The Changing Landscape of Supply Chain Management in the Wake of COVID-19
The impacts of COVID-19 on business operations and the economy is complex and continuing to evolve. To better understand what we are facing today, we will first look at a few principles and trends from the 1950s and how they are forcing organizations to rethink their operations. We will dive into some of the potential short- and long-term impacts on consumers and the importance of identity governance during this rapid digital transformation.
Applying Theories and Trends of the 1950s to Today
The 2001 film “A Beautiful Mind” highlighted the work of Nobel laureate and mathematician John Forbes Nash Jr. Using the game theory, a branch of applied mathematics that studies strategic situations where players choose different actions in an attempt to improve his performance, he developed the “Nash equilibrium” to explain a dynamic involving two or more players where no player has to gain by changing his strategy unilaterally.
When applied to the business environment, mathematical models seek to establish the variables resulting from changes in strategies between players (organizations) considering that the costs and benefits of each option are not fixed, but variable depending on their strategic choices.
In the 1950s following World War II, Japanese automaker Toyota created a production model that aimed to combine great flexibility to manufacture small batches with levels of quality comparable to its North American competitors. This concept of producing only what the market demanded with the main objective of acquiring a competitive position became known as “just-in-time.”
In the years that followed, most automakers followed suite. This also translated to manufacturing in the most diverse sectors where they adopted this model and adapted it to the specific needs of their segment. The advancement of digitalization processes and the speed of connectivity between data networks allowed this model to explore the best options for maximum efficiency and best possible costs. This also created production value chains involving large multinationals and hundreds of suppliers in the most diverse geographies.
Supply Chain Vulnerabilities Exposed
Prior to the pandemic, organizations in the early stages of their digital transformation followed a natural review of the production value chains. This was done maintaining the Nash equilibrium where all parties involved had satisfactory cooperation agreements and market conditions involving the main variables quality, time, prices and availability. Geographical issues and possible geopolitical tensions were considered low priority, but they would eventually pose great risks to all parties (players) involved.
Abrupt interruptions occurred in the production chains during the lock-down periods where just-in-time vulnerabilities were immediately evident. They were facing an unprecedented event where decisions had to be made immediately. Critical components were suddenly unavailable due to high demand or lack of the necessary inputs to produce it. The final product was compromised and suddenly there were flaws in this previously highly productive chain that affected suppliers, the end consumer and many other parties.
CEOs today are faced with many difficult questions and decisions including is still feasible to maintain “just-in-time” operations with the geopolitical tensions that emerged during the crisis? The immense losses incurred during the unproductive months will become tangible in numbers when companies and countries report 2nd Quarter numbers. These announcements will also likely expose which sectors were most impacted.
Long-Term Economic Impacts Expected
Governments are being forced to quickly find financial solutions to save companies in sectors considered to be critical, such as aviation. For example, in April Boeing withdrew $4.2 billion to form a joint venture with the Brazilian Embraer and requested an investment from the US government of $60 billion to overcome the crisis. Similarly, Germany and the European Union announced the end of May a preliminary investment of $9 billion Euros in exchange for 20% of the company (and could reach 25%).
The Brazilian government considering a model similar to Germany using resources from the National Development Bank (BNDES) to save the four largest companies in the airline sector. The probable nationalization of companies from hard-hit segments had led to a greater concentration of jobs in the countries of origin for these organizations. Operations that require expressive credits using public resources will generate a great indebtedness from countries most affected, reaching 100% of the GDP or even in some cases characterizing a technical insolvency.
The generation of jobs in the host countries will directly affect the “Nash equilibrium.” This nationalized production will deconstruct the structure of value chains before the crisis and likely generate unemployment in other countries. Production of components within the country of origin will be encouraged to hire labor that has lost positions and to guarantee the availability of all components, even under conditions of superior prices and quality. Parallel to this movement, consumers will be more interested in verifying the origin of the materials and inputs of the products they may purchase.
Balancing Consumer Satisfaction & Demand
As consumption habits and preferences undergo changes that are not yet possible to estimate, one of the big questions will be how quickly companies can adjust their localized production models to meet consumer satisfaction. It is expected that consumers may find themselves paying higher prices for a lower quality product but with less risk of unavailability.
With these dramatic changes to supply chain operations and associated reorganizations, there will be an even more expressive migration to cloud and even multi-tenant environments. Effectively managing the governance of thousands of participating digital identities will be critical for competitive success while in the search for efficiency and repositioning market share.
Keeping up with these evolving consumer behaviors and preferences will also rely heavily on AI and ML algorithms. This includes automating the management of digital identities – allowing the correct granularity of interactions between internal users and mitigating risk with multiple actors participating in the production value chains.