Where Supply Chain Digitalization Went Wrong

Remember that digital itself is only part of the solution. The future of robust, reliable and high-performance supply chains requires a networked approach.

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Nowhere has the Coronavirus disease (COVID-19) pandemic revealed such deep-rooted inadequacies as in the global supply chain.

In the years leading up to COVID-19, the digital revolution promised to transform international trade, and it did. Lean manufacturing techniques, just-in-time supply chains, hyper-specialized production lines and a host of other practices brought large-scale efficiencies, and most importantly for the customer, cheaper goods. Everyone was a winner, until the tide went out.  

In the face of COVID-19, these new supply chain models (and the technology supporting them) left producers and suppliers unable to adapt. For example, the world is making millions fewer cars because they can’t get the microchips they need.

The digital threads that increasingly form the fabric of international trade have failed to deliver; rather than delivering the promised new era of insight and agility, they have proven to be the Emperor’s New Clothes. What went wrong? And, how can buyers and suppliers ensure they are not caught bare the next time the tide goes out? 

Transformation fatigue

Digitalization is difficult. Most businesses have a string of failed digital projects behind them, so when they hit upon a system that works for them - for submitting invoices or POs, say - it’s in their interest that their suppliers adopt it too. What’s more, buyers have the financial clout to demand that they do. 

In short, it’s a buyer’s world; suppliers just live in it. But, that doesn’t mean enterprises always get meaningful benefits from mandating their own portals. While this can work well and bring value to both suppliers and buyers, more often than not, digitalization efforts fall short. Instead of bringing smoother processes and greater efficiencies, businesses end up relying on manual processes to query, clarify, amend or cancel a significant proportion of invoices, making a mockery of the effort spent on creating a digital portal in the first place. 

Process is only one side of the coin, though. Perhaps even more importantly, digital supply chains are based around the outdated hub-and-spoke model of discrete 1-to-1 relationships between buyers and suppliers. This means every relationship becomes a project in itself, requiring significant time and effort from both buyer and seller. It's costly, cumbersome and inherently inefficient; what’s more, it rarely if ever delivers the benefits digitalization is supposed to bring -- greater accountability, enhanced regulatory compliance, transparency, real-time insight or a holistic view of relationships. 

Given the deficiencies of today’s supply chain software model, businesses might be tempted to stop dreaming of digitalization and return to entirely paper-based and manual processes. But, there’s no need for such a defeatist, backwards step. The problem isn’t the technology itself, it’s the relationship model. For a picture of what it could (and indeed should) look like, we can learn a lot from networking on social media. 

The network effect

There are two types of social media users -- those who treat it as a space to host their cover letters, and the “power” users who understand how to exploit this massive, worldwide network ecosystem to grow long-term relationships.

What’s great about some social media platforms is that there is no barrier to entry -- you just need an email address and away you go. That’s exactly how supply chain relationships should be. No need for investment or new infrastructure; just plug into a universal platform and start digitizing any and every aspect of your relationship, from invoicing to purchasing to payments.

This easy, low-cost and modular path to digitalization might be “carrot” enough to encourage suppliers to join a digital supply chain ecosystem, but it only scratches the surface of what such platforms can bring. Businesses can build their own trading networks, recommending suppliers and buyers to each other, offering preferential payment terms and other incentives to trusted partners. 

Digital ecosystems mean businesses no longer have to spend 100% of their time onboarding and managing the 20% of their relationships that bring in 80% of their revenue. Instead, they can take a far more holistic view of their entire supply chain ecosystem, including “long-tail” suppliers, without adding an unmanageable amount of extra work. 

Meanwhile, these supplier ecosystems will finally bring all the long-promised, never-delivered benefits of digitalization. Buyers and sellers alike will gain unprecedented transparency and visibility throughout the entire supply chain - not just their Tier 1 suppliers, but their suppliers’ suppliers, enabling them to prove their sustainability or environmental, social and governance (ESG) credentials beyond doubt. They can create online marketplaces and even pioneer new methods of supply chain finance. With between $7-9 trillion worth of payments outstanding at any one time, businesses can spin this into new lines of credit to the benefit of every company in the global supply chain. 

As the industry strove to build faster, smarter and more economically, it lost sight of the most important attribute of any supply chain -- to get goods where they’re needed, reliably and on time, whatever the circumstances. COVID-19 has shown the danger of trying and failing to digitalize each relationship and of building new business models without the ability and the agility to adapt when things go wrong. As we begin to build back better, remember that digital itself is only part of the solution. The future of robust, reliable and high-performance supply chains requires a networked approach.