Need to build industrial resilience with supply chain observatories

Supply chain observatories enable better decision-making and policymaking by creating knowledge and data capabilities, supporting a more resilient industrial ecosystem

Updated: Feb 7, 2024 06:06:52 PM UTC
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Industrial resilience is the study of resilience within a complex ecosystem, encompassing networks of factories, logistics, supply chains, and external institutions such as governments, universities, regulators, and financial agents. It involves examining various events that occur around industrial systems to understand how these events interact with the system's vulnerabilities and generate risks. Addressing these risks requires investments in specific capabilities.

In this context, a supply chain observatory stands out as a crucial capability for studying industry-level supply chains. It relies on a digital infrastructure to facilitate information flow. Enhanced with cross-domain databases and advanced analytics, the observatory aims to inform companies, governments, and regulators about the current state and potential future scenarios of end-to-end supply chains. This, in turn, creates the knowledge and data capabilities necessary for better decision-making and policymaking, supporting a more resilient industrial ecosystem.

However, a supply chain control tower is specific to a particular enterprise for transparency. For example, Infosys has partnered with its customers for logistics control tower implementations. These control towers track shipments and help business leaders make informed decisions based on insights generated. It has increased on-time delivery, reduced payment errors and plugged holes in the freight costs.

Research on supply chain resilience within industrial resilience began over a decade ago in our Institute for Manufacturing's Industrial Resilience research group, initially focusing on the impact of climate change. At that time, the specifics were not entirely clear. A significant realisation was that more than 70 percent of enterprise value was vulnerable to climate change risks, which many business leaders were unaware of. The COVID-19 pandemic underscored the importance of often-overlooked aspects, such as personal hygiene, and shifted the value placed on various manufacturing sectors. Products like gloves, masks, and PPE, critical for society, suddenly became high-value items, highlighting the importance of managing the production of such seemingly non-critical products in times of crisis.

Also Read: Three factors contributing to the ongoing global supply-chain crisis

Past studies of the automotive ecosystem failed to recognise semiconductor chips as a critical component. Today, a high-value car may contain more than 8,000 chips, a number that continues to rise, and production can be halted due to the non-availability of even a low-value chip. The evolution of supply chains and the impact of local events, such as the Russia-Ukraine war, need to be closely observed. Supply chains designed at a specific time may exhibit numerous vulnerabilities when placed in a future context, necessitating ongoing observation and study of their evolution.

Supply chain observatory for industry-level study

Digital technologies are essential for collecting information, making strategic, tactical, or operational decisions, and managing supply chains. Ensuring supply chain visibility is crucial for resilience, although it has always presented challenges. For instance, the supply of paracetamol tablets in the UK depends on several countries across three different continents. Conducting case-based studies on specific firms is time-consuming, and the findings are not always applicable on a larger scale. In response to these challenges, a supply chain observatory offers a method for studying supply chains at an industry level. This digital infrastructure enables companies to operate efficiently and effectively. While governments worldwide have provided the necessary physical infrastructure, such as roads and ports, there is a noticeable lack of digital infrastructure to enhance supply chain resilience.

Take the food industry as another example; supply chains were initially established to address global hunger. This goal has been nearly achieved, with only a few areas still in need. However, the extensive geographical spread of these supply chains has led to a lack of understanding about production locations and processes. Before the Ukraine war, there was little awareness of the region's significant production of fertilisers, wheat, and barley. The war's impact extended beyond Europe, affecting global food prices and causing widespread human suffering. To mitigate such risks, the focus should be on rationalising the location perspective, localising food production, fostering innovation, and shortening the supply chain. However, it is crucial not to sever global supply chain connections, as they are vital for managing local disruptions. The food industry, in particular, lacks supply chain visibility, making developing a digital infrastructure all the more essential.

Preliminary insights from the ongoing Israel-Hamas conflict

Drawing lessons from past industrial and supply chain resilience experiences is crucial, especially considering the vulnerabilities exposed by the recent Israel-Hamas conflict. While the immediate impact on food supply chains might be limited, there are significant vulnerabilities, particularly in relation to fertiliser production and oil and gas supplies. Companies such as ICL Group and Haifa Chemicals, based in Israel, are integral in producing phosphoric acid and various finished phosphate fertilisers.

Also Read: India's trade and the Ricardian comparative advantage

Israel plays a significant role in the global supply chain for advanced semiconductor chips in the technology sector, hosting major industry players like Intel and Nvidia. These companies have experienced firsthand the effects of the conflict, highlighting the potential for significant disruptions to global supply chains. In 2021, high-tech exports, including advanced chips, constituted 54 percent of Israel's total exports, emphasising the country's critical role in the global technology sector. The main destinations for these exports are Ireland, China, the US, Vietnam, and India, showcasing the extensive reach and potential global impact of disruptions originating in Israel. Should the conflict escalate or spread beyond its current geographical confines, it could result in major global supply chain disruptions.

Different nations are investing in distinct supply chain capabilities, like localising or reshoring semiconductor production, yet there is a necessity to safeguard critical mineral supply chains stretched across diverse geographies. Without a global supply chain observatory, the world grapples with these intricate networks, barely seeing ahead, which complicates our ability to foresee and lessen the fallout from these disturbances.

About authors: Dr Mukesh Kumar, Associate Professor, Institute for Manufacturing, Department of Engineering, University of Cambridge and S Ramachandran, Principal Consultant, Infosys Knowledge Institute, Infosys.

The thoughts and opinions shared here are of the author.

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