Towards a new paradigm in supply chains: The holistic supply chains

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Towards a new paradigm in supply chains: The holistic supply chains

Towards a new paradigm in supply chains: The holistic supply chains

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Mar 10,23

The 'holistic’ supply chain (HSC) is a new development, the next step in the evolution of supply chains. In essence, an HSC is a derisked, potentially high inventory holding alternative to resilient supply chain, says R Jayaraman.

Towards a new paradigm in supply chains: The holistic supply chains

As businesses age with time, and technologies overwhelm the practitioner, some things don’t change. A manufacturing company has to still buy its raw materials, consumables etc., from either outside or make it in-house. When done inside, it forms a part of the value chain within the corporate boundary. However, if it sources from outside, which is often the case, then the supply chain comes into action. Take, for example, a steel company. Many of them buy iron ore, coal and other minerals from the market. A telecom company buys its cables, the antenna electronics etc., in the market. A car company usually makes the engines in-house, but buys the electronics, mechanicals etc from outside.

Covid gave a big jolt to this rather peaceful looking state of affairs. It brought into focus something which supply chains had not encountered significantly – disruption. To a manufacturing company, disruption is an anathema. Given the fact that system inertia is well known, most manufacturers struggle to keep their lines humming all the time, as a start and stop operation will lead to a lot of waste and cost inefficiencies, due to the ‘inertia’ effect. Lean manufacturing brought a lot of relief, as it fine tuned the machine operations, so that start and stop can be minimised even while changing products on line. A good example of this is an automobile assembly line, where, Toyota can manufacture three cars of model A, two of B and so on, one after another, continuously. Lean manufacturing was perhaps the first step towards a ‘holistic’ supply chain or HSC. Lean, when combined with Just In Time (JIT), leads to ‘chained’ supply chains. Which is to say, the supplier and the buyer are very tightly connected. Any disruptions in any one can affect the other sooner than later.

The 1980’s were the years of lean, TQM, high quality manufacturing in large volumes. In this scenario, the western businesses discovered China. Their efforts to practice TQM, lean etc., did not lead to the kind of growth and expansion they were looking for. Moreover, to gain a competitive advantage, they chose cost as one of the key drivers. So started the biggest binge in supply chain history. Large western corporations, like Apple, made a beeline for China, principally. Huge factories were opened in China to cater to the unsatiable demand of goods for western industries. Many Indian companies also started sourcing from China, as the mass manufacturing in China, coupled with low wages, at least to begin with, made the cost of manufactured goods globally competitive. And so, it came about that many supply chains encompassed China as the fulcrum. And then Covid happened.

In the aftermath of covid, resilient supply chains came to be seen as the key to successful, competitive manufacturing and selling. Accessing markets and manufacturing goods for the markets were found to be seriously dependent on supply chains. There began a scramble for creating ‘resilient’ supply chains. This is still working itself out, but this new journey in supply chains has been disrupted by developments in IOT, AI, Big Data, 3D printing, 5G and 6G connectivity and data transmittivity – all now being a part of ‘Industry 4.0’. With I 4.0, the development of resilient supply chains has taken a new direction. In fact, one could say that the SC is now turned 180° and returning to its origins. The Big Three – Ford, General Motors and Chrysler – were the originators of the ‘many suppliers, dispersed suppliers, supplying at the lowest possible cost’ syndrome. To keep the cost of their supplies low, they purchased from several suppliers. With the advent of TQM, and Toyota JIT practices, and lean management, this was turned by 180° - have suppliers – have few. If possible, own some or all of these, either fully or partially, keep management control through equity interests. Now, with the ‘resilient’ supply chain phenomenon, the tide is again turning.

In order to reduce risks, keep the supply chain functioning and keeping costs as low as possible, companies are working to develop alternate suppliers, specially from different geographies. This is a difference, when compared to what the big three did in their early days. And this is the trend which will, going forward, become a feature of all supply chains which are a part of large manufacturing companies’ ecosystem. And these are what we call as the ‘Holistic Supply Chain’ (HSC).

The HSC is a new development, the next step in the evolution of supply chains. The HSC is typically for large manufacturing companies, while also applicable to medium ones too, but, for SME’s and MSME’s, doesn’t make a lot of sense. What are the forces driving the formation of HSC? For one, covid type of interruptions where supplies suddenly dry up due to natural calamities. Although known in the business as a ‘Force Majeure’ condition, the newness is that, while the FM conditions would last for a few days or weeks, the covid type of interruptions last longer, lead to significant changes in the composition of the SC, seriously affect costs over the medium and long term. Technological and other interventions are not either in place or not even in sight in the near term. There are four features which distinguish a HSC from a Resilient SC (or RSC). HSC is an advancement over RSC.

Firstly, HSCs are geographically dispersed. For example, large manufacturing companies will try to have suppliers located in many geographies, including at-home/ in-house. In a 1994 paper published in the HBR, two Harvard Professors – Gary Pisano and Robert Hayes – had recommended this step. The truth value of this recommendation is now dawning upon the world. They recommended that the USA should always maintain a certain presence in manufacturing, especially R&D and design, apart from running the lines, within the country, even if they have facilities outside.

Widely dispersed supply chains have the disadvantage of cost, but they are the insurance for a risk free operation. The idea should be to develop supply chain centres in select geographies based on cost, quality and political/ other risks. Although the PESTEL analysis in economics has been used for such decisions, it is now imperative that the decisions factor in the risk factors with greater weight. In India, this has taken the shape of ‘Make In India’, which has seen a lot of new industries coming up in defence, electronic, cell phone, automotive, pharma and related sectors.

Second, companies should use the concept of ‘clusters’ in developing the HSC. In India, this idea is not new, industrial areas, special economic zones etc. have been around for quite some time. Avadi in TN and Adityapur in Jharkhand are two good examples of how these can provide goods at low cost, speedily with flexibility. This will compensate for the cost increase, to an extent. So, the HSC centres should be located in such areas, as these are already derisked.

Third, high inventories should be held as a hedge against disruptions in the SC. The HSC should have certain designated depots/ warehouses where extra inventory is held, as a risk premium. The choice of such locations should be made considering speed, certainty of supply and limited risks. Ideally, these could be located close to the manufacturing centre.

Fourth, the HSC should follow lean management practices, like, JIT, two or three bin system, etc., for replenishment and ordering, value stream mapping to keep cycle times and throughput times to the minimum. It is imperative that lean practices should now become routine, as these will not only address customer requirements optimally, but also reduce waste, streamline production lines and the entire SC process.

Some companies think that reshoring is a good alternative, but this is fraught with time loss, involve rebuilding time and equipment, rediscovery of technologies and designs which were lost after off-shoring. In a recent study, Goldman Sachs report that onshoring in American companies is going slower than expected. The HSC is therefore a good alternative to install, as the increase in cost of the supply chain can be compensated to a good extent by adopting Industry 4.0 practices.

In essence, an HSC is a derisked, potentially high inventory holding alternative to RSC. It is RSC plus high inventory holding. Naturally, the cost is likely to go up, but, with Industry 4.0 practices, which become mandatory, and lean management, costs can be brought to optimal levels, commensurate with a highly responsive, full service, service-at-all-times supply chain.

About the author:

R Jayaraman is the Head, Capstone Projects, at Bhavan's S P Jain Institute of Management & Research (SPJIMR). He has worked in several capacities, including Tata Steel, for over 30 years. He has authored over 60 papers in academic and techno economic journals in India and abroad. Jayaraman is a qualified and trained Malcolm Baldrige and EFQM Business Model Lead Assessor.