to change given digitization, business consultancy McKinsey reports. Although management has bought in to the digital evolution, the investment and effort necessary for the transition have been eclipsed by day-to-day business needs.

The pandemic has upended “business as usual.” A significant portion of the global workforce is working from home. Manufacturing capacity has decreased. Many small- to mid-size companies still process orders, invoices and payments manually which, in turn, negatively impacts the financial health of these organizations. The global electronics supply chain has been disrupted, and trade restrictions weigh heavily on large segments of the industry.

Covid-19 is also sparking unlikely partnerships between companies that want to collaborate and produce goods in short supply, according to Richard Howells, vice president of solution management for SAP Digital Supply Chain. “The pandemic has vaulted the supply chain to a level of awareness that we haven’t seen before,” he said. “We’ve seen automotive companies manufacturing ventilators, distillers making hand sanitizers, and sneaker manufacturers making masks to serve the greater population. But we’ve also seen the level of agility, visibility and planning that’s required to achieve these goals.”

This challenge was recently played out in the UK. In March, UK government called for 15,000 ventilators to treat coronavirus patients. The UK Ventilator Challenge convened a group of industrial, technology and engineering businesses from across the aerospace, automotive and medical sectors to produce the critical equipment.

Two designs, based on existing technologies, received regulatory approval in mid-April.

The supply chain for this project literally didn’t exist. Electronics used in medical equipment must meet stringent quality and performance specs. But component lead times can stretch 8 to 10 weeks, and volumes aren’t always on-hand. The project required contracts, payment terms, testing and logistics services secured in record time.

Electronics distributor Converge played a significant role in condensing component lead times from months to in some cases days. Some 900,000 components were supplied to 3 different companies in support of the UK challenge. The consortium is on target to produce 1,500 units a week.

“Recent data show that we have vaulted five years forward in consumer and business digital adoption in a matter of around eight weeks,” McKinsey reports. “As one CEO of a large tech company recently stated, ‘we are witnessing what will surely be remembered as a historic deployment of remote work and digital access to services across every domain.’”

Necessity as an accelerator

Necessity has driven a lot of the progress as e-commerce demand has skyrocketed in the past 6 months. Manufacturers’ efforts to produce critically-needed equipment has also propelled digitization. But the process is far from seamless.

Manufacturers can’t just instantaneously change production processes, Howells explained. “Historically, factories are configured to mass produce the same products over and over again. We have seen the need for agility and resiliency across the supply chain. Globally, many factories are still in the process of resuming operations, so the supply chain is inconsistent. Factories that are reopening do so at reduced capacity because workers must practice social distancing.”

“In some cases, you have a labor shortage because employees can’t safely return to work,” Howells added. “And when critical workers are able to work, you have to ensure they are in a safe and healthy environment. Digitization, visibility and automation can help to achieve these common goals.”

The Covid-19 crisis has only reinforced the importance of effective collaboration between organizations and their suppliers, said Alex Saric, chief marketing officer for procurement platform Ivalua. “Our new research from Forrester confirms that, while procurement has made significant progress, there remains significant room to improve the scale and depth of collaboration.”

Problem areas

Forrester found the industry lacks tools to overcome physical and cultural divides. Respondents rate physical and time zone gaps as the top obstacle to collaboration with business units (50 percent) and strategic suppliers (43 percent). Lack of mechanisms to collaborate well is the top barrier to collaboration with the wider supply base (42 percent). Performance goals and KPIs that emphasize greater collaboration (76 percent), technology that enables better information sharing (63 percent), and communication (56 percent) are key elements to improving collaboration.

In its recent study, Lux Research categorizes the supply chain into six distinctive parts: planning and forecasting, purchasing and procurement, inventory, warehousing, transport, and supply chain platforms. Warehousing and transport have shown the most activity, while digitization of supply chain platforms will facilitate processes that will shift priorities in planning and forecasting.

“Supply chain management challenges come from all directions; upstream, internal, and downstream,” says Jonathan Melnick, Ph.D., director of research at Lux. “Companies are facing internal pressures to be more efficient, integrated, and agile and to meet new consumer expectations of increased visibility into products. This is causing a shift in how vendors are evaluated and sourced to meet those expectations.”

Typically, companies source from preferred vendors at the expense of efficiency and transparency, he said. As more data around vendors and their products become available, digitization gives companies greater insight into better and more dynamic vendor selection. This is enabling sourcing on demand, where new vendors are brought in rapidly, reducing trust and long-standing established vendor relationships.

Digitization is being used in purchasing and procurement in two ways, Lux found: To understand product quality and detect genuine vs. counterfeit products; and to lower transaction costs through increased pricing visibility. “Supply chains are becoming increasingly complex and interconnected, which has made managing risk more challenging. Digitization allows companies to effectively manage this increasing challenge and risk,” Melnick explains.

Despite advancements, companies and supply chain solution providers will need to integrate previously siloed areas of supply chain management, increasing value and leading to a more optimized and autonomous supply chain, said Melnick. As companies move toward a zero-inventory manufacturing model, the role of supply chain management is expected to include supervision of digital assets along with physical ones.

To date, evidence of advanced digitization is largely anecdotal, although multiple studies point to the trend. McKinsey noted in 2017 the average supply chain digitization level was 43 percent. A Deloitte survey found 51 percent of manufacturing respondents believed the digital maturity of their supply chains was “above average.” But only 28 had started to digitize their supply-chain operations.

Alvarez & Marsal’s (A&M) Private Equity Performance Improvement group reports progress in high tech. "We are seeing two types of responses from the high-tech and EMS industry," said Senior Director Nausheen Kaul. "Major EMS industry players are focused on real-time visibility of materials and inventory, collaboration with OEMs on demand signals and high-quality scenario-based analytics, to prepare for any future waves of outbreak, and improve their ability to respond to rapid changes, up or down, in demand."

Broader high-tech industry leaders are continuing to accelerate their digital transformation to create entirely new business models such as the Circular Economy (CE), he added. For example, Cisco is building new customer offerings around managing material use, packaging waste, and repair and reuse of materials, leveraging its data and digital technology foundation.

For many companies, the only option is to accelerate their digital transformation, McKinsey said. “That means moving from active experimentation to active scale-up supported by ongoing testing and continuous improvement." These moves should happen across two dimensions: at the core of the company and through the development of new businesses.

"In the current environment, the natural tendency is pull back on investments related to digital supply chain programs," said A&M's Kaul. "We believe that EMS supply chain leaders should press forward on investments in high quality data and analytics, real-time visibility, demand sensing, and digital manufacturing (e.g. IoT) capabilities to improve their agility and responsiveness. We recommend a mix of supply chain investments that are 60-70 percent focused on the digital foundation (technologies that are proven and mature today); 20-30 percent on digital innovation (technologies that will mature over the next 2-3 years); and 10 percent on the digital edge (disruptive technologies that will mature in 5+ years)."