Four Compass Points for global supply chain management…revisited

From the September-October 2018 edition of Supply Chain Management Review.

September-October 2018

If it’s September, it must be time for Gartner’sTop 25 supply chains, the lead article in this issue of Supply Chain Management Review. As I was reading this year’s contribution from Gartner, I was struck by the…

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“The points on a compass have kept travelers headed in the right direction for hundreds, if not thousands of years, even as they sailed off into uncharted waters or ventured into new territories. Managers of global supply chains are in a similar boat as their ancient counterparts. Their world is changing rapidly as their companies enter new, unchartered territories and they confront a host of new cultures and broader trends.”

That paragraph opened “Four compass points for global supply chain management,” an article I wrote for the September 2015 issue of Supply Chain Management Review. Back then, the trends I believed were having the biggest impact on global supply chains were emerging markets, mega cities, millennial consumers and e-commerce. They were the unprecedented challenges staring down global supply chain managers as well as the areas for the greatest opportunities for innovation for those hardy souls who navigated their ways through the choppy waters.

Of course, three years is a lifetime in global supply chain management. For that reason, the time seemed right to re-visit the topic. For example, technological advancement has raised consumer expectations for the rapid and convenient delivery of products, while powerful economies are reshaping the contours of global trade. A spate of geopolitical events is adding new complexity to how organizations source, manufacture and sell their products.

Supply chain executives can work to maneuver through these challenges when they consider the following trends:

• online marketplaces;
• global trade;
• emerging technologies; and
• omni-channel.

As with 2015, think of them as four interconnected points on the supply chain compass—modern global supply chain managers who take them into consideration when designing their processes and networks will stay headed in the right direction. Let's take a look at each in turn.

Online marketplaces

When you consider that Jeff Bezos is the wealthiest person in the world and Amazon the second most valuable company on the planet, it's hard to remember that the online marketplace as a business construct is only two decades old and most of its impact on the global economy has occurred since the end of the Great Recession.

The advent of the World Wide Web and the growth of the Internet in the mid-90s allowed big companies, entrepreneurs and mom-and-pop-retailers to set up shop online. Most of them, including an IBM venture, failed. The present big four of e-commerce, Amazon and eBay in the United States, along with China's Alibaba and Japan's Rakuten, each started in the mid- to late-90s with limited formats.

For instance, eBay launched in 1995 as a listing site for collectibles, Amazon in 1994 as an online seller of books, Alibaba in 1999 for online wholesale trade and Rakuten in 1997 as a subscription-based virtual internet mall. Their transitions into full-fledged e-commerce marketplaces saw each through the burst of the dot-com bubble in 2000 and drove their spectacular growth.

In fact, Amazon turned its first profit in the fourth quarter of 2000, proving to the skeptics that its unconventional model could succeed even in difficult times. The exponential growth in e-commerce orders in recent years has transformed distribution centers from storage facilities to order fulfillment engines and has turned last mile delivery on its head.

Looked at through today's lens, it's equally hard to remember that it took more than a decade before the volume of e-commerce orders had any visible impact on the logistics industry. When viewed from an e-commerce perspective, the two critical components of logistics—transportation and warehousing—share traits with the real estate rental industry.

Both sectors involve the leasing of valuable assets and multiple layers of intermediaries, fixed-term contracts, complex taxation structures and, of course, regulatory compliances. That translates into red tape. The implosion of the housing market in 2007-2008 cleared the road for the way ahead for the digitization of e-commerce logistics.

As the writer Danielle Sacks noted in Fast Company: “Spawned by a confluence of the economic crisis, environmental concerns, and the maturation of the social web, an entirely new generation of businesses is popping up.” This was of course, about the emergence of “sharing economy” successes like Airbnb, Uber and Lyft, or to use Silicon Valley's preferred phrase, start-ups that enabled “under-used asset utilization.”

Airbnb's short-term lodging model came into being during the peak of the crisis in 2008 and had a disruptive impact on the hospitality services industry. In 2017, three million people in over 80,000 cities worldwide spent their New Year's Eve in Airbnb apartments. A recent Morningstar Equity Research report says that Airbnb is worth about $55 billion, more than any other hotel company, including the $46 billion Marriott International, the world's biggest hotel company.

Uber, the taxi-cab service aggregator, was founded in 2009 and has been such a spectacular success that it gave birth to the term “Uberization” to refer to the use of underutilized capacity or skills through tele-networked systems to provide highly economical and efficient services. Now, it's the logistics services industry that is ripe for Uberization.

