5 Supply Chain Challenges Solved by Good Design

This is an excerpt of the original article. It was written for the March-April 2020 edition of Supply Chain Management Review. The full article is available to current subscribers.

March-April 2020

Are you ready for NextGen technologies? Just the other day, I had the opportunity to tour one of Amazon’s highly automated robotic fulfillment centers. I expected to be dazzled—and I was. But it wasn’t because of the automation. The tour was a reminder that there’s no question that NextGen technologies such as Artificial Intelligence, blockchain, robotics, 3D printing and 5G are going to be the differentiators in tomorrow’s supply chain. The question is: Are you ready?

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As the profile of supply chain continues to elevate in organizations and corporate boardrooms, the challenges associated with operating a global network are getting an equal amount of attention. Of particular interest is how organizations structure and manage their supply chains to effectively balance manufacturing costs, inventory and transportation—also known as supply chain design.

Done right, supply chain design boosts efficiency, reduces costs, increases output and improves profitability. It also helps companies overcome challenges like low labor availability, tariffs/trade wars and the rapid pace of business. Here are five challenges that supply chain managers are dealing with that can be solved through a combination of good design and technology.

1.) High-cost/low-availability warehouse labor.

With the national unemployment rate hovering at 3.5%, and even lower in some areas, labor has become a key driver of supply chain network design. Where several years ago a warehouse operator could afford to hire 200 extra pairs of hands to manage its busy season, that's not always an option in today's labor market. To offset this challenge, Ian Hobkirk, president at Commonwealth Supply Chain Advisors, sees more companies working automation into their supply chain designs. “The ROI for automation is more compelling now that labor costs are high—and just really not available to begin with,” says Hobkirk. Particularly compelling for consumer goods-oriented companies that need additional labor to manage their huge fourth-quarter spikes, automation like mobile autonomous robots, Swisslog's AutoStore, OPEX Perfect Pick, pouch sorters and various AS/RS technologies are helping companies tackle these challenges without the need for more human labor. Other strategies include setting up operations in areas where labor is more available and affordable. Rather than opening a DC in California, for instance, companies are serving their West Coast customers from operations in Las Vegas, Reno and Salt Lake City. “They still get very good access to population centers in Southern California,” says Hobkirk, “but for somewhat lower operating costs. That's definitely a trend that we're seeing, and one that is in no small part driven by California's high labor costs.”

2.) Tariffs and trade wars.

When the trade wars started to heat up in 2019, there was suddenly an intense focus on the downsides associated with global diversification. This immediately affected supply chains across numerous industries, with automotive, electronics and consumer goods all feeling the earliest impact of the trade wars. “Companies with supply chains that were running like clockwork were suddenly asking themselves how the tariffs would affect them, what their new cost structures were going to look like and whether they needed to look for new sources of supply,” says Matt Tichon, vice president of industry strategy at Llamasoft.” The tariff situation appeared to be easing up slightly as we moved into 2020, but companies are still on edge about the future impacts. “The trade wars were the catalyst for the executive suite to look at how it was quantifying risk, what its exposures were across different geographies and whether it was dual-sourced on certain items,” says Tichon. “That led to an increased focus on the overall theme of supply chain agility.” It also sent companies back to the drawing board, knowing that the supply chains they'd implemented years or even decades ago were largely static and asset-centric in nature. “The focus now is on supply chains that can quickly respond and shift to the changing needs of the market,” he adds, “and all in the name of having a more nimble network that isn't as exposed to geopolitical changes that can happen quickly.”

3.) Y2K legacy systems that don't “talk” to one another.

It has been two decades since the world's computer systems successfully endured the “Y2K” threat that was expected to wreak havoc as the year changed from 1999 to 2000—which of course never happened. Technology has advanced rapidly since then, but some companies are still using their Y2K-era systems to run their global supply chains. “A lot of systems that are in place either date back to Y2K or have been put together in a piecemeal fashion,” says Jon Chorley, vice president of SCM strategy at Oracle. These systems can't keep up with the business and market shifts, nor do they “talk” to one another. This has created a largely siloed structure that doesn't support a modern day supply chain network. Knowing this, companies are now reevaluating their supply chain platforms and looking for ways to progress down the path of digital transformation. As part of this push, they want to be more connected, flexible and responsive to new opportunities and challenges. For example, Chorley says IoT-enabled systems that provide visibility into real-time data sit high on most supply chain managers' must-have lists right now. “We're seeing an interest in systems that are easy to use, have low barriers to entry and can accommodate workforce shifts,” Chorley says. “They want help managing the movement away from tribal knowledge and over to more system supported decision-making.”

4.) Geopolitical instability and global uncertainty.

Tariffs aren't the only global issue taxing the world's supply chains right now. The threat of war with Iran, the ongoing debate over Brexit, unpredictable terrorist attacks, fluctuating currency exchange rates, the coronavirus and overall political instability are also weighing on these networks. “We're in a market where some very fast and unpredictable changes are emerging,” says Milena Janjevic, a research scientist at the MIT Megacity Lab. “These sources of uncertainty are becoming an increasingly important aspect of supply chain design. If you don't somehow incorporate these issues into your design process, you'll end up with a supply chain that's not robust to those changes.” To make sure this doesn't happen, Janjevic says companies need to incorporate flexibility into their supply chain design, all with an eye on creating networks that can be more “adaptive to those eventual changes.” By seeking out more diverse sources of supply, for example, supply chain managers can better respond to geopolitical events as they emerge. “This can help make supply chains less prone to disruption,” says Janjevic.

5.) Company-specific requirements.

As the director of the MIT Humanitarian Logistics Lab, Jarrod Goentzel works with companies of all sizes and across numerous industries. Because each brings its own unique logistics requirements to the table, there's no one-size-fits-all answer to the supply chain network design problem, nor is there a single software package that can address every company's top challenges. “The companies that we're meeting with and talking to all have very diverse requirements,” Goentzel explains. For example, some of the organizations want to know where they should locate their warehouses and DCs, knowing that some pockets of the country have better (and more affordable) labor availability than others. A different company may be focused on getting as close as possible to its customers in an effort to shorten delivery lead times. Particularly in urban areas, that need must be balanced against the cost and availability of warehouse space. Another organization might be focused on connecting its supply chain strategy with the quality of its outside sales force, knowing that integrating these two components can result in higher profitability.

“The questions are always very specific, and require a good understanding of the most impactful industry and market-specific elements,” says Goentzel. “From there, it's about finding a way to integrate those elements into the supply chain planning process.”

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