Tuesday 30 May 2023
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This article first appeared in Digital Edge, The Edge Malaysia Weekly on December 21, 2020 - December 27, 2020

The globalisation of trade and decades-long innovation in supply chain networks have resulted in significant benefits for all stakeholders — greater efficiencies, lower costs, greater access to markets, to name just a few. Yet, Covid-19 has exposed vulnerabilities in global supply chains.

Dispersed supply chains offer more possibilities for shocks to penetrate and spread, while practices such as JIT (just-in-time) and single-sourcing can amplify shocks and lengthen recovery time.

Which begs the question: Why were companies not better prepared? After all, academics and practitioners have been stressing the importance of agility and resilience in the supply chain for decades. They have advocated diversification in order to equip value chains to handle demand and supply shocks.

The problem, however, is that in good times, companies are unwilling to make the larger investments that have always gone along with diversification, in the form of complexity and coordination costs.

The choice is to either economise with a concentrated supply chain structure that increases crisis vulnerability, or build in expensive redundancies to prepare for a rainy day that may be a long way off. This cost-agility trade-off leaves conscientious companies splitting the difference between present realities and projected future demands.

A careful look at how some firms effectively responded to the crisis due to Covid-19 reveals that this trade-off can be broken, opening a new, more effective, supply chain frontier.

Is it possible for firms to enjoy the “best” operating model depending on the operating conditions of the moment (for example, diversified during periods of high volatility and concentrated in stable periods)? In other words, can firms swiftly and seamlessly shift their supply chain structure not just during the crisis but also post-crisis without ruining their business due to the costs of pivoting and restructuring? The answer is yes.

During Covid-19, hospitals were able to use online platforms to access and share crucial supplies of personal protection equipment (PPE) and ventilators. Tech giants such as Alibaba Group Holding Ltd used their shopping and logistics infrastructure to support farmers in Hubei to revive sales post-lockdown. Apple Inc and Huawei partnered with delivery platform Meituan Dianping to deliver smartphones to customer’s doorsteps. Rungis, one of the world’s most iconic food markets in Paris, was able to overcome the lockdown of its B2B business by connecting a much diversified supplier base with a relatively concentrated pool of institutional food/hospitality  companies by starting a new B2C business, Rungis Livre Chez Vous (Rungis Delivered to Your Home) in partnership with a five-year-old start-up.

The bond-market trading platform MarketAxess, which had struggled to break into the institutional bond markets that relied largely on personal contacts, was able to leverage the supply spike in corporate bonds due to corporates rushing to shore up their finances, and an ecosystem of traders and investors with no option other than work from home.

The common denominator is that these businesses tapped platform solutions to absorb demand-and-supply shocks and improve the agility of their supply chains. Platforms allowed these businesses to gain access to multiple, diverse and reliable suppliers and customers that were previously inaccessible, or were too costly to reach. In addition, these businesses benefited from platform-enabled policies and processes, focused on assuring quality and building trust among businesses and suppliers.

And it was not only legacy businesses that benefited from partnering with platforms. The first wave of the pandemic saw platforms teaming up with one another to increase and diversify their reach. Alibaba itself tapped the online freight platform Freightos to serve its international buyers and sellers. Nairobi-based Twiga Foods, Africa’s leading B2B agtech start-up, responded to profound demand disruption from its outlets by collaborating with B2C e-commerce firm Jumia to reroute its fresh produce to Jumia’s end-customers. Thanks to their platform technology, these two firms were able to merge their diverse demand-and-supply pools in the face of unprecedented crisis.

But are these observations enough to conclude that integration with platforms is the inevitable future for every supply chain? There is no doubt that platforms give participating firms the advantages of diversification, but they are not without cost. Indeed, platforms offer lower coordination costs than a firm would incur on its own in attempting to diversify its supplier and/or buyer pools, yet the transaction fees charged by such platforms can be significant.

Platforms acting as intermediaries also present a potential threat to participating firms by controlling the flow of information in the value chain. Moreover, in the post-crisis period when volatility declines, the economic advantages of platforms may disappear (for example, Apple may not prefer to continue to use food delivery platforms to deliver iPhones in China post-Covid, especially when customers are ready to flock back to stores).

Therefore, the next step in moving the supply chain frontier would be for firms to increase or decrease their degree of engagement with platforms, depending on their current operating circumstances.

Firms can attain such a high degree of agility by proactively investing in a robust platform technology stack including cloud computing, API (application programming interface)-led connectivity, and integrated data systems. Firms that ensure that the platform technology stack is integral to their IT and business strategy will be able to swiftly plug into multiple third-party platforms or build their own network of suppliers and buyers in the long term.

Note that these technologies independently provide firms with operational advantages such as cost savings due to automation, supply chain transparency and data-driven business intelligence. However, combined use of these technologies gives firms platform-enabled agility without a substantial increase in their operating costs.

The platform technology stack has been discussed in the recent past due to its ability to provide economies of scale, scope and learning (intelligent automation) to firms. An additional compelling advantage of such a stack is to permit firms to operate a digital platform-enabled operating system, which gives them the agility to swiftly and cost-effectively shift its supply chain structure as needed to deal with the circumstances. Platform-enabled firms have displayed markedly greater resilience during Covid-19.

We believe digital platform-enabled operating systems should be central to the firm’s strategy in planning and building an agile supply chain that can respond to supply-and-demand shocks and easily revert to steady-state operations when the crisis subsides. The future of agile supply chains lies in operational agility, which will be generated by the technological architecture of firms rather than an operational strategy choice alone.

Aarti Gumaledar is Emergentech Advisors director, Sameer Hasija is INSEAD professor of technology and operations management  and V Padmanabhan is INSEAD professor of marketing

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