And, without question, there is under-utilized capacity: Take warehousing, where in the United States alone there is about 4 billion square feet, or 30% of available warehouse space, lying unused on any given day—and it's worse in Asia where over half of the warehouse space goes unused.

But logistics services is not an easy nut to crack. Logistics markets in developed regions like the United States and Europe have strong entrenched players in the heavy freight, last-mile delivery and 3PL segments, such as UPS, FedEx, DHL, CH Robinson and others.

Logistics sectors in emerging economies like India and South Africa are highly fragmented markets made up of unorganized players. In a developed economy, a logistics service aggregator has to compete with well-established, large companies while in emerging economies an aggregator may have to onboard hundreds or even thousands of transporters and warehouse owners that operate behind a near-impenetrable wall of intermediaries.

Nonetheless, start-ups see challenges as a business opportunity and the logistics services segment is the biggest of them all. A recent Transparency Market Research (TMR) report envisioned the global logistics market, valued at $8.1 trillion in 2016, to reach a size of $15.5 trillion by 2023, rising at 7.5% CAGR.

The primary market drivers of the industry are technological innovations including inventory-aware automation, Warehouse Execution Systems (WES)—an evolution of Warehouse Management Systems, IoT platforms, improved TMS, data analytics and the digitization of the supply chain among many others.

Sustained growth in capacity and emerging solutions for cross-supply-chain visibility of shipments have birthed successful logistics e-commerce start-ups in the last five years such as Freightos, an online marketplace for freight forwarders and shippers; Saloodo, an online trucking marketplace; and DeLiv, a same-day lastmile delivery service, to name a few.

The warehousing industry is witnessing its share of game-changing startups such as Flex, Warehouse Exchange, Flowspace, Temando—a Cloud-based fulfillment platform—and Seegrid, which has brought robotics to material handling and counts Amazon and Boeing among its users.

These companies are posting growth in business and the kind of valuations one usually associates with proven e-commerce business models. Consider that the five-year-old freight forward company Flexport is valued at over $1 billion and helped more than 15,000 companies deliver goods worth $3.8 billion worldwide in 2017 and in April 2018 secured $100 million in the latest round of funding from China's SF Express courier company.

Kontainers, a UK-based company that developed the ship.mearskline.com platform for the world's most significant shipping line, has announced the launch of its ocean freight forwarding platform to be made available to European and North American forwarders in September this year.

Something similar is happening in the “warehousing on demand” space. Jonathan Rosenthal, a serial disrupterentrepreneur, founded Warehouse Exchange (WE) last year to aggregate unutilized warehousing space to enterprises looking for flexible and agile warehousing solutions.

Warehouse Exchange has partnered with Associated Warehouses Inc., a global 3PL consortium and with IBM Watson's Supply Chain Insight Group to integrate artificial intelligence and machine learning into its warehousing offerings. WE is also working on a co-warehousing concept that will help small e-commerce businesses share warehousing space and partake in the marketplace economy without having to build their supply chain infrastructure from scratch.

Online marketplaces for logistics services like these are well on their way to fulfilling a long-held promise—the Uberization of global transportation and warehousing networks—by utilizing unused capacity instead of building capacity for peak demand, and all of this at unheard of, highly economical spend.

Global trade

Three significant developments in the last two years have turned the compass point of international trade some degrees away from globalization into the direction of protectionism.

The first occurred in June 2016, when a majority of British voters supported leaving the EU. That was followed by a “Presidential Memorandum” signed by President Trump on January 23, 2017 directing the United States Trade Representative to withdraw the United States as a signatory to the Trans-Pacific Partnership (TPP), in favor of bilateral trade negotiations “to promote American industry, protect American workers, and raise American wages.”

The TPP was a proposed trade agreement between 12 countries including the United States that aimed to lower tariff barriers among the signatories and establish an investor-state dispute settlement (ISDM) mechanism. The third development occurred in July 2017, when the Trump administration revealed a detailed list of changes for an overhaul of the 24-year-old North American Free Trade Agreement.

That followed a series of talks between the trade representatives of the United States, Canada and Mexico that brought to the table, among other proposals, a “sunset clause” that seeks to end the agreement in five years unless the member nations vote for an extension.

