TRADE WARS AND WAREHOUSING: ACHIEVING AGILITY AND EFFICIENCY IN AN ERA OF UNCERTAINTY
As executives and supply chain practitioners are all too aware, global trade has been in turmoil, and while there are signs it is abating, the outlook over the longer term looks increasingly unpredictable and volatile. This makes it imprudent for companies to pursue a singular strategy that assumes a particular outcome, such as favorable trade relations with a particular country. Rather, businesses need to prepare scenario-based plans and playbooks for multiple outcomes, along with adaptable processes and the enabling technologies to execute them. In other words, it’s the ideal time to modernize and optimize for uncertainty.
Currently, businesses are buffeted by a variety of forces, domestically and globally, and there’s no end in sight. Whether it’s the U.S.-China dispute, UK’s Brexit, the EU and U.S. investigating tech giants, Europe’s faltering growth, currency swings, or some variant of the above, it’s clear that the business climate is more unpredictable than it has been in a long time.
Yet there are also some positive signs that could facilitate trade and increase certainty. New infrastructure projects and trade agreements are being negotiated in Asia (RCEP), Europe, Africa (AfCFTA), and South America (MERCOSUR) that could have a significant impact on supply chains in the future.
All these factors exert enormous influence over businesses and their supply chains, dramatically impacting sourcing decisions, market opportunities, partnerships, competitiveness, and long-term growth and profitability.
Increasingly Complex and Contorted Supply Chains
In the wake of these trade disputes, supply chains are right in the middle of the turmoil. Careful strategic decisions about markets, sourcing and distribution that have driven a business’ long-term plan are now uprooted and in doubt. New tariffs, regulatory changes, or regional economic shifts are changing the basic economics of many established plans, casting doubt on previous decisions and future plans. Worse, they often “de-optimize” the supply & logistics network, leaving companies working with less than ideal customers, suppliers and business partners. This undercuts margins and profitability, making companies more vulnerable to competition, and to natural and economic disruptions. It also changes the competitive landscape both at home and abroad.
In response, some companies are holding inventory in their countries of origin to avoid paying tariffs. Others are importing as much as they can to beat expected tariffs and mitigate the effects of other possible impacts in the future, while some are considering alternate sourcing and rerouting shipments through other countries. Recently, a board member of a manufacturing company told me that they are considering moving manufacturing from the U.S. to their destination market, in order to avoid tariffs on that end and remain competitive in their key market.
Pressures for Warehousing and Distribution
These kinds of responses to the trade wars and tariffs have a major impact on warehousing and distribution networks. Warehouses operate as “shock absorbers” in the supply chain, holding safety or buffer stocks to “ride out” periods of volatility and uncertainty. They enable a company to supply products to customers, even when demand and supply are highly variable. But this entails additional costs and risk, and ties up working capital in inventory.
The immediate effect of the proposed tariffs and trade disagreements signal higher prices and increases uncertainty. This stimulates companies importing goods to boost orders and stockpile inventory, in order to minimize the effects of the upcoming tariffs. Their supply chains often operate at near maximum capacity, with agile businesses trying to move their goods as quickly and efficiently into their warehouses closest to their customers. On the export side of the equation, the manufacturers and logistics providers are under pressure to meet this increased demand.
However, over the longer term, companies will need to adjust strategic plans to account for the new economic realities that trade wars engender. Importers bearing the higher prices, will need to review current operations and future plans, and evaluate them in the light of shifting incentives and penalties. They will need to look at all their available options for cheaper alternatives in sourcing, manufacturing capacity, warehouse capacity, and logistics partners. Businesses in exporting countries also need to consider that they may lose these customers and may have to seek out new customers, new markets and others may have to reevaluate product lines and even business models.
In this environment of uncertainty, volatility and shifting alliances, companies and supply chains that are engineered for speed and agility will win. Companies that can identify trends early, adapt quickly, reconfigure supply chains, and effectively embrace new trading partners, will have a major advantage. In order to capitalize on this advantage, they will need to establish secure but flexible trading relationships, with shared work processes, communication, business rules for exception handling, and effective master data management, so all parties are working from a single version of the truth. Even the domestic supply chain structure may need to change in response to shifting entry points, volumes and lead times.
Modernization is Well Overdue
Most multi-national companies have been around for decades, and that means that for most, their technology is rooted in siloed, functional systems like enterprise resource planning (ERP), manufacturing resource planning (MRP), transportation management systems (TMS), and similar function and company-centered systems. In today’s world, where companies need to switch or find alternate suppliers, new logistics partners, and even new markets, this approach is no longer satisfactory. As professor Jonathan Byrnes at MIT has said, “Many supply chains are perfectly suited to the needs that the business had 20 years ago.”
