SAP - a bumpy road ahead for global supply chain management

Gary Flood Profile picture for user gflood June 14, 2022 Audio mode
Summary:
As firms give up on both just in time and globalization, is there a way to restructure procurement that doesn’t hurt the consumer or the bottom line? SAP thinks there just might be

Image of a truck delivering goods as part of supply chain

A combination of post-pandemic supply chain bottlenecks and Russia’s invasion of Ukraine have forced corporations to move from a ‘just in time’ way of accessing products and parts, to stockpiling (or ‘just in case’).

If that’s true, that would mean an end to a half century of focusing on cost as the main factor in sourcing and keeping inventory as low as possible—and a move to so-called ‘safety stock’ accumulation.

It would also be counter to the other major global business trend of the past three decades - globalization.

These global shifts were recently highlighted in a poll of 200 UK business organizations, surveyed by ERP giant SAP.

Its study says 84% of the businesses it contacted are planning to move on from just in time.

Results also show that even though 72% of UK businesses think deglobalizing the UK’s supply chains would be disastrous for economic growth - over half, 56% still plan to prioritize UK-based supply chain solutions.

Challenges supply chain issues have presented include delays in production of goods/delivery of services (66%), decreased revenues (64%) and experiencing a loss of customers as a direct result (58%).

In response, 68% plan for pay and recruitment freezes, 61% plan job cuts - while 23% expect supply chain issues to last until Summer 2023.

Chillingly, these results were gathered before the outbreak of the Ukraine war, SAP confirmed, which has raised fears around wheat, grain, and key raw materials shortages,

While supply chain problems are global, the crisis is exacerbated in the UK, added Unipart - an SAP customer that runs major supply chains in the country for the NHS, Jaguar Land Rover, Vodafone, and Sky - by Brexit, which has had particular impact on the recruitment of extra labor. Speaking at the press launch of the findings, the company’s global Logistics Managing Director, Ian Truesdale, stated:

With Brexit and the impact of the pandemic around the world, and now with the war in Ukraine and the impact of that in Europe and the supply of goods, we've been going through the biggest disruption to the supply chain in my 35-year career in operations. At least for a period, supply chains will be less efficient, more fragile, less flexible, and more costly.

People use the word ‘unprecedented' a lot, but it is pretty much unprecedented. I've never seen anything like it.

A retreat from globalization?

Some 15-20 years ago, he added, a simple solution to reducing supply chain cost was to outsource manufacturing to Asia. Companies were happy to pay for the resulting increased freight cost, as their overall end-to-end supply chain cost was reduced.

But in the immediate future, that trend will be reversed, with a return to nearshoring and onshoring - manufacturing and assembling products closer to home. 

The move to ‘just in case’ will therefore almost certainly result in added cost for consumers and put severe pressure on margins, added SAP. This is because, historically, markets either put up prices to reflect inflationary pressure, which hits the customer, or absorb some price rises and reduce their margin, which then possibly puts their own long term sustainability under pressure. Michiel Verhoeven, SAP’s UK and Ireland Managing Director, sums up the problem as:

If you're a manufacturer or a producer of goods, obviously it's very difficult to pass on inflationary pressures all the way to the end consumer. The just in case model means you are increasing your safety stock and the number of locations in which you have that stock - so clearly, your working capital is going to go up, and your profit pressures are going to increase. That's an additional effect in addition to the higher input prices. So, businesses and consumers are stuck.

However, the vendor suggests there is a ‘third way’ out of the crisis, with its Industry Value Advisor, Retail, Shaid Latif, claiming:

We believe businesses should use their data, systems, technology, and business network to find alternative sourcing and alternative options for supply and pricing.

These will give you a more solid supply chain foundation, and an opportunity not to have to do either of those things.

‘Network’ here should be taken to mean the German enterprise software giant’s own ‘Ariba’ system, which numbers 6.7 million members.

Such networks can be used to find new local suppliers, as well as forge new, longer-term commercial relationships to ease pressure, recommends the company. 

In SAP’s case, during the pandemic it found suppliers in places it didn't expect, Verhoeven claimed, both locally, as well as regionally and globally. He added:

This network is twice the size of Alibaba and Amazon combined - so why would you not want to participate as a company in an expanded network, especially if you're short of supply and you want to have clarity and traceability of where the goods are in the supply chain?

Users should explore whatever they can to improve sourcing

SAP also believes CEOs need to be looking for better business process visibility from the moment they design and manufacture products to spot opportunities for cheaper or more dependable sourcing of parts.

This could be a practical solution, added Stephane Crosier, who leads supply chain activity at SAP partner, Accenture. He said:

There are many, many things you can do to increase the resilience of your supply chain in the long-term, like looking at alternative sources of supply, alternate logistics, but also new thinking about product design and simplifying there. You need to focus on what's going to have the biggest impact on securing your business and improving resilience - and for that, for sure visibility is key.

Accenture also believes digital twin modelling of a supply chain can also be a useful way to spot possible optimization routes.

To some extent, Unipart’s Truesdale agrees with a possible tech and network-based way out of the supply chain crisis - but says society should still brace for a bumpy immediate future. They said: 

I think certainly some of these findings are absolutely correct in the emphasis on the need for increased levels of visibility, more investment in digital tools to enhance supply chain accuracy and the ability to be more granular at the SKU-level across the network. 

It'd be great if there were some simple solutions to the problems that we're facing, but there aren’t. It's going to be a very difficult time for people operating and running supply chains.

My Take

SAP isn’t the first to call out the move from JIT to JIS. And it would be tempting to say that there’s a hidden sales message here for both its product stack and, especially, Ariba membership.

However, the real-world experiences of stakeholders like Unipart and the global view of these trends by Accenture, as well as the hard data in the study, makes the idea of a way out of the 2022 supply chain smash-up that minimizes harm to both Wall St and Main St is certainly worthy of serious attention.

The full study, Tomorrow’s Supply Chain: Disruption Around Every Corner, is available here.

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