Meanwhile, the U.S.-China trade row continues unabated as both sides exchange threats of new trade tariffs. What do these recent developments portend for the future of international trade? Is this the beginning of the end of globalization? Are we going back to the pre-1950s era of economic nationalism? And, what does it mean for global supply chains?

While these questions are debated by economists and policymakers across the political spectrum, we do know that international trade has contributed significantly to the growth of the world GDP. Global business accounted for 60% of the world's GDP in 2017, up from about 6% in 1820.

We also know that higher trade barriers may save and even increase jobs at home in the short run, but they also increase supply chain costs and decrease competitiveness. What's more, it is difficult for global, and even domestic, manufacturers to unwind complex supply networks.

General Motors' supply chain involves 20,000 businesses worldwide. Apple has suppliers in more than 30 countries across the globe. About 30% of a Boeing aircraft's parts come from suppliers outside the United States. Yet, given some of the recent geopolitical events, it may very well be time for big multinationals in the United States and elsewhere to rethink their global supply chains.

No growth without trade

Global trade, which began thousands of years ago as a means to acquire exotic commodities and technologies, has come to determine the fate of human societies. Indeed, the facilitation of commerce and trade between different countries, particularly during the last 70 years, has contributed substantially to the fast growth of the global economy and helped lift billions of people out of poverty.

To quote British economist Angus Maddison: “Between 1950 to 1973, the global per capita GDP rose nearly 3% a year; world GDP rose by nearly 5% a year and world trade by about 8% a year.” Following World War II, the rising superpower America articulated procedures for cooperation between nations as the U.S. pursued the road of liberal trade.

Together with other advanced industrial economies, the U.S. set down rational codes of behavior and created new institutions of cooperation in international trade such as OEEC, OECD, IMF, World Bank and the GATT. On 15 April 1994, 124 nations signed the Marrakesh Agreement to replace GATT with the World Trade Organization, the most significant economic organization in the world that deals with international trade in goods, services, and intellectual property, heralding in an era of multi-lateral agreements.

At present, the United States has bilateral free trade agreements with 20 countries and bilateral tax treaties with 60 countries. It also has multilateral trade agreements like NAFTA and the Dominican Republic-Central America-United
States Free Trade Agreement.

Bilateral and multilateral trade agreements have strategic benefits of their own; however, the ongoing trade disputes indicate that powerful economies now favor the bilateral approach over the alternative, including many in the Trump administration. In a recent article, Wharton management professor Mauro Guillen noted that bilateral plans could be viewed as more manageable for negotiators and companies that rely on them to gain market access.

“But bilateral deals risk treating some countries better than others. The United States already does this with its FTAs (free trade agreements) with Colombia, Israel, South Korea and many other countries in addition to Mexico and Canada. The issue [becomes whether] those bilateral agreements will be about free trade or about privileging some countries over others.”

Given that the United States has the highest GDP in the world, it certainly holds more cards at the negotiating table than most countries. On the other hand, U.S. multinationals would undoubtedly prefer multilateral agreements that create global standards as well as help them leverage global labor arbitrage and open up new markets.

Toward informed decision making

In a globalized world, it is imperative for governments, mainly the democratic capitalist U.S., to continue to promote fair trade and open access to the market. The U.S. must allow the ecosystem within the country to provide a competitive landscape to the multinationals, but to force them artificially through tariffs and other regulations will result in long-term damage to the fabric of the market economy.

It indeed appears that the American consumer will end up footing the cost of the ongoing trade row with higher prices for everyday commodities. It may not be evident today, but the cumulative effect will be adverse for everyone involved. The western hemisphere should find ways of constructive engagement with the world's second-largest economy and articulate fair trade practices through data-driven decision making.

What is at stake is more than one person's win or lose gambit—this is about a global trade that impacts billions of lives.

Emerging technologies

Emerging technologies are reshaping supply chain management, and attracting billions in private investment dollars. For instance, IDC estimated early this year that blockchain spending would reach $2.1 billion in 2018, more than double the $945 million spent in 2017.

The study said that the United States would see the most substantial blockchain investments and deliver more than 40% of worldwide spending. Western Europe will be the next most significant region for blockchain spending, followed
by China. A number of projects have been in the news.

This past August, the global shipping principal A.P. Moller-Maersk and tech giant IBM announced the creation of TradeLens, a global trade blockchain platform.

TradeLens uses blockchain smart contracts to enable digital collaboration across multiple trading partners including shippers, shipping lines, freight forwarders, port and terminal operators, inland transportation and customs authorities. Participants can interact through real-time access to shipping data and shipping documents, including IoT and sensor data ranging from temperature control to container weight.

