Neil R. Brown and Frances B. Lim of KKR were featured speakers at a LiquidX webinar May 12, 2021, to discuss their study, A New Era for Supply Chains. The webinar was moderated by James Yu, LiquidX Managing Director.
Supply chains are like electricity, according to Mr. Brown. Most people don’t think about electricity until they flip a switch and nothing happens. Covid “flipped the switch” to put the spotlight on supply chains but seismic shifts were already in motion long before. Supply chains became longer and more complex with the expansion of global trade. Various factors, including increasing geopolitical tensions, growing populism, and transnational threats, have been building for years. Corporations are realizing they need to shift from thinking strictly about supply chain efficiency to looking at all inputs impacting supply chains.
Changing nature of trade
Supply chains naturally shift and respond to changing trade dynamics. But what is different today is the changing nature of trade, according to Ms. Lim. She notes that in recent years the center of gravity has moved from West to East, with economic activity being driven by consumption as world income and maturity grew. The global trade basket also expanded to include services such as experiences and health care instead of solely consumer goods, altering trade balances between countries. Complex and widely-dispersed supply chains are vulnerable to impacts from a variety of non-commercial factors.
Three major themes
The complexity and uncertainty that investors, companies, and policymakers face today falls into three broad themes. First is the need for thinking to continue to evolve around supply chains. Simply “rearranging the deck chairs” will not be enough in a more digital and services-oriented economy, or with more geopolitical volatility ahead, according to Mr. Brown.
Merely moving from an efficiency model that is hyper focused on margins to a resiliency model with more cushion in the system is not sufficient. Companies have been reliant on globalization to drive down costs, but this strategy does not take volatility into account. This volatility has three main sources:
- Increased geopolitical competition, which goes beyond the US-China trade war and is focused on broad issues such as technology and energy.
- Increasing domestic populism and nationalism, which encourages more inward-looking government policies.
- Transnational threats such as climate change, natural disasters, and pandemics such as Covid-19.
Taken together, these inputs have the potential for broad economic impact and require global solutions that are difficult to bring about.
Second, companies must think less about the “chain” and more about “supply chain mesh.” Labor and goods still matter, but trade has become more data driven and services oriented. Each input has risks that must be considered. For instance, governments are more inclined to apply a national security lens to industrial policy and technology, leading to a rise in “data nationalism” around the world. At the same time, data is a critical currency of global business. Global policies and regulatory frameworks have not kept up with technology, becoming a growing of competition and concern.
Finally, the present situation presents opportunities for both companies and investors that incorporate mesh thinking into their investment and commercial strategies. Some examples include adopting Environmental, Social and Governance (ESG) measures to make supply chains more climate friendly and responsive to customers, embracing automation, and exploring opportunities such as regional data centers.
Data will be key
With companies contending with more non-commercial external shocks, data can provide the real-time visibility to protect both the business and supply chains against disruption. One lesson during the Covid-19 disruption was that companies often do not see beyond their Tier 1 suppliers. If all competitors are sourcing from the same vendors, a disruption is bound to happen. Companies need to identify critical points of failure across the business and take a “longer-term mindset” to think of all inputs in concert.
ESG may seem like a buzzword today, but the principle of good governances has been guiding business plans for a long time. Being less wasteful is “good for the bottom line,” as Ms. Lim notes. Socially conscious behavior can be driven by consumers, shareholders, or companies, and can be a tremendous value driver for companies. For example, younger consumers, are more environmentally aware and tend to purchase fewer goods.
Businesses need consider this trend and the opportunities it provides. ESG behavior is being encouraged both on the “carrot” side, with tax and financing incentives, and on the “stick” side, with the expected development of ranking or scoring systems for corporate ESG behavior that will create competitive pressure for companies to change.
Supply chain strategies
The panelists noted several areas where companies are adapting their supply chains to decrease risk and increase efficiency.
- Trade regionalization – to add resiliency and shorten supply chains.
- Reshoring back to the US – to create additional balance.
- Adoption 3D printing – to shorten production and delivery times.
- Automation – to increase productivity levels.
The panelists stressed that it is “no longer business as usual” regarding supply chain management. Supply chains are highly complex and there are no “silver bullet” solutions. Successful companies in a post-pandemic world will be those that act to build in resiliency and understand the interlocking inputs that comprise their supply chains. In doing so, these companies will bring focus to managing a broader set of non-commercial risks, avoid wasting time on severing chains that cannot be decoupled, invest in resilience even at the cost of some redundancy, and advocate for better policy safeguards.