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Supply chains must change - does the circular economy provide a better model? IFS weighs in

Jon Reed Profile picture for user jreed August 3, 2022
Summary:
Companies have been in reactive supply chain mode for several years now - it's time for that to change. But fresh data from IFS shows that new sourcing tactics create new problems. Does the circular economy provide a better model? Time to go behind the numbers.

Circular economy - hand holding grass sustainability loop with choice of globes © BsWei - shutterstock
(© BsWei - shutterstock)

It's time to advance the supply chain conversation. Enough of the volatility and logistical barriers - what are we going to do about it? A recent IFS study, Large enterprises, forced to innovate by supply chain disruption, see costs and complexity ramp up, documents the situation.

One thing jumps out: companies are now taking decisive action, expanding and localizing their networks.

  • Seven out of ten respondents polled for the survey (70%) said they had increased the number of suppliers of materials/products they use in response to recent supply chain issues.
  • Nearly three-quarters (72%) of the survey sample claimed to have grown the proportion of materials/products they source from domestic suppliers as a result of these issues.

Supply chain data - the circular economy force the issue

But these actions created new problems. Via this survey of 1,450 supply chain decision-makers, IFS found:

Together, these innovative measures are also likely to add more complexity and waste into the supply chain, at a time when increased regulatory burdens (highlighted by 15% as a primary contributor to their current business disruption) and the need to tap into the many benefits of the circular economy is making supply chain management more complex.

That's not the only obstacle:

Many are facing challenges in terms of delivering on their goals, with around 60% of those saying they are in the process; still developing objectives; yet to plan programs; or have their objectives on hold.

You probably noticed I skipped over the phrase "circular economy." I'm not a huge fan of the phrase - I find it to be more like science fiction than reality. Don't get me wrong - I would love a truly circular economy, where all manufactured waste and disposable externalities were put right back into needed deliverables - who wouldn't?

I'm going to have to reckon with this buzzword after all, because IFS found:

It is positive that 93% of respondents said their organization was either embracing the circular economy today or planning to in the future.

Customers clearly need a framework to manage supply chain change, and measure progress. Time for context, via a video chat with Antony Bourne, Senior Vice President - IFS Industries. If companies want to face these problems effectively. Bourne sees three factors: visibility, predictability, and sustainability.

He began with visibility:

A company has to be able to see what the demand picture is for their products or services, and what the supply picture is. IoT is part of the jigsaw, not just getting data in, but using AI and machine learning to help make their lives easier.

For example?

It can be anything from looking at transportation coming through, and getting data for when that container or lorry is going to be received - because if it's delayed, then they'll need to do something about it.

For supply chain predictability, external data is needed

When it comes to AI/ML, you get my attention when you start talking about integrating external data sources - data that has a critical impact on supply chain planning. Most legacy planning tools can't handle that. I was glad to hear Bourne bring up external data early and often:

We've got capabilities to take in weather predictions, because that can have a big impact on supply chain. You want to make sure that you're satisfying your customers. At the end of the day, you don't want that much scrap.

And what about predictability? Bourne:

How confident am I that I can meet, for my existing supply chain, the demand that's been forecasted? Again, technology is an enabler there. But it's not just a case of ticking that box; you need to be able to have it in that use case. So again, looking at the demand picture, how has it changed over the years?

Are there external sources that I can use in my machine learning to help increase the predictability of that forecast? Then I can start looking at my supply chain, and how to meet that. And again, we've got capabilities.

Historically, MRP was really an internal discipline. Bourne believes customers need "demand-driven MRP." That's an externally-driven practice, focused on shortening lead times, adding "strategic buffers" to your bill of materials. And what about sustainability? Bourne:

Fuel prices are going through the roof at the minute. So bringing it back to near-sourcing, it's a case of: is that a better option? Is that an option to reduce my carbon footprint to be more sustainable? But it comes at a price in a lot of cases. So a company may say, 'The price of my product is going to go up. Can I bear the brunt of that? Or can I use it to my advantage and talk about it from a sustainability angle?'

Consumers like the feel-good factor when we buy something, but not everybody can afford to pay that premium for a sustainable product. So it depends on where the customers are, in that journey or in that market.

The circular economy - why should customers care?

Okay, I'll bite: why should customers care about a circular economy?

For example, Volvo Trucks. They use our system to do circular manufacturing; I think 80% of the engines can be reused. Going back to your point about supply chain issues, if I get engines back in; I can take them apart, check them, make them as good as new again, and put them back into the warehouse.

I do not have to buy anything then. I'm not subject to the fluctuations in the travel costs, things like that...  I won't stop preaching about the environmental aspects of it. We don't want to continue digging up, mining for gold and precious metals.

But from a consumer point of view, I will still buy a product; it will still have the same warranty, like the laptops we're getting. A lot of that is coming back in through the supply chain as well. They're making better use of the components they've got, or used already. So it's more beneficial to companies rather than consumers. But if they can market it accordingly, then [it can be effective for consumers also].

My take - supply chain excuses are out, bold changes are in

The supply chain conversation needs to change. There are three points we can't run away from: supply chain volatility is a permanent constant, not a pandemic hangover. And: no more excuses. Bourne has a strong view on this:

If you want to buy a product now, and they say, 'Yeah, we can't deliver it to because of the pandemic.' You say, 'Yeah, absolute nonsense... You're just covering up your inefficiencies.'  During the pandemic, our customers embraced the chance to improve their opportunities with their customers.

Yes, companies are out of runway to play the pandemic card. That doesn't mean that creating a fluid, adaptable supply chain is easy. Bourne sees plenty of opportunities for vendors to help, giving companies better visibility than they've had. He believes digital twins can make a big difference here:

Everybody has been talking about digital twins for asset management, but from a result point of view,  you want to be able to see and manage what your company is going to do... You want to see, 'Okay have I got enough suppliers in place? Do I need to increase my dual sourcing,' because you don't want all your eggs in one basket. You want to be able to say, 'Okay, I want to be able to bring some of it more local,' to be able to react.

It doesn't stop at local and multi-sourcing. Bourne says about 60% of companies want to make more of their supplies internally, rather than source them externally. Bourne thinks this should add some momentum to 3D printing as well.

Supply chain visibility is a worthy use case for a digital twin; I'd like to document that via a future use case. As for my aversion to the "circular economy" phrase, I don't mind it as an ambition. Companies that excel with "circular" processes will find ways of bringing those benefits back to the consumer, one way or the other.

The third point? Companies that fall back on just-in-case inventory levels aren't going to thrive. There's just too much pressure from investors - and the executive team - to squander working capital by tying up resources in risk-averse inventory levels - "assets" that may not even reflect future demand. I'll give Bourne the final word on this:

Many companies don't have appropriate technology in place. You can imagine the CFO saying, 'Why the hell is my inventory now $10 million? Pre-pandemic, it was like $6 million?' 'Oh, yeah. Because of the supply chain nonsense.'

It's just wasting money in a warehouse. If they've got appropriate capabilities to look at demand, to look at supply chain, not just have a single source of shipping containers coming across. Look at dual sourcing, look at how I can add some predictability into my supply chain - and visibility.

I'd say that's a pretty good call to action.

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