Podcast transcript: How manufacturers can future-proof their supply chains

11 min approx | 12 August 2020

Announcer

Welcome to the EY Advanced Manufacturing and Mobility Business Minute podcast series, where EY practitioners explore the critical business issues impacting our industry today.

Moderator

Here with us for this episode of the Advanced Manufacturing and Mobility Business Minute is Sven Dharmani, EY Global Advanced Manufacturing and Mobility Supply Chain Leader. Thanks for joining us today, Sven.

Sven Dharmani

Glad to be here.

Moderator

Sven, there has been a lot of uncertainty with COVID-19, and supply chains the world over have been disrupted. What are you hearing from your clients?

Dharmani

As you can expect, there is a great deal of concern and questions. As you know, Forbes reported 94% of the Fortune 1000 companies have experienced disruption in their supply chain. Most traditional supply chains, including the modern ones, are fairly linear in their nature, and they were designed to be efficient and cost effective, and producing products just in time, minimizing inventory and working capital. As it is, these models are not as resilient. They have done a great job in committing to just-in-time and methods like production systems to become efficient and lean, but they don’t have the capability to be very, very resilient or flex with a major disruption. So, they are lacking in agility and flexibility. 

Moderator

What are the potential ramifications of that lack of flexibility?

Dharmani

As you can expect, there is a great deal of concern and questions. As you know, Forbes reported 94% of the Fortune 1000 companies have experienced disruption in their supply chain. Most traditional supply chains, including the modern ones, are fairly linear in their nature, and they were designed to be efficient and cost effective, and producing products just in time, minimizing inventory and working capital. As it is, these models are not as resilient. They have done a great job in committing to just-in-time and methods like production systems to become efficient and lean, but they don’t have the capability to be very, very resilient or flex with a major disruption. So, they are lacking in agility and flexibility. 

Moderator

What are the potential ramifications of that lack of flexibility?

Dharmani

So, as we have seen, there has been a wide-spread disruption, and we will continue to see it for a significant amount of time. If you look at the context of now, many suppliers and manufacturers had to stop their operations due to lock-down, social distancing, the way their plants are set up, etc. And they may not even have the raw materials to produce it. Demand has dropped in many areas but has spiked in other areas. For example, it could be chemicals needed for hand sanitizer. That demand has really spiked up. So, what we are seeing is some of the effects are temporary, but some of the effects are going to be much more permanent. There are immediate effects of the pandemic, but I think what we are going to see is some of the nodes in the networks may go dark permanently. For example, if the manufacturers are using warehouses to do consolidation, they may instead choose in the future to do direct ship to consuming locations and eliminate the distribution center overall if they have four truckloads. So, that’s an example of how some nodes may become really light or become dark all together.

Moderator 

It sounds like manufacturers will need to adjust to a new normal.

Dharmani

Absolutely. I think it’s fair to say we have to first understand what the new normal is and then adapt and adjust to that. I don’t believe that we can simply pick up where we left off. There is a lot of uncertainty. There is, I’d say, a lumpiness and spikiness in demand, and the supply chains, because they are linear, whenever there is a hiccup at one end it actually travels through the rest of the supply chain. So, you are not going to see a smooth-running supply chain like we used to pre-January for some time to come. Also, there is a dependency on the developments in the medical science. So, we are not just dealing with the lock-down, but we have to figure out how we’re going to have the workforce and the customers and suppliers stay safe. So, it’s going to be a different environment. It’s certainly going to be a changed normal, and a new normal. I think there are going to be deep learnings from this experience, and companies are going to have to scrutinize their supply chains more rigorously. I think there is going to be much, much more focus on resiliency. We already had historically seen more natural disasters like earthquakes and tsunami and tornados and typhoons in the last 10 years than in the 20 years before that. The pandemic is another example of a major disruption. Trade wars are causing disruptions. There are man-made disasters as well. These can all happen very, very quickly. Because the supply chains are linear, and they were designed to be efficient and effective, they don’t have the flexibility and the responsiveness to major disruptions. So, this is what the manufacturers and the suppliers have to think about and adjust for, because there is a big risk in terms of business continuity.

Moderator

So, what steps should companies take to build a more resilient supply chain?

