• External Contributor

Supply chains have been upended. Here’s how to make them more resilient

In the wake of supply chain disruptions due to coronavirus, several experts have reiterated the need to obtain more visibility across the chain. Companies who sell finished goods generally know production and shipment schedules for their Tier 1 suppliers, but they usually have little to no knowledge of suppliers further up the chain.

Obtaining this visibility is considered key to optimizing supply chain efficiency and agility during normal production. When critical supply chain disruptions hit, this visibility becomes crucial to understanding the impact of the disruption on the rest of the chain so that others in the ecosystem can plan and take action, such as developing routes to alternative suppliers.

Because COVID-19 has led to lockdowns, suppliers in the chain are temporarily ceasing production, and logistics providers can no longer transport goods as seamlessly, particularly across borders.

Fiat Chrysler Automobiles announced in mid-February that it was temporarily halting production at a car factory in Serbia because it could not get parts from China. Hyundai has made a similar announcement for factories in Korea. International air travel transported a significant amount of trade cargo prior to COVID-19 but has seen its flights decrease by 55% since the beginning of the pandemic. China plays a central role in global supply chains.

This is not a new problem: companies have been trying to uncover this data for decades, but suppliers are not forthcoming with the information. Here is how we can actually achieve visibility across the entire value chain:

1. Move away from paper to digitization

Trade is notoriously reliant on paper-based processes: the “Bill of Lading” – a detailed list of a ship's cargo; notices filled out by hand; paper copies of packing lists from each logistics carrier. In some cases, such as with the Bill of Lading, physical paper copies are required by law. For the most part, however, companies have yet to digitize their supply chain processes because they have determined the cost of doing so does not bring enough efficiency or security to justify the endeavour.

Protective measures for COVID-19 have made clear that operations dependent on physical assets, such as paper, can face serious disruption when physical presence is not a possibility. Wet signatures and paper printouts are usually handled by operations personnel who must come to the office, or another place of work, and coordinate with others. In addition, value chains that rely on information in these paper documents lose access to that visibility very quickly and cannot react to changing conditions.

Digitizing, then, is not simply a matter of cost, but primarily of visibility and managing supply chain risk. To limit the impact of points of failure in the value chain, it is important to make data available through digital means. In the current COVID-19 pandemic, governments and businesses with strong digital infrastructure and enabling regulations such e-signature and e-transactions laws, are dealing with the supply chain disruptions much better than those without.

2. Ensure data privacy for suppliers

The reason why upstream suppliers will not reveal information to end customers, even if it's easy for them to do so, is that they fear losing commercial advantage if their customers know even more about their operations, pricing and sourcing. Suppliers have to be able to control exactly who receives what data from them, and independently verify such controls.

Most digital communication in the supply chain happens via Electronic Data Interchange (EDI) and Excel spreadsheets. When passed back and forth only between two parties in the supply chain ecosystem, data privacy is easily controllable and not a concern. When the data in these communications needs to be distributed to more parties, however, traditional supply chain systems, which are centralized, cannot grant independent and auditable access controls to each individual party. A decentralized system that is nevertheless owned by a large buyer is the best way to give suppliers the privacy they need and buyers the visibility they want.

A blockchain with either private or public permissions meets this criteria. When created properly, suppliers can audit their data-sharing permissions directly on their own blockchain node. At the same time, their data can be securely distributed to others in the blockchain network without requiring the point-to-point integration that centralized systems do. We’ve therefore solved a key technology problem in getting suppliers to participate in supply chain visibility initiatives.

3. Give suppliers an incentive to share their data

For buyers who value data highly, they may consider paying their suppliers for the data itself, in addition to the physical goods they’re sourcing. A more cost-efficient and profitable method is to institute supply chain finance programmes that offer the buyer's own competitive interest rates.

Many buyers already offer such programmes to their Tier 1 suppliers. However, the lack of visibility is a problem that stems from other suppliers who are Tier 2 or even further up the supply chain. The financing needs to reach these suppliers as well. Blockchain is the ideal technology to ensure that data on performance and risk, which underpin all supply chain finance transactions, can be shared in an authenticated manner with financiers and other parties to a transaction, even when there is no direct relationship between them.

Using blockchain, buyers can, for example, use payment commitments on the blockchain as alternatives to a Letter of Credit, pay suppliers later, reduce cost of goods sold, and insulate themselves from supplier bankruptcy. Suppliers, in turn, recognize revenue sooner and replace their current supply chain finance arrangements with much lower financing terms. These benefits multiply as the network grows. The result is a financing ecosystem that makes data sharing pay for itself.

4. Start early – don’t assume the current disruptions will never happen again

Supply chain initiatives take time to roll out. The most effective move to take now is implement supply chain finance programmes to support suppliers in financial straits and make the value chain more capital efficient. If companies begin to institute data sharing in their supply chains at the same time, they will be in a much better position to deal with a future shock.

Global trade and supply chains are going through an unusual and massive shock, which strikes from both ends – the supply and the demand side. Companies, whether buyers or suppliers, are facing tremendous challenges in keeping the goods and services flow at a time of global lockdowns. Countries, especially developing countries, are carrying the direct consequences of supply chain breakdowns aggravated by trade restrictions. As the COVID-19 situation changes daily, it’s crucial for all parties to have visibility into the supply chain, to share data, and communicate effectively. Technologies accompanied by enabling policies can play a significant role in rebuilding the trade and supply chain system, and making the supply chain more shock-proof in the decades to come.