Is it possible to manage demand uncertainty, flexible supply chains, and high SCM costs?

Flexibility and efficiency are a trade-off that most companies make while building their supply chains. To make supply chains more cost-effective, companies often choose offshore production and sacrifice accessibility and visibility. The popular efficiency approaches such as just-in-time inventory or seeking the lowest cost supplier contributes to the illusion that efficiency is the only important aspect. However, the weakness of these popular approaches has become more apparent in the ongoing pandemic. These methods aren’t really capable of ensuring resilient supply chains because they aren’t built to tackle demand uncertainty. Demand uncertainty is a situation that can happen at any time with or without a pandemic -- and can leave businesses grasping at straws to keep their supply chains functioning.

What is demand uncertainty and how is it linked to high supply chain costs?

Demand uncertainty refers to the external factors that cause demand to unexpectedly increase or decrease. This situation can be caused by a public health crisis or even a sudden shift in the customers’ tastes. Many software help companies to forecast demand and develop relevant production and supply chain strategies. But most businesses account only regular demand and forget to include uncertainties in their production plans. This mistake can cost a fortune due to excess inventory, excess capacity, and expensive transportation that companies may need to resort to swiftly respond to demand shocks.

How to manage demand uncertainty while keeping costs in check?

Resilient and flexible supply chains that are capable of absorbing demand shocks require collaboration and agility among all players in the network. Some ways to manage demand uncertainty are as follows:

Adopting a variable cost approach

During periods of no demand or less demand, continuing to pay the same costs for warehousing dents the bottom line further. Hence, it’s important to collaborate with supply chain service providers that adopt a variable cost approach. H&S is the only company in India that helps enterprises save fixed costs by charging for services that are availed on the units sold. This works wonders in keeping supply chain costs to a minimum when sales fluctuate unexpectedly.

Enabling digital collaboration

Information sharing is the key to ensure that each node of the supply chain is aware of the current status of the operation. Companies can use cloud-based applications and collaborative platforms to assist every partner in the chain to access information quickly and securely. This enhances the speed and quality of decision making within the organization as critical information is shared with relevant parties as soon as it is received.

Real-time visibility and analytics

Control tower solutions refer to central command centers that integrate data from all supply chain partners using technologies such as 5G technology and blockchain. This enables companies and their distributors to know the exact location and state of the goods. With this data, organizations get visibility into the operations of all the partners in the chain. Furthermore, they receive real-time demand signals which enables them to reevaluate production. Companies can also adopt machine learning and artificial intelligence to generate early warning signals, simulate risk scenarios, and develop appropriate responses to disruptions in the supply chain.

Supplier assessment and inventory optimization

During a period of uncertain demand, it’s imperative to critically analyze every supplier in the chain. Some suppliers are more critical than others, hence different strategies must be developed to handle each segment. Additionally, companies must diversify and collaborate with local suppliers if their current partners are situated abroad and are inaccessible.

Lastly, manufacturers must keep track of inventory levels at different locations and re-route distribution to locations with high demand. As soon as there is a hint of demand uncertainty, companies must update their demand forecasts and revise their production schedules to meet the new estimates.

The strategies that once allowed companies to become efficient have now caused them to struggle during demand uncertainties. However, efficiency no longer has to come at the cost of flexibility. Increased output, reduced financial loss, and minimized product development cycles are just a few benefits of investing in resilient supply chains. The benefits, as well as the current instability in the global economy, are pretty good signs that the time to build nimble supply chains is here.

Sources

●      https://home.kpmg/in/en/home/insights/2020/05/ramping-up-the-supply-chain-post-covid-19.html

●      https://www.bain.com/insights/supply-chain-lessons-from-covid-19/

●      https://www2.deloitte.com/content/dam/Deloitte/ca/Documents/finance/Supply-Chain_POV_EN_FINAL-AODA.pdf

●      https://pdfs.semanticscholar.org/043f/02d995bfc37425b0b898e37920ee31477bd8.pdf

●      https://blogs.sas.com/content/hiddeninsights/2018/07/12/reducing-supply-chain-uncertainty-downstream/

4 layers of logistics services and the rise of 4.5PL

Back in the 1980s, trade restrictions made it difficult for companies to dive into the unknown territories of international markets. But once local markets began saturating and international trade started thriving, companies began exploring newer markets across the globe. The pace of globalization increased and companies needed to build an extensive supply network to support overseas expansion. This led to the development of third- and fourth-party logistics as we know today. However, before the evolution of these modern logistics services, first- and second-party logistics were the default choice of businesses.

What are 1PL and 2PL?

First-party logistics (1PL) refers to companies that retain complete control of their logistics. They use their own assets (trucks, warehouses, etc.) to store and deliver goods to their customers. Though, 1PL helps to keep a close eye on operations, the additional infrastructure and resources needed are a permanent cost to the business.

Companies might decide not to own any assets and outsource logistics to service providers with transport, handling, or storage capabilities. Such a service provider is known as a second-party logistics provider (2PL). This method provides the flexibility to outsource only a few components of the supply chain. Hence, it is only suitable for businesses that want partial control over their supply network.

What are 3PL and 4PL?

From warehousing to delivery, third-party logistics providers take care of the entire supply chain, using an asset-based model. 3PL enables companies to focus their time and resources on their core competencies while also reducing costs and delivery times. Since 3PL providers pool resources and generate economies of scale unlike any other logistics services, they are the go-to choice for businesses that want to reduce cost.

