Over the next five years companies plan to shorten and simplify their supply chains to make them more flexible and agile
The Economist Intelligence Unit
May 18, 2017
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This white paper was made public at an EIU conference in Singapore, May 18, 2017
Rebooting supply chains:
Shorter, smarter and more sustainable?
Contents
1. Executive summary
2. Confidence, commodities and costs
3. Strategic innovation and supply chains
4. A future with shorter supply chains
5. Treasury: An underutilised resource?
6. Conclusion
Appendix – Survey results
1. Executive Summary
Concerns about geopolitical and economic risks have grown among those who oversee company supply chains. Both Brexit in 2016 and the seeming arrival in 2017 of a new era in US trade policy under the presidency of Donald Trump have created new uncertainties. For example, factory managers in Asia, whose operations are vital links in many companies’ global supply chains, may read nationalistic rhetoric from the West and logically wonder whether some of their supplier relationships have become politically inexpedient. Senior executives at multinational companies with complex sourcing networks spanning the globe may worry that populist pressure could force them to re-shore jobs or to rethink how their products are made and where they come from. These are not necessarily unfounded fears, as this Economist Intelligence Unit (EIU) report concludes.
The rules of global trade are shifting and companies will need to make sure their supply chains have the agility and resourcefulness to deal with potential challenges and disruptions that may lie ahead. Questions remain about whether the pace of globalisation will slow considerably, shift its direction or possibly reverse A survey about the future of supply chains, conducted by The EIU and commissioned by Standard Chartered Bank, found that company executives are focused on keeping down operating costs over the next year and increasing operational transparency through technological innovation. Over the next ve years, companies envision bigger changes: sourcing networks will be simpler, smarter and ideally more sustainable.
Key findndings from the research include:
Most companies are con dent about being able to deal with supply-chain disruptions over the next year, but they are very sensitive about costs.
The survey found that those who are better prepared are more con dent about dealing with challenges and disruptions. There was substantial agreement on another point: lowering costs in the supply chain.
Innovation is seen as a crucial part of strategic supply-chain management because it will help create full visibility across production networks and thereby support sustainability.
Commitment to technological innovation is extraordinarily widespread in supply chain management. More than nine-in-ten (93%) executives surveyed have identi ed it as important. Companies that believe innovation is very important are also more con dent they can address external disruptions.
Global supply chains are expected to shorten, but depending on the industry may not necessarily become less complex.
More companies (49%) expect supply chains to become shorter and simpler in the next ve years than those (33%) who expect them to grow longer and more complex. Even so, some companies that expect to shorten their supply chains may increase their complexity in response to consumer preferences. Shortening and simplifying are seen as ways to reduce the vulnerability of the supply chain to external disruptions, as well as to lower costs and improve effectiveness.
Treasury may yet emerge as a leader of strategic supply-management efforts. Are treasurers ready for the challenge?
Companies rate core skills of the treasury function highly when it comes to managing supply chains in the future. But most companies still see treasurers in a governance role, rather than having a strategically important role for supply chains. Treasury will have to be enabled, and some industries, such as IT, energy and industrials, are more likely to thrust treasury into a leadership role. This begs the question: are treasurers ready to embrace the challenge of leading a supply chain?
1 Executive summary
Heightened concerns about geopolitical and economic risks have gained new attention among those who oversee company supply chains. Both Brexit in 2016 and the seeming arrival in 2017 of a new era in US trade policy under the presidency of Donald Trump have created new uncertainties. For example, factory managers in Asia, whose operations make up vital links in many companies with global supply chains, may read nationalist rhetoric from the West and logically wonder whether some of their supplier relationships have become politically inexpedient. Senior executives at multinational companies with complex sourcing networks spanning the globe may worry that populist pressure may force them to re-shore jobs or to rethink how their products are made and where they come from. These are not necessarily unfounded fears, as this Economist Intelligence Unit (EIU) report concludes.
The rules of global trade are shifting and companies will need to make sure their supply chains have the agility and resourcefulness to deal with potential challenges and disruptions that may lie ahead. Questions remain about whether the pace of globalisation will slow considerably, shift its direction or possibly reverse. And some expect that supply-chain retrenchment may lie ahead.