However, “rewiring” the supply chain with today’s siloed, enterprise-centric systems is a monumental task, involving resource-intense, point-to-point integrations between a whole host of systems and partners. In a Wall Street Journal article, Jacob Parker, vice president of China Operations for the U.S.-China Business Council, said, “Businesses are making arrangements to diversify their supply chain investments away from the China market and enacting other structural changes to account for that. It could take about three to five years to build up the supply chain elsewhere.”
Many companies will need to move much faster if they are to retain their competitive positions. Still, some executives are paralyzed by uncertainty and hoping for quick resolution to the disputes so that trade can return to normal. It’s possible, but the signs are ambiguous, and it looks just as likely for uncertainty to continue – if not in the form of ongoing trade wars, then in some other form.
One source of change and uncertainty is the rise of new technologies such as 5G, additive manufacturing, artificial intelligence (AI), robotics, and augmented and virtual realities. These can quickly give rise to new competitors, partners, and possibilities, and dramatically change an industry’s landscape. A recent McKinsey & Co report, “Why Digital Strategies Fail”, found “only 8 percent of companies said their current business model would remain economically viable if their industry keeps digitizing at its current course and speed.” As a result, executives are realizing that they simply cannot wait.
A Fundamental Shift: Optimizing for Uncertainty
As the Wright brothers were developing the airplane, they encountered a seemingly insurmountable problem in designing a plane that was stable in flight. That’s when their experience with bicycles came in useful. They soon realized that perhaps the search for stability was misplaced. Like riding a bicycle, they discovered that a plane could be inherently unstable, yet still controlled via continuous inputs to the controls that cancel out the forces that buffet the plane, resulting in stable flight. This insight forever changed the world.
Today, this is the position many businesses and their supply chains face – an accelerated pace of technological change, impacted by constantly shifting global business variables. Businesses can tackle these challenges on two fronts. First, by minimizing the existing uncertainty in their supply networks. And secondly, by building a resilient and adaptable infrastructure capable of responding rapidly to shifts in supply, demand and logistics. The accumulation of separate systems over the years is understandable, but has led to a lack of end-to-end connectivity and real-time visibility, along with limited collaboration capabilities. While traditional systems such as ERP, MRP, WMS, and TMS provide vital functionality, these are often weakly connected and primarily centered on the organization.
These systems have introduced latency through batch processing to synchronize the various systems – both internal systems and those of trading partners. Batch processing across these linked systems leads to increasingly stale data, which compounds down the supply chain, and contributes to Professor Hau Lee’s famous “bullwhip effect.” Any information sent upstream or downstream that is subject to delays is affected. It undermines effective decision-making and makes it difficult to effectively plan production, inventory, capacity and transportation. Colleagues and partners across the supply chain have to resort to phone calls and email to try to manage problems that arise. This leads to inefficiencies and higher costs throughout the network.
Siloed systems and their hardwired integrations also create a rigid infrastructure of systems and trading partners, which make it difficult for companies to adapt systems to new partners, business opportunities, and workflows. These silos are difficult and costly to customize, manage and upgrade, and changes to one system can have impacts on other systems. It also means that executives lack a clear, coherent view of their supply chains and the overall business landscape, making it difficult to take into account all relevant factors and plan strategically. Worse, important trends are obscured, making it virtually impossible to identify and react quickly to opportunities and threats.
Removing the Guesswork with Real Time Business Networks
Legacy enterprise systems have a place, but to ensure all parties are in alignment and collaborating for shared objectives, supply chains need to share a “single version of the truth” (SVOT) across all parties and in real time. This enables companies to share vital information rapidly, collaborate when necessary to plan and work together to resolve supply chain issues. It also allows them to identify and respond to risks early, and exploit business opportunities in a rapidly changing trade environment.
Multi-party business networks connect all supply chain partners on a single system, enabling data to flow in near real-time from customer demand through all tiers. This provides transparency, eliminates information latency and minimizes uncertainty and variability. Using the SVOT, with access controlled by a permissions model, companies can share data with partners as changes occur. All relevant parties can have visibility to demand, inventory, orders, shipments, capacity, and constraints. It also enables companies to embrace the inherent uncertainty and volatility of today’s markets, by giving them real-time visibility to supply chain conditions, and the tools to respond.
This eliminates much of the uncertainty endemic to traditional supply chains, and enables companies to minimize safety stock, inflated lead times, and other buffers against variability.
With all business partners on the same network, and with planning and execution on the same platform, many complex, cross-functional and cross-company processes can be simplified, streamlined, and even automated. For example, many documents for trade compliance can be created automatically, easing the burden on staff administering the import and export processes. AI can also help as intelligent agents can monitor milestones and events, and alert users to missing customs documentation and other issues to ensure compliance.