While 3PL takes care of the operational aspect, 4PL builds a customized model to increase the overall efficiency of the value chain. 4PL operates on an asset-free model to assist companies by enabling coordination among other service providers. However, the services of 4PL are limited to consultations -- they aren’t involved in the execution of the supply chain model. 4PL services are usually the ideal choice for businesses that are looking for custom solutions and value chain optimization.

The middle ground - 4.5 PL

4.5PL goes a step further than other service providers by integrating the operational excellence of 3PL with the technical and business expertise of 4PL. 4.5PL is a promising hybrid solution that is only provided by a handful of companies. In India, H&S continues to be the only 4.5PL company.

What makes 4.5PL unique?

●       Cost efficiency - A 4.5PL enables businesses to reduce their capital investments by taking over their entire supply chain operations. Economies of scale allow service providers to optimize cost for all their clients

●       Consultative partner - They consult businesses on every component of supply chain operations and devise strategies that can optimize the entire value chain

●       Customized solution - They build customized solutions to address the specific challenges of each business

●       Expertise - They have the industry expertise to understand the trends and upcoming technologies such as AI, ML, Blockchain, and IoT that can be implemented into the business

●       Technological prowess - They provide a well-developed IT structure and boast in-house technologies to enable supply chain visibility and foster collaboration

Since the advent of global supply chains, the world of logistics management has gone through several transformations. As customers demand and technologies continue to change, so will the logistical needs of companies. In this ever-changing industry, 4.5PL providers handle current supply chain needs and bring the agility needed to respond to any future opportunity or challenge. H&S is one such dedicated 4.5PL partner that can help you design and execute a cost-efficient, high-tech model to address your business concerns and to equip you for the future.

Sources:

●       https://www.tradegecko.com/supply-chain-management/what-is-4pl#:~:text=What%20is%204PL%3F,supply%20chain%20solutions%20for%20businesses.

●       https://beamberlin.com/logistics-101-1pl-2pl-3pl-4pl-5pl/

●       https://legacyscs.com/evolution-of-3pl-supply-chain-challenges/

The COVID shock to global supply chains and the path to recovery

Global supply chains form the backbone of modern economies. For years, these networks have helped us get products from across the world to our doorsteps. While this has definitely allowed us to live a quality life, the dark side of these interwoven networks has come to light in recent times. The limitations are such that if one link of the supply chain network happens to weaken, a domino effect is triggered that can lead to the complete collapse of economies. This is exactly what we are seeing in the wake of COVID-19. The destruction caused by the pandemic is rumbling through our world, disrupting supply chains and shutting down businesses.

Here’s a breakdown of the impact COVID-19 has had on every stage of the supply chain.

The Chinese effect on procurement and production

Considered to be the ‘de facto’ factory of the world and now the epicenter of the coronavirus, it’s no wonder that businesses that source or produce in China are the ones hit the hardest. China contributes around 17-20% to the world GDP — a statistic that showcases the damaging effect that this crisis has had on businesses that are reliant on China for their everyday operations. The hunt for lower-cost, efficient production has resulted in the consolidation of risk, which has caused industries to come to a standstill.

Global shortages

Modern logistics have made it easy for economies to engage in import manufacturing and exporting. However, since transporting raw materials and finished goods has become a herculean task in the COVID environment, there is a real possibility of global shortages of essentials. For instance, India is the leading global supplier of generic medicines. But, around 70% of raw materials for these pharmaceuticals are imported. With restrictions on transportation, the world may be on the edge of a global shortage of this life-saving commodity.

Distribution disruption

Lockdowns and curfews across nations have already led to labor shortages in warehouses. Additionally, fear and uncertainty have pushed customers to stockpile essentials, pressurizing supply chains that are not prepared for such spikes in demand.

The way forward: How supply chains can cope with COVID-19

The pandemic has brought the weaknesses of global supply chains to the forefront and made companies realize that a change was long overdue. Some of the ways companies can make their supply chains more resilient are:

Digitizing supply chains: Technologies such as IoT, blockchain, artificial intelligence/machine learning-enabled demand forecasting, AGVs, and drones, among others can help to reduce dependency on labor across the supply chain.

Enhancing risk management capabilities: Organizations must be prepared for all future contingencies that might lead to supply disruptions. Modeling cost structures, monitoring performance data, and providing visibility into value chains are some ways to minimize the risk.

Performing simulations: Simulating supply chain networks before implementation can help businesses identify the most efficient strategy. Companies must ensure that this strategy is adaptable to current and future constraints. Additionally, stress tests must be undertaken to make supply chains more flexible and resilient.

Diversifying operations: Companies must reduce their dependence on one country for sourcing or delivery, and explore other avenues so as to reduce the risk of failure. 

Although a pandemic is a grim situation for us all, it has shown us that there’s always room for improvement. During this time, businesses must reflect on the weaknesses of their supply chains and devise their future strategies accordingly. Yes, these situations are nearly impossible to predict but we can still learn lessons from our present and make the best of technology to ensure the robustness of supply chains even in the face of adversity.

Sources:

●      https://www.entrepreneur.com/article/349229

●      https://www.imd.org/research-knowledge/articles/supply-chains-adapting-to-covid-19/

●      https://www.thehindubusinessline.com/opinion/covid-19-exposes-indian-industrys-supply-chain-vulnerabilities/article31224928.ece