A survey about the future of supply chains, conducted by The EIU and commissioned by Standard Chartered Bank, found that company executives are focused on keeping down operating costs over the next year and increasing operational transparency through technological innovation. Over the next five years, companies envision bigger changes: sourcing networks will be simpler, smarter and ideally more sustainable.
Key findings from the research include:
Most companies are confident about being able to deal with supply-chain disruptions over the next year, but they are very sensitive about costs.
The survey found that those who are better prepared are more confident about dealing with challenges and disruptions. Nine in ten (93%) executives surveyed are confident their companies can contain the fallout from disruptions. There was substantial agreement on another point: lowering costs in the supply chain. Half said it is a key company objective, a higher share than for any other goal.
Innovation is believed to be a crucial part of strategic supply-chain management because it will help create full visibility across production networks and thereby support sustainability.
Commitment to technological innovation is extraordinarily widespread in supply chain management. More than nine in ten (93%) of executives surveyed have identified it as important. More than four in ten (44%) say innovation is very important. Companies that believe innovation is very important are also more confident they can address external disruptions.
Global trade may enter a period of supply-chain retrenchment, during which production links will shorten and become less complex.
In a dramatic turnaround from the long prevailing trend, significantly more companies (49%) expect supply chains to become shorter and simpler in the next five years than those (33%) who expect it to grow longer and more complex. Shortening and simplifying are seen as ways to reduce the vulnerability of the supply chain to external disruptions, as well as helping lower costs and improve effectiveness.
Corporate treasurers will emerge as increasingly important contributors to supply-chain management.
Companies have increased the role of Treasury in supply chain management and rate Treasury skills high. Yet, there appears to be room for greater utilisation in the future. In the next five years, less than half of companies expect Treasury to play a role in overseeing cost management and optimising working capital, as well a monitoring liquidity and risk management – all areas where Treasury can help the supply chain function better. Companies expect to utilise Treasury more as key resource for the strategic management of the supply chain. The roles they expect for Treasury include cost management, optmising working capital and monitoring liquidity. These same functions are also seen as crucial for the strategic management of the supply chain over the next five years.
About this study
Rebooting supply chains: Shorter, smarter and more sustainable? is an EIU report, sponsored by Standard Chartered. It is part of the Growth Crossings series. The report explores the objectives, challenges and potential disruptions facing companies with global supply chains and how they are preparing to deal with them in the future.
The report draws on two strands of research for its findings:
In February 2017, The EIU surveyed 522 business leaders in 13 countries. Six of the nations represented are in Asia Pacific, five in Europe, and two in North America. Nearly half (48%) of the respondents hold C-level or board positions, while the rest are senior executives and other senior managers.
Respondents participating in The EIU survey are spread around the world in countries from North America to Europe to the Asia Pacific.
In terms of corporate functions, financial executives and managers represent 28% of the sample. The remaining three categories of respondents each represent 24% of the sample: strategy and business development, procurement, and supply-chain management.
Survey respondents are distributed across seven types of businesses. Three of them – energy, materials and healthcare – each represent 19%. Industrials are the next largest segment at 12%, followed by consumer discretionary at 11%, and information technology and consumer staples both at 10%.
In-depth interviews were conducted with the following individuals (in alphabetical order by their last names):
Deborah Elms, founder and executive director, Asia Trade Centre
John Hayduk, chief operating officer, Tata Communications
Tom Linton, chief procurement and supply chain officer, Flex
Ernest Mui, director of treasury and tax, Asia Pacific, Knorr-Bremse
Corrado Snaiderbaur, supply chain manager, ChiesI Pharmaceuticals
Sander de Vries, manager, Zanders
Roy Williams, managing director, Vendigital
We would like to thank all interviewees and survey respondents for their time and insight.
The EIU bears sole responsibility for the content of this report. The findings do not necessarily reflect the views of the sponsors.
2 Confidence, commodities and costs
Supply chains today face myriad risks, but business leaders have prioritized several, according to the survey. Whilst headline risks related to political changes over the past year clearly have entered the radar of executives, other issues are also of concern. The following external factors were rated by respondents as the top three most disruptive to their supply chains in the next year: fluctuating commodity prices, political instability, competitive pressures that speed up product innovation. In 2016, the CBOE crude oil volatility index, a measure of oil price fluctuations, reached its highest in nearly eight years. Later in the report, we will see how these factors may be driving a focus over the next twelve months on reducing supply-chain-related costs.