Dharmani 

There are a number of considerations that they are going to be looking at. How do you build resiliency? I think, first of all, you need to think through all the scenarios that can happen. I don’t anticipate that we can ever think up all the scenarios, but at least the ones we can think through and plan for will help us create more agile and more responsive supply chain. Responsive in terms of, how do you respond to disruptions? There are lots of nodes in the supply chain. If one node goes down or one geography goes down, what are the backup plans to ensure continuity? A lot of times, manufacturers have sole source. You probably need to rethink that. Even though sole sourcing can be cost effective in the long run it also introduces more risks and results in lack of responsiveness and flexibility to any of their disruptions. So, those are a couple of the strategies. The other thing that has to change is traditional supply chains are very, very linear. We are really starting to evolve, and we were doing a little bit of that even pre-COVID-19 — more of a supply chain network. That is definitely something that we need to look at much more diligently and then work towards, because the networks can be much more flexible and resilient than a linear chain. So, those are some of the things that we should look at. We need to look at business continuity plans. We need to look at, can the supply chains run autonomously? We need to look at our JIT models, just-in-time models. And how do we carry inventory, and how can the inventory help us respond better without astronomically increasing the working capital requirements? The other last thing I’ll say is our planning systems and our scheduling systems, how resilient are those in terms of being able to help the businesses recover? So, we need to perform stress tests against these scenarios and revisit it. I think the other thing suppliers and manufacturers need to do is almost have an annual risk mitigation plan and review, so that they can continue to adjust the risk response plans. I think that is what we are going to see over the next few years.

Moderator

That’s very interesting. Are you saying companies don’t fully understand the complexity of their supply chains in order to create that resiliency?

Dharmani

From a high level, the manufacturers do understand their supply chain. But not in the depth and granularity that they need to. When it comes to their performance and interdependencies and looking at risks, including third-party or counterparty risk, that’s where they don’t have the granularity they need to have, or how the supply chains are going to behave under a high degree of strain. It’s also challenging to develop a level of understanding when the systems don’t permit that. So, you almost need a 360-degree view with help of technology, to be honest, which a lot of manufacturers don’t have right now.

Moderator

What technologies can manufacturers leverage to become all-knowing?

Dharmani

There is quite a large range of technologies that can help supply chain become more knowledgeable and resilient. Industry 4.0 has created a lot of capabilities, such as RFID, GPS tracking, sensory data, IoT connectivity. All of these can provide better information and gather the data that’s needed to understand and know how the supply chain is working and how it can be resilient. Artificial intelligence and machine learning can be used for predictive modeling and risk profiling. There are two technology tools that I’m really excited about that can become quite indispensable for creating a resilient supply chain. Those two are digital process mining and digital twins for the supply chain.

Moderator

I’ve heard of digital twins but not digital process mining. Are they related in some way?

Dharmani

Ah, yes. Digital process mining can be a great foundation for digital twins for the supply chain. In the most basic sense, the supply chain is a collection of processes that connect suppliers to a node connect to manufacturers and they’re internal production to the DCs, etc., etc. So, what digital processing mining can do is provide visibility into how the processes are working and how you can switch, from a digital sense, how effective your supply chain is. For example, in an ideal scenario you might think a process gets completed in two hours, but when you actually log the data from your backbone systems and track it you find it might take two or two days. It might be 10% of scenarios where the processes are running as designed, but in 90% of the cases, there might be exceptions or changes or stops along the process that effectively cause them to take much longer than they should, and you don’t have this visibility without digital process mining. And this is why digital process mining can create a fantastic foundation for developing the digital twin for the supply chain. DPM also has visualization and uses ERP as an import. So, it’s really running off your real-time data, and it helps create that real-time replica and the digital twin of your supply chain.

Moderator

Can these tools help visualize effects of disruptive events like the COVID-19 pandemic?

Dharmani 

Yes, the digital process mining and digital twin can definitely help in visualizing the disruptions. So, for example, if you know your order fulfillment takes a certain amount of time, and includes transit between different nodes, some of it may be air, some of it may be ground, some of it may be ocean, and you know that you have disruptions at the ports. You know you have disruptions in land transportation or rail transportation. You can model that in your digital twin and you can come up with a plan of how do I respond and how do I have that resilience in my supply chain so I can have continuity, and that continuity, in this time, can be the competitive edge that you need.

Moderator

Competitive edge in these challenging times can go a long way. Thanks for sharing your insights, Sven.

Dharmani 

My pleasure, and thanks for listening, everyone.

Announcer 

Thanks for listening to today’s EY Advanced Manufacturing and Mobility Business Minute podcast. We hope you found it engaging and informative. To listen to other Business Minute podcasts, you can find them at ey.com\ammpodcasts.