Interview: Navigating Parallel Paths of Innovation and Supply Chain Challenges
(Pic Courtesy: NCSU)
As we delve into the intricate world of procurement and supply chain management in 2024, it's clear that the landscape is undergoing a significant transformation. With the advent of cutting-edge technologies like generative AI and digital twins, and the evolving strategies in inventory management, the function is facing both challenges and opportunities.
The shift towards more efficient models and the strategic diversification in global supply chains, including nearshoring and reshoring, are reshaping how companies approach procurement and supply chain logistics.
Beroe spoke with Dr. Rob Handfield, Professor of Supply Chain Management at North Carolina State University (NCSU), to gain a clearer understanding of the expected trends in 2024 and how companies are adapting to the ever-changing landscape of supply chain management.
It was 9.30 a.m. in Raleigh, North Carolina, when Prof Handfield received Beroe’s call.
Sakthi Prasad (SP): Hello Rob, could you highlight the key trends you believe will significantly impact procurement and supply chain management this year, particularly in a practical context, for 2024?
Dr. Rob Handfield (RH): In my opinion, there are several groundbreaking technologies emerging that will significantly influence procurement. The most notable of these is generative AI, like ChatGPT. This technology is still quite new and feels like uncharted territory, but it has immense potential. For example, it can create various scenarios, gather information on specific topics, and assist in structuring negotiations by providing comprehensive information, like analyzing a company's 10-Q report to understand a supplier better. However, its source of information can sometimes be unclear, so caution is needed. We're expecting a range of new generative AI tools this year that will harness this budding technology.
Another major trend is supply chain resilience, which is a top concern for many. Current events like the Suez Canal blockage by Houthi rebels and the Panama Canal drought are causing significant disruptions in global shipping, affecting oil, gas, and component part deliveries. These incidents highlight the vulnerabilities in major shipping routes. Additionally, geopolitical tensions, such as those involving China, Taiwan, Ukraine, Israel, Gaza, and Iran, are causing further disruptions. Moreover, weather events linked to global warming, like El Niño, hurricanes, and winter storms, are increasingly affecting supply chains. It's crucial for organizations to not just monitor these issues but also engage in proactive measures like Wargaming and scenario planning.
A particularly exciting development is the advent of digital twins, which are closely related to enhancing supply chain resilience. Companies can use digital twins to simulate various scenarios and employ AI to devise new solutions. These AI-driven solutions can learn from past disruptions to propose effective strategies. Digital twin technology is offering a new set of tools for procurement and supply chain logistics managers.
Lastly, a significant shift in global economics and logistics is the rise of nearshoring and friendshoring. The reliance on China is still strong, but there's a noticeable increase in investments in countries like Mexico, especially from the U.S., signaling a geographical shift in production and supply chain strategies.
SP: Professor, the start-up ecosystem in the procurement technology sector is notably vibrant. There are numerous start-ups offering solutions that can fit into the Source-to-Contract (S2C) process, as well as the Procure-to-Pay (P2P) process. I'm curious about your views on these emerging technologies. In particular, which areas within S2C and P2P, be it upstream or downstream, do you see procurement teams more actively adopting solutions? This question is relevant considering the complexity of emerging technologies like AI and digital twins, which many procurement teams might not be ready to embrace immediately for various reasons. Yet, there are practical solutions available throughout the supply chain, whether in upstream S2C or downstream P2P. What trends or patterns are you observing in the industry? And where do you see significant adoption or traction occurring?
RH: Indeed, we're witnessing the rise of more tactical Procure-to-Pay (P2P) technologies. For instance, robotic process automation is becoming more prevalent, utilizing bots to automate certain tasks. Additionally, AI technologies are enhancing efficiency significantly. A practical example is in handling supplier communications. Where previously a staff member might arrive to a backlog of supplier emails, AI technologies can now sort through these, responding to queries like payment status or invoice approvals, and even provide suggested actions for the remaining messages, reducing the workload on procurement staff.
