Econ 4.0: How strong is your supply chain?

This article first appeared in Enterprise, The Edge Malaysia Weekly, on April 13, 2020 - April 19, 2020.

Asia is heavily dependent on Chinese components and there have been major supply chain disruptions since the outbreak of Covid-19

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Here is a modern management fable. A procurement clerk, a supply chain manager and the head of logistics are checking their warehouse inventory when they find an unmarked box. They open it and find an antique lamp. They rub it and a genie emerges in a puff of smoke.

“You have been granted three wishes,” the genie says pompously. “Each of you get one wish. Who would like to go first?”

The procurement clerk says, “I have been working all day, so I want to go first. I want to live like a prince in Phuket with a million dollars.”

The genie waves his hand and the clerk disappears in a puff of smoke.

“Wow!” exclaims the supply chain manager. “I want to go next. I want to live in Switzerland and own a company that is worth a billion dollars!”

The genie waves his hand and the manager also disappears.

The genie turns to the head of logistics. “The last wish is yours. What grand wish will that be, sir?”

The head of department wipes his weary brow: “I want those two back in the office after lunch.”

If that story does not sound funny to you, you are probably in your company’s procurement, logistics or supply chain department, where you are blamed for failed deliveries, delayed deadlines and quality control issues. It is all the more relevant now, as the novel coronavirus or Covid-19 outbreak disrupts supply chains and manufacturing operations.

The most vulnerable are companies that rely heavily on factories in China for parts and materials. The activity in Chinese manufacturing plants has fallen in the past month and may remain depressed for months to come if Covid-19 is not brought under control.

The Severe Acute Respiratory Syndrome (SARS) epidemic in 2003 did not create as acute a global supply chain disruption. Why not? First, China has more than doubled its share of trade with the rest of the world between now and then. The SARS epidemic broke out in Guangdong province in 2002, leading to 8,000 infections in 2003.

“In 2003, China’s GDP accounted for 4.31% of the world’s GDP. By contrast, the number of detected cases of Covid-19 has already passed the 100,000 mark and China now contributes about 16% to the global GDP, an almost fourfold increase,” notes the Harvard Business Review (HBR).

The disruption in China’s manufacturing and logistics sectors is already reflecting adversely on the high-tech industry. In mid-February, Apple announced that it expected its quarterly earnings to be lower than previously anticipated due to two challenges — a constrained global supply of iPhones and a significant drop in demand in Chinese markets.

Early last month, S&P Global Ratings warned that the coronavirus fallout could see US$211 billion (RM880 billion) being wiped off Asia-Pacific economies this year. In a worst-case scenario, China could see growth of less than 3% and Japan, Australia and Hong Kong could “flirt with recession”, it says in a report.

Meanwhile, the Asian Development Bank (ADB) says China could take a GDP hit of US$103 billion. “Other developing economies in the region could see US$22 billion in losses. The magnitude of economic losses will depend on how the outbreak evolves, which remains highly uncertain.”

But the worst is yet to come. “We predict that the peak of the impact of Covid-19 on global supply chains may have occurred in mid-March, forcing thousands of companies to throttle down or temporarily shut assembly and manufacturing plants in the US and Europe,” the HBR article notes.

The crux? Asia is heavily dependent on Chinese components and disruptions in supply chains are already beginning to hurt. About 50% of Vietnam’s imports come from China, South Korea and Japan and almost 50% of South Korea’s supplies come from China, Japan and the US.

More than 20% of Malaysia’s imports are from China. In 2018, it imported US$43.32 billion worth of goods, according to the United Nations Comtrade database on international trade.

 

Malaysian manufacturing

Manufacturing is a major component of Malaysia’s economy and contributes about 23% to its GDP. Up to 98% of companies in the manufacturing sector are small and medium enterprises, which are mostly Malaysia-focused but with great potential for export.

The manufacturing sector employs 17% of the country’s workforce, compared with the services sector at 62%. That is natural, given that services need a huge human component while manufacturing requires a major capital outlay.

A key challenge? A shrinking base. “The contribution of the manufacturing sector to GDP dropped from 32.3% in 2000 to 30.1% in 2007, and to 24% in 2008. It has remained stagnant at 23% since 2013,” Soh Thian Lai, president of the Federation of Malaysian Manufacturers said in October 2018.