Forbes has reported, “Collectively, the shipping companies account for more than 20% of the global supply chain market share, with 20 port and terminal operators in Singapore, the United States, Holland and more, serving 235 marine gateways around the world.”

TradeLens is not the only player in the fray. Tradeshift, a supply chain payment and marketplace startup valued at over $1 billion recently reported a 350% increase in gross merchandise volume on Tradeshift's platform compared with a year ago and a 315% yearover-year rise in new bookings.

Globally, organizations have been taking advantage of blockchain technology to improve traceability in their supply chains. Last year, IBM announced that ten food companies including Nestlé, Unilever, Walmart, Golden State Foods, Kroger and McCormick and Company had agreed to identify new areas where the global supply chain can benefit from blockchain.

Walmart, for instance, sees blockchain as a way to improve the freshness and safety of food in its supply chain. Frank Yiannas, Walmart's vice president of Food Safety and Health, revealed to an audience at an MIT Technology Review's Business of Blockchain conference that blockchain was able to shorten the time it took to track produce from six days to two seconds.

In June this year, Walmart was awarded a patent for a system that would store medical records on a blockchain from a medical device. Walmart has also recently filed a patent for a blockchain-based customer marketplace for reselling
its goods.

In the academic realm, this past August, the USC Marshall Centre for Global Supply Chain Management, where I am the director, brought together industry leaders, tech investors and innovators at its Sixth Annual Global Supply Chain Summit to launch IBISC, an initiative that aims to partner and collaborate with governments and multinational companies to drive future best practices and standards for the adoption of blockchain.

Artificial intelligence (AI) and machine learning are also enabling digitized supply chains to predict customer demand and integrate internal and external stakeholders for effective collaboration across the value chain. Leveraging the machine-learning capabilities of IBM's Watson, IBM launched Watson Supply Chain last year. It focuses on creating supply chain visibility and gaining supply risk insights.

The system uses its cognitive technology to predict supply chain disruptions based on external data from social media, news feeds, weather forecasts and other sources of historical data. Tania Seary, the founder of Procurious, a social network of procurement professionals, reported: “Watson supported $71.7 billion in revenue, managed 150,000 contracts, and supported 20,000 professionals and 11,000 suppliers to ensure 5,000,000 deliveries were made.”

Omni-channel

An omni-channel supply chain enables sales, inventory management, ordering, order fulfilment and final delivery via numerous retail channels such as web, stores and mobile. Omni-channel implementation requires an organization to integrate omni-channel retailing with IT, sales and marketing, procurement and transportation.

The advent of retail omni-channel is changing the way retailers ensure consumer satisfaction. Fulfilment centers work round the clock and have reduced errors and delays to a bare minimum. On the other hand, omni-channel retail has also changed the way customers interact with brands.

The omni-channel phenomenon was brought into the mainstream by Amazon Prime in 2005. Amazon's new program, which promised subscribers free two-day shipping on qualified items, was designed to improve loyalty and drive sales growth. Over the years, it has had a significant impact on Amazon's success.

But Amazon is not alone. In July this year, Alibaba, the Asian e-commerce leviathan, debuted its new FashionAI, a concept store that integrates smart mirror technology with RFID, machine learning and computer vision to introduce mix-and-match styling options to its consumers through every platform.

Likewise, footwear leader Nike has launched a concept store in Los Angeles that utilizes digital data from the user community to bring in-store omni-channel experiences to the customers. These are just some of the ways companies are employing the power of predictive and prescriptive analytics and machine learning to extract insights from data, increase speed-to-market and improve agility to deliver the omnichannel experience.

Navigating through supply chain evolutions

I'd like to end this article similar to the way it began—by revisiting my original piece. Despite the changes in global supply chain management in the last three years, the takeaways are still relevant.

“What then should a supply chain manager make of these trends? And, how do they use them as compass points for navigation? We believe the layering of each of these factors can assist organizations in traveling the rapidly shifting waters of supply chain. None of the four compass points of modern supply chain management are fully distinct; rather, they point to an increasingly global world that demands an increasingly technology-driven global supply chain.”

In the coming years, online marketplaces, global trade, emerging technologies and omni-channel business models will continue to re-shape supply chains. The best organizations will balance these demands in order to stay relevant with their stakeholders.

SC
MR