TIME TO RETHINK YOUR SUPPLY CHAIN

by Atul Chandna Asia-Pacific Supply Chain Leader, EY

Companies that saw their supply chains crippled by disruptions over the past two years would agree that there’s no better time than now to build one that is stronger, smarter and more resilient. Here’s why and how.

Before the pandemic, global supply chains ticked many boxes: lower labour and operating costs, wider product ranges and greater reach to new markets. When the pandemic struck, it didn’t just cause unprecedented supply chain disruption, it also highlighted the fragility and inherent inefficiencies of traditional supply chains.

According to the new EY whitepaper, Supply chain reinvention: what you need to start and stop now, the old models of just-in-time planning, siloed teams and business-to-business blinkers are neither fit for now, nor fit for purpose anymore.

Today, labour and energy costs have risen sharply, as have the costs of raw materials and freight rates. Trade flows are being redefined by foreign policies and tax regimes. Customer expectations are fast changing against increasing emphasis on sustainability and corporate citizenship.

These global developments will impact supply chains. What are the new parameters that are redefining a future-ready supply chain and how can business leaders act on them?

Emergence of reimagined supply chain

Over the last two years, companies have started to review their supply chain, focusing on four areas: shorter and localised supply chains; multiple sources of supply; omnichannel connections with customers; and market clusters.

The benefits are numerous. For example, in a localised supply chain, companies shift from a stock-keeping model to one that’s made-to-order, which can reduce working capital and simplify the sales, operations planning and forecasting process. Multiple sources of supply also help companies better manage excess capacity and volume redundancy while reducing global trade complexity and compliance burden.

With changing customer expectations, having omnichannel connections with customers has become part of the customer engagement process as many manufacturers transition from a largely business-to-business (B2B) model to one that also conducts business-to-consumer (B2C) transactions. Leveraging market clusters i.e., where local demand is met by production within the market or cluster, affords proximity to market and potentially eliminates the need for a regional planning centre.

Harness technology for transparency

When reimagining the supply chain to build resilience, fundamental shifts from traditional supply chain operating models will be needed. For example, managing shorter and localised supply chains require more technology-enabled and analytics-driven capabilities. Multiple sources of supply will require networks to be reconfigured. In omnichannel connections with customers, companies must realise that just a 5% shift to a B2C base can impact demands for planning, warehousing and packaging, and so on.

Many companies are turning to supply chain control towers, where a connected and customised dashboard of data, business metrics and even events, allows businesses to understand, prioritise and address critical issues in real-time.

These control towers support collaboration across teams and provide end-to end visibility across the entire supply chain by tapping on advanced technologies such as artificial intelligence (AI) to break down data silos, run scenarios and deliver real-time actionable insights. Through this, companies can foresee and act on unplanned events before they become major disruptions.

Sustainability risks and opportunities

The pandemic arguably turned a stronger spotlight on sustainability, which was already a growing concern for businesses and consumers.

The EY Future Consumer Index in February 2022 found that 25% of consumers globally were shopping with a “Planet first” mindset, up from 18% who were doing so in May 2021. As well, the EY 2022 CEO Outlook Survey found that CEOs in Asia-Pacific ranked sustainability as the second-most critical risk to their future growth strategies. Nearly three-quarters of the Asia-Pacific respondents cited environmental, social and governance (ESG) as an important driver of value over the next few years.

How can companies ensure their supply chain is aligned with their sustainability goals? Technology is a key enabler. Through digital tracking, businesses can identify emission-reducing opportunities and proactively flag other potential sustainability issues.

Smart companies are using sustainability drivers to rethink their supplier relationships. The old model where supplier relationships are negotiated on low cost and immediacy of supply is making way for one based on mutual benefit, sustainability, traceability and trust.

Talent at the core

At the heart of a strong supply chain is talent. Supply chain teams, once considered a commodity in the value chain, stepped up to deliver results during the pandemic, drawing attention to the importance and value of a strong supply chain talent pool.

The skillsets needed for supply chain management are evolving to include those related to critical planning, manufacturing, data science, artificial intelligence, machine learning, and more. Talent with these skillsets is scarce. Hence, companies must reassess their talent acquisition, development and retention strategies to compete for top supply chain talent. These strategies should include extensive retraining and cross-training, in addition to investments in technology.

Talent with the necessary skillsets can leverage the power of technology – to complement, supplement and support them. Autonomous decision-making can be key to building a resilient and agile supply, and the key question perhaps is how to harness the optimal mix of human and machine.

Consider tax implications early

Shifting the supply chain from global to regional or local can have important tax implications.

Previously, companies ran regional supply chain hubs that acted as strategic command centers. From a tax perspective, such arrangements generally entitled the organizations to lower taxes, and encouraged businesses to establish hubs in operationally and tax-attractive locations.

With fragmentation and localization of supply chains, companies may be required to revisit their international tax structures as legal entities and tax treatments change. Transfer pricing, in particular, must be re-examined. Other considerations include how profits are split i.e., how is the distribution of these profits achieved without undue tax leakage in the form of withholding taxes, GST or VAT?

Answering these questions and allocating profit requires a detailed analysis of the underlying value drivers and contributions of all levels of the supply chain. Technology also introduces new value drivers that must be quantified and reflected in the transfer pricing design.

Supply chains fit for the future are founded on end-to-end interconnectivity that will deliver visibility and build resilience. The big question for every organization is: am I taking the right steps to bring that visibility, build that resilience, and ultimately reinvent my supply chain?

The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organization or its member firms.

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