Another area of development is the integration of procurement and market intelligence. This involves merging internal data, like spend data, with external data sources. Tools like Power BI and other cloud-based systems are facilitating better data visualization, helping to identify trends and enable self-discovery within procurement processes.
Furthermore, the COVID-19 pandemic has dramatically accelerated the focus on supply chain technology. What was once a less emphasized area has now become a hotbed of innovation, with a surge in start-ups focusing on supply chain solutions. For instance, at a recent event by the National Retail Foundation, there were over 1,600 tech start-ups showcasing their solutions, indicating a significant boom in this sector.
SP: Alright, shifting the focus to upstream procurement, Professor, specifically in the Source to Contract (S2C) domain, could you share your insights on the trends you anticipate in this area?
RH: Yes, Source-to-Contract (S2C) technologies are indeed on the rise. They're evolving to allow contracts to be linked with various events, notably through the use of blockchain technology. This integration enables the monitoring of external events in relation to contractual terms and conditions, which can influence factors like pricing and other contract specifics.
Additionally, there's significant innovation happening in trade finance. For instance, I've worked with a platform, which allows suppliers to instantly access trade financing terms and receive payments promptly upon submitting an invoice, simply by clicking a button. So, we're seeing some really fascinating developments in the area of trade finance as well.
SP: Market intelligence, or MI, is traditionally utilized by procurement teams mainly during the sourcing phase and typically concludes once contracting is finalized, thus primarily within the S2C phase. However, considering the current era of AI, where data can be extensively analyzed and interpreted across various systems, do you believe that market intelligence can be effectively implemented throughout the entire Source-to-Pay (S2P) process? Is it feasible for a company to integrate MI at every stage of this chain? If so, how might this be achieved?
RH: Absolutely, that's an excellent observation. Market intelligence is no longer confined to just the sourcing aspect. It can indeed be a valuable tool in every stage of the contract and agreement lifecycle. Consider this: once a contract is signed, it's crucial to keep a continuous watch on market developments. This includes monitoring fluctuations in raw material costs, changes in labor expenses, assessing market conditions, and keeping track of supply chain disruptions. It's also vital to stay updated on emerging technologies. All these factors play a significant role and need ongoing attention as part of any category strategy. So, the integration of market intelligence throughout the process represents a significant shift and an important development in procurement strategies.
SP: Okay, so you envision that market intelligence can be effectively utilized throughout the entire cycle, from sourcing to the payment of invoices, facilitated by technological advancements. The era when MI was solely provided through reports, like PowerPoint or PDF documents, is behind us. With data and information being digitized, it seems much more feasible for it to seamlessly integrate and flow across various processes, right?
RH: Absolutely. With the digitization of data, as you mentioned, the ability to update information becomes much faster. For example, we're seeing the rise of cost-based contracts, where a portion of the cost might be linked to an external market index, allowing for adjustments over time. Similarly, in large project management, payments can be tied to the achievement of specific milestones or based on work hours each month. This presents numerous opportunities to digitize various work, production activities, and link them to contractual terms and payments.
There's an emerging range of tools designed to digitize work done by suppliers and connect it directly to the payment process. Additionally, when external factors come into play, digitizing these elements and integrating them into performance tracking and quality service metrics becomes invaluable. This integration can feed into a dashboard, facilitating not just quarterly business reviews but also real-time monitoring. Unlike the traditional approach where data was manually downloaded and formatted for presentations and reports, today's technology enables instant access to this information at the push of a button. The key advantage here is the availability of real-time data, eliminating the delay in data compilation and enhancing immediate visibility and decision-making capabilities.
SP: Moving forward, reflecting on last year, our primary concern was excess inventory. You mentioned it would take companies around six to eight months to deplete their inventory levels. Could you update us on the current inventory situation? What is the status of inventory management at present?