A key goal within companies has been preparedness: 93% of respondents say they are either confident or very confident in their companies’ preparations to deal with external disruptions to their supply chains. Interestingly, respondents with a finance function were nearly twice as likely as non-finance functions to be very confident. This report will make the case that while internal collaboration between operations and finance is taking place to manage supply chains, much more needs to be done to achieve strategic objectives.
Size matters, but also preparation
Among the respondents who said they were very confident about their company’s ability to deal with external supply-chain disruptions, 57% came from firms with more than US$500m in annual revenues. This suggests the size of the principal in a supply chain matters when it comes to provision of resources to deal with disruptions. But this is only one factor.
Overall, collaboration between internal teams, including finance and risk management, is the top action that 42% of respondents said they were taking to reduce fallout from supply-chain disruptions. A third of those surveyed report their companies have then taken the next logical step and developed plans to mitigate the fallout from disruptions. Being prepared to mitigate or hedge potential disruptions allow companies to be more flexible with their responses, says Roy Williams, managing director at Vendigital, a consultancy focused on supply-chain management. “If your supply chain is more agile, you can adjust to changing trade policy and other challenges,” he says.
Given that the pace of new product innovation can be a significant challenge to the supply chains, 29% of respondents in the survey also report their companies are conducting demand planning for new products as one of the actions they are taking to mitigate fallout from disruptions. And nearly three-in-ten (28%) respondents say their companies have also engaged in scenario planning.
Scenario planning is particularly handy during a time of geopolitical uncertainty, and should also include disruptions in trade policy, such as fallout from Brexit, says Deborah Elms, president and co-founder of the Asia Trade Centre in Hong Kong. “It will take a while for companies to grasp how damaging this will be,” she says because clarity about the new rules governing trade flows in Europe will not be known for quite some time.
Taking a closer look at the cohort of respondents who said they were very confident about dealing with supply-chain disruptions reveals a simple rule: those who are very confident are more likely to take steps to limit supply-chain disruptions. Among the actions taken to reduce fallout, the very-confident cohort was more likely than the less-or-not-confident cohort to set up internal units to study disruptions, buy insurance against specific events, hire supply-chain management specialists and secure additional lines of credit.
There is no silver bullet for supply-chain risks though. A significant majority of respondents take multiple actions to prepare against potential disruptions.
Delivering value, or slash and burn?
Supply-chain-related costs are a top concern among businesses globally, particularly as customer expectations for product quality increase. Reducing costs in the supply chain over the next twelve months is the most-cited objective, with 50% of respondents identifying it as a focus. Respondents are also keen on increasing sales (42%), improving customer service (36%) and improving the quality of products and services (35%).
Controlling costs is important because companies have to provide a return on their investment earlier and earlier in product cycles, according to Corrado Snaiderbaur, supply chain manager at Chiesi Farmaceutici
Group in Parma, Italy. Even patents, which offer protection for new pharmaceutical products, do not provide a long term safe harbor like they used to do. “If you are not able to earn a return on investment in the shortest possible period, you may be exposed to risk from competitors who may put a better drug on the market,” he says.
Cutting costs is a logical reaction to higher levels of market uncertainty, but businesses should be focused on delivering value to customers rather than getting caught in relentless drives to reduce expenditure.
Boosting profitability and competitive position undoubtedly give companies a better chance of dealing with disruptions. The survey found that difficulty controlling costs in the supply chain to be their most significant challenge, a view cited by half of respondents. However, there is often a lack of clarity around what is really driving costs within an organization. Later in the report we will explore how achieving complete transparency in supply-chain operations is major strategic goal revealed by the survey.
Vendigital’s Mr Williams adds that it is important that business leaders avoid a “slash and burn approach” to cutting costs. Indeed, there are good costs and bad costs. Bad costs may be more associated with fixed legacy costs in a part of the business where margins are eroding, and these should be the focus of cost reduction drives. “Good costs are things that help the business grow,” he says. These are usually variable costs that, when they are rising, translate into higher revenue and profit growth. The next section of this report will focus on what may be one of the most important “good costs” when it comes to strategic management of supply chains: innovation.