With unified solutions like inventory, warehouse, yard, and transportation management all running on the same network, businesses are better positioned to understand real demand and their various supply and logistics options, so they can engage with their partners to meet the demand at the lowest costs. Leveraging real-time data across the network removes much of the uncertainty and variability and allows inventory levels to be lowered significantly across the network, sometimes by as much as 30 percent. This relieves the pressure on warehouses and other nodes as well, as companies can leverage the network to make better decisions about where and when to move inventory. If stockpiling is strategically necessary in order to take advantage of market fluctuations or impending changes to tariffs and regulations, companies can leverage the network to find new partners for storage, distribution and logistics services.
Optimizing for Uncertainty Means Embracing Digital Transformation
Digital transformation is not simple or easy, so to illustrate some of the challenges and complexities, let’s turn to an essential foundational element of multi-party business networks, namely master data management (MDM). A multi-party network addresses this by bringing all supply chain participants together and providing a shared single version of the truth by harmonizing and mapping data across all parties. For example, a former global supply chain manager for a major automotive company said their major challenge during their transformation was reconciling the many names for the same suppliers and carriers across their multiple ERP systems. This is a problem shared by business partners on any network model, but there are ways to deal with it. For instance, an MDM solution capable of identifying and managing conflicts, and reconciling them across trading partners enables companies to manage and map data between enterprises, and partners to solve data issues collaboratively.
Another major challenge is the cultural shift that needs to occur within a company. Close cooperation between business partners means companies can find and fix problems sooner, cheaper and serve the customer at the lowest total cost. However, many companies hesitate to share much of their information with partners, even though it helps their partner provide better service. To help remove this barrier, it is important to measure and focus on the relevant outcomes and mutual progress with partners to help incentivize and facilitate data sharing. It’s also important that the responsibility and rewards be mutual. For example, a retailer who shares demand information to help a supplier plan, may in turn earn access to information on the part of the supplier that can help the retailer plan available capacity, so the retailer can plan promotions accordingly.
Sharing data precisely and securely, and only sharing the relevant attributes with a specific role at a partner organization, can help companies feel more confident about sharing data. A powerful but flexible data-sharing permissions framework gives companies fine-grained control over what data is shared and with whom, and can help overcome cultural resistance. Such a framework should enable visibility to some attributes of an order or shipment, by role and by organization. This would allow a carrier to see the quantity of a shipment, but not the price, whereas someone in purchasing could have access to that information. That way, trading partners share information strictly on a need-to-know basis and minimize the risk of confidential information being misused.
Business Transformation is Important and Urgent
Business transformation to real-time digital networks brings with it a host of benefits. From increased agility and speed for all network participants that enable a more sensitive and responsive supply chain, to better decision-making, better balancing of supply and demand, to reduced inventory across the network for all partners. Lower inventory levels are one of the major benefits of real-time business networks, with companies typically reducing inventory levels by 10 to 30 percent.
This has a tremendous impact on the supply chain, meaning less inventory needs to be produced, moved and stored. It relieves pressure on production, logistics, and warehousing. Reducing inventory also reduces the risk of product obsolescence, reduces waste, and frees up working capital. Lowering inventory clears the supply chain and warehouses to better manage the inventory that is moving to markets where it is actually selling, instead of storing product that goes unsold and must be moved or sold at a discount, thereby eroding margins. However, the greatest benefit of digital business networks is the fact that they provide a rich pool of potential partners that are readily accessible.
Strategically, this means that exploring new markets, suppliers, contract manufacturers, and logistics providers is significantly easier. These networks can support “what-if” scenario analysis, so companies can compare different options, for example, the costs and lead times of using alternative supply locations and logistics providers. But a multi-party digital business network can do it more accurately, using execution data from across the global network, e.g., using actual costs and lead times on lanes and routes, rather than estimates. And once new partners are identified, platform access comes at the cost of a click, rather than needing to go through lengthy and costly physical software implementations that only connect them to individual partners. This makes companies’ business ecosystems adaptable and more agile, and they can be controlled by the business analysts charged with managing supply and demand, rather than involving scarce IT resources. Another vital element of an agile business is the ability to adapt solutions to meet changing business needs and trade conditions, without a vendor’s involvement. Instead, companies can use software developer kits to quickly customize and extend network solutions to meet new business requirements, workflows and partnerships that might arise from changing markets, trade regulations and emerging technologies.
Will You Bet Your Success on One Outcome?
Likely not. Digital business networks provide an unmatched platform for not only conducting business, but also responding to the inevitable volatility and uncertainty. They provide an agile and frictionless platform to support resilient supply chains and evolving partnerships. They minimize costs, even as you execute your chosen scenario options in the face of unpredictable markets and shifting trade alliances. Digital business networks offer a rich platform that helps companies adopt and adapt solutions quickly, keeping enterprises agile despite our uncertain world.