What can be done to revitalise it? Soh listed four action items: clean governance, a more business-friendly environment; a move up the value chain with high-tech production and supporting a “buy Malaysian” campaign.

One option: more automation. In 2017, the McKinsey Global Institute found that about half the activities people are paid to do could potentially be automated using technologies that exist today. While few occupations can be entirely automated, 60% of all occupations have at least 30% of constituent activities that can be automated.

“Importantly, many more jobs will be changed than lost. Less than 5% of occupations can be automated in full. We are more likely to see significant changes to the mix of activities that make up a work day,” according to Malaysia-based McKinsey partners Nimal Manuel and Ee Huei Koh.

“Some of the biggest changes will occur in jobs that require routine physical activity in a predictable setting, such as operating machinery or preparing food. About 50% of the work time in Malaysia is spent on these types of highly automatable activities.”

McKinsey says its study indicates that by 2030, automation could displace up to 25% of hours (equivalent to about 4.5 million workers) in Malaysia. Yet, the country’s job outlook is ultimately promising as the job losses will be more than offset by the demand for new skills and labour.

Three factors are expected to drive job creation. First, rising consumer incomes and their impact on consumer goods. Second, increased spending on education. And third, an ageing population that will create new demand for a range of occupations, including doctors, nurses and personal care aides.

“These factors alone have the potential to create about 3.3 million full-time jobs in Malaysia. An additional 1.7 million jobs could be created if policymakers and businesses make higher investments in energy transitions, infrastructure and real estate, and technology,” report Manual and Ee.

“For example, investments in renewable energy or energy-efficient technologies may create demand for new workers in manufacturing, construction and installation. Increased spending on infrastructure could create jobs in architecture, engineering, carpentry or machine operation.”

 

Squaring the circle

What is the future of the supply chain? What else can logistics managers do to improve the process and keep it clean, green and sustainable? Move from a linear to a circular supply chain model, says Gartner Inc.

“To remain competitive, supply chain leaders must shift from wasteful linear to circular models. As consumer and shareholder preferences shift towards sustainability, supply chain officers must prepare for the transformation from a linear to a circular supply chain without waste,” it notes.

By 2029, the circular economy will be the only economy, replacing wasteful linear economies. Gartner defines the circular economy as an economic model that separates the ability to achieve economic growth from the consumption of natural resources. Circular economic business models encourage continuous reuse of materials to minimise waste. It starts with good design, with end-of-life and raw material reuse in mind.

“Organisations are under pressure to reduce the amount of waste they are producing. The solution to this challenge is a shift towards a circular, waste-free economy. The supply chain will play a key role in this process,” says Steven Steutermann, managing vice-president at Gartner’s supply chain practice.

Globally, humans generate about 1.3 billion tonnes of trash a year, far more than we can properly process or recycle, notes the World Resources Institute. This leads to environmental tragedies like ocean plastics pollution and geopolitical tensions as Western countries search for new places to stash their trash.

That is why the concept of a circular economy is gaining traction. Up to 84% of participants in Gartner’s recent market survey stated that the supply chain has, or will have, decision-making authority when it comes to their organisation’s circular economy strategies and initiatives. About 70% of global supply chain leaders are planning to invest in the circular economy in the next 18 months.

“The circular economy creates an ecosystem of materials. What was previously viewed as waste now has value,” says Sarah Watt, a senior director in Gartner’s supply chain practice.

“Digital technology has the potential to provide visibility and enable improved decision-making when it comes to raw materials and services. Already, 35% of companies believe that digital technology will be a key enabler for their circular economy strategies. However, very few are leveraging the technology for this purpose.”

The bottom line: The circular economy is a linear problem. The supply chain will take it up seriously only if top management takes it seriously. Top management will take it up seriously only if government regulators take it seriously. Regulators will take it seriously only if its citizens take it seriously and force top management to do so.

Since we started with a management fable, let’s end with one. An eagle is sitting on a tree, apparently doing nothing. A small rabbit wanders by and looks up at the eagle. “I would also love to sit like you and do nothing. Can I?”

“Sure, why not?” the eagle says nonchalantly. “Don’t bother about the world. Pretend to be in deep thought.”

The rabbit sits on the ground, right below the tree, puts one leg on top of the other and pretends to be in deep thought. Suddenly, a fox appears, jumps on the rabbit and kills it for supper.

The moral of this fable: To be sitting and doing nothing, you must be sitting very high up.