3 Strategic innovation and supply chains
Innovation, especially through the use of digital technologies, will likely transform supply-chain management over the next five years. This study found that business leaders are very focused on using innovative technologies to increase efficiency and ultimately to achieve much greater transparency about operations.
Nine-out-of-ten (93%) respondents say innovation is important when it comes to supply-chain management. Nearly half (49%) rated innovation very important, with 44% rating it somewhat important.
Companies clearly are embracing an innovation ethos when it comes to their supply chains, and over the next five years they will be focused on improving two related aspects of supply-chain management: data analytics and visibility. For senior executives, this will likely mean that the kind of skills and capabilities needed to manage supply chains will evolve and may require much more collaboration with hitherto unrelated functions, such as treasury and IT systems management.
Technology improvements that enhance visibility can also improve productivity, says Tom Linton, chief procurement and supply chain officer at Flex in San Jose, California. He cites as an example the company’s creation of a cloud-based platform that allows it to be better informed in near real-time about the functioning of the supply chain. “We know how our materials move in different areas of the world and how finished products reach our customer’s door step,” says Mr Linton. “In times of crisis and disasters, we can quickly react to it because the system allows us to run ‘what-if’ scenarios and hypotheses in a very detailed manner.”
Strengthening data reliability
The need for better information to make business decisions lies at the heart of data reliability issues. Supply chains can generate huge amounts of valuable data, such as delivery times, shipment locations, inventories, new orders, payments and the list goes on. But before a company can process and analyse this information, it needs to know the data is clean and reliable.
When asked what their companies will do in the next twelve months to improve data reliability, 43% of executives surveyed said they would establish new supplier relationships. This strongly suggests suppliers themselves will need to improve their data management capabilities or face the risk of being replaced. Companies plan to automate processes in the supply chain to improve their ability to monitor inventory. More than four in ten (41%) in the survey identify this as one the steps their company plans to take over the next twelve months. Almost as many companies (38%) also plan to engage suppliers to improve their data collection and dissemination.
Companies are seeking to improve their ability to trace the origins of materials and goods in their supply chain. About one third (34%) of executives in the survey identify this as one of the steps the company will take in the next twelve months. Defining common data standards for the organization is also identified as a step companies plan to take.
From data reliability to complete transparency
Innovation is expected to have a transformative effect on strategic supply-chain management, and most importantly on creating see-through sourcing networks. Respondents cited improving supply-chain visibility as the area of greatest need to manage the supply chain more strategically. Better visibility can help companies be aware of weak points in the physical production process or in financing that could lead to slowdowns in deliveries or disruptions. By knowing where these weak points are, supply-chain leadership can take steps to mitigate or hedge those risks.
Better visibility can help companies decide where in distribution they need to send new product shipments, according to Mr Snaiderbaur, who implemented a supply-chain planning tool for Group affiliates when he first came to Chiesi twelve years ago. In 2012, the company implemented an enterprise resource planning (ERP) platform to monitor the data from the affiliates. “Having clear visibility of data across the supply chain from the corporate position allows you to make a common decision with the affiliates based on data and not based on a negotiation basis, which is always better,” says Mr Snaiderbaur. Such decisions involve where Cheisi will ship new products so that the company can be sure it is sent to where it is needed and not to where inventory may be too high.
Companies also see a need for contingency plans to deal with disruptions. More than a third (36%) of executives in the survey identify this is an area of greatest need for innovation. Nearly a third (31%) of respondents identify optimising working capital as an area of greatest need, while nearly a third (30%) also named quicker receivable collections.
Digitising supply-chain transactions was cited by nearly one in three (29%) as an area of greatest need for innovation. Why it is digitisation so important? It both automatically identifies and records which part of a supply chain is involved in a particular event or issue, according to Vendigital’s Mr Williams. When transactions are digitized, it frees up resources than can be applied toward reducing costs and improving the effectiveness of the supply chain.
Improving financial flows can reduce delays in the financial supply system that can slow down movement in the physical supply chain. Thus, it should not be a surprise that companies also identify as areas of greatest need several innovations designed to streamline the flow of funds in the financial supply chain. These include procure-to-pay technology, cited by 27%, supply-chain finance platforms (21%) and dynamic discounting (16%).
A number of improvements in financial management complete the list: quicker receivable collections (30%), procure-to-pay technology (27%), supply-chain finance platforms (21%), and dynamic discounting (16%).
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