RH: Yes, the current inventory situation is significantly more dynamic. Organizations now have a much clearer understanding of their inventory levels, thanks to improved visibility. Additionally, their forecasting capabilities have advanced considerably, allowing for more accurate predictions of seasonal fluctuations and other variables. This enhanced forecasting ability is making a substantial difference in managing inventory more effectively and determining necessary stock levels. Furthermore, this situation has also led to increased supplier collaboration, which in turn contributes to reduced inventory levels. Overall, the previous trend of inventory build-up has decreased substantially. Companies are now employing more sophisticated and effective strategies to manage their inventory.
SP: So, the issue of excess inventory that was a major concern for companies last year is no longer a problem. Essentially, that challenge has been resolved?
RH: I would agree to a certain extent. It's not that the problem of excess inventory has completely disappeared, but the situation has definitely improved. Companies are becoming more adept at monitoring their stock-keeping units (SKUs) and have a clearer understanding of their inventory requirements. Overall, my assessment would be that they have significantly enhanced their inventory management practices.
SP: The concept of Just-In-Time (JIT) inventory management, especially during the pandemic, faced a lot of criticism and divided opinions. There were two main schools of thought: one argued that JIT was the root cause of the chaos and stockouts, while the other believed that it wasn't JIT that failed, but rather the planning around it, considering the pandemic was a once-in-a-century, “Black Swan event” that overwhelmed all systems. As things normalize, there's a question of whether JIT will regain its prominence. What are your thoughts on this? Based on what you're hearing from the industry, is JIT still being favored or shunned by companies? Are they reverting to JIT methods?
RH: The criticism of Just-In-Time (JIT) during the pandemic largely stemmed from its application in contexts where companies relied heavily on global sourcing, particularly from countries like China, while still adhering to JIT principles. This approach was problematic, considering the extended shipping times and reliance on everything proceeding flawlessly, which is often an unrealistic expectation. However, the concept of JIT itself isn't flawed. It's about the application.
Originally pioneered by companies like Toyota and Honda, JIT was highly efficient with local suppliers who could deliver products daily, adjusting to product variations and production volumes. This close proximity between buyers and sellers reduces the need for extensive inventory as lead times are shorter. The essence of JIT is effectively managing the reorder point, which remains a valid approach.
JIT is evolving rather than disappearing. There are systems like vendor managed inventory, where suppliers have visibility of their inventory at the customer's facility and can manage it more effectively. We're also seeing innovative approaches like supplier managed warehouses located close to the facilities they serve, hosting multiple suppliers. These new methods are creating unique and efficient JIT adaptations.
SP: What's the current state of reshoring in the U.S., considering that India is still attracting investments, albeit not at the scale of China, but still significant due to the China plus one strategy? Given that both major political parties in the U.S. have emphasized the importance of bringing manufacturing jobs back to the country, how is this reshoring or nearshoring trend unfolding in relation to the U.S.?
RH: Currently, there's a noticeable shift towards greater nearshoring, particularly in the U.S. where there's a trend of moving operations to Mexico. Similarly, there's a growing movement towards Eastern Europe and South American countries like Brazil. This change reflects companies' efforts to redesign their global supply chains due to various challenges and shifts in the global landscape.
Additionally, many industries are diversifying their supply chains away from traditional centers. We're observing increased trade and manufacturing activities in countries like Vietnam and Indonesia. This diversification is part of a broader trend where companies are reevaluating their dependence on specific regions for manufacturing and supply.
While certain categories of goods and services remain heavily reliant on specific regions due to their specialized manufacturing capabilities and cost efficiencies, there's a strategic move to diversify for various reasons, including national security considerations.
In terms of the semiconductor industry, it's recognized that certain hubs, known for their intellectual capital and technological advancements, play a critical role. These centers are irreplaceable in the current global supply chain due to their unique contributions, particularly in advanced technologies like semiconductors.
Overall, the trends in onshoring and reshoring are evolving, shaped by a complex mix of economic, strategic, and geopolitical factors. It's an interesting and dynamic period for global supply chain management.
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