Erevents such as the blocking of the Suez Canal or the closure of the Chinese ports of Ningbo and Yantian have far-reaching effects: They put global networking in the industrial environment to the test. Entire industries and their workforces around the world are affected. The battle for sometimes inconspicuous products and raw materials has begun - supply shortages range from steel and wood to plastics and packaging materials made from them. Transport capacities as well as the necessary containers are becoming a sought-after luxury good. Material availability is the new credo.

External and internal influencing factors

At first glance, these events can be classified as "force majeure", i.e. force majeure. But if you look at them more closely, you will see that business leaders will have to systematically take comparable influences into account and evaluate them in their day-to-day work in the future (see figure on the following page).

If we talk about supply chains, it would be short-sighted to consider only the external factors of influence. Internal company challenges are also currently being accelerated and intensified. At best, New Work approaches should have been known before the corona pandemic; in many places, therefore, they were far from being implemented. But during the lockdowns, when working on the shop floor was often not possible, companies, their employees and partners, and thus entire networks, were forced to go digital faster and more comprehensively. As a result, digital workplaces and processes have become commonplace and have created expectations in the workforce. Companies will also have to continue to address these internal needs.

Complex optimization problem

The combination of external and internal challenges leads to a complex optimization problem. Demand fell in the pandemic year 2020, which in turn led to consumptiongrowth and additional demand in the year 2021. Transport routes have been torn up and production capacities are now reaching their limits in many places, exacerbating the bottleneck situation. In many industries, production capacities are particularly cost-intensive and cannot be expanded at short notice. Blast furnaces for the production of steel come to mind here. If a company in the value chain suffers from supply bottlenecks, it is only a matter of time before the problems spread to its downstream customers. As a result of the supply shortage, prices are increasing across all product categories. The price increases ultimately reach the end consumer: there are price increases for everything from basic foodstuffs to the automotive industry. There the lack of availability of chips lead to downtimes in vehicle production and these in turn lead to more expensive used cars. Value chains have always been subject to structural changes, from the former transport, handling and storage (TTS) to the former process logistics to today's supply chain management (SCM). Silo thinking has been replaced by holistic thinking in value-added networks. The focus in recent decades has been primarily on cost optimization. Short-term operational improvements and transformational changes resulted in lower storage and transportation costs. "Just-in-time" (JIT) production was considered the optimum until recently. A perfect interaction of suppliers and in-house production made it possible to dispense with intermediate storage and brought cost savings. But it is precisely this coordinated interdependence that at the same time harbours an enormous risk: complete dependence on the upstream stages of the value chain.

New top priority: material availability

The events of the last year have forced many decision-makers to rethink, so that we are currently experiencing a fundamental change in mentality. Cost optimization, which had dominated for a long time, was suddenly pushed into the background. Today, material availability is the top priority. This is also reflected in our customer survey at Kerkhoff.

"Current supply issues" are cited by two-thirds of respondents as the highest priority in their SCM organization. One third sees rising commodity prices as the biggest challenge. Political claims such as the Supply Chain Act or the Green Deal and the Carbon Footprint are (still) of secondary importance.

However, it is also clear that the optimisation task of the future will change from the previous priority of cost reduction to a multidimensional challenge which, in addition to material availability - as the new top priority - and cost optimisation - as an economic perennial - must also take into account environmental protection, digitalisation and the expectations of the workforce.

"Decision-making processes around the supply chain will become more complex in the future."

Decision-making processes around the supply chain will therefore become more complex in the future. Companies may then stop considering their long-standing network partners if they do not meet the additional requirements - even if they remain cost leaders. The holistic design of the upstream and downstream value chain is becoming a critical competitive factor for companies even more than it is today.

Balancing areas of tension, agility as a trump card

The keyword agility sums up what is important for organizations: They must be able to transform themselves within a short period of time and prove flexibility with regard to new challenges. For logistics sectors almost a novelty and still rather uncomfortable: to better understand and respond to their own workforce and their needs. Mobile working and flexible hours can become differentiating factors, important in recruiting talent, difficult in day-to-day operations. A stable digital infrastructure and the topic of cyber security are also of great importance.

The political framework conditions also remain in flux. Trade conflicts such as the tensions between China and the US (and arguably the EU) require a continuous review of their own structures, processes and systems. The competition between global giants forces companies to keep a constant eye on the supply chain to avoid getting caught between the sometimes shifting fronts.

Logistical solutions must be configured in the overall context to mitigate conflicting goals and form global rather than local optima. Easy to say, but how does it work in practice? How can SCM networks be set up to be resilient on the one hand and cost-optimized on the other, support future growth and at the same time make a positive contribution to protecting our environment? There is no such thing as a "One-size-fits-all" solution that can be applied to every company and every value chain. It's about the right combination of approaches and, more importantly, the right prioritization. Conflicting goals can hardly be avoided, but they will cause major or minor problems. Smaller are the problems when five questions are answered situationally coherently:

1. growth: is the network designed for future growth?
2. sustainability: can political and ecological regulations be met in the future?
3. resilience: can the network respond proactively to risks?
4. performance: does the network ensure the level of service required in the future?
5. cost efficiency: does the network have a future cost-optimal configuration?

Cost efficiency, which has been in the foreground for many years, is taking a step backwards, back into the value chain, so to speak. And not to forget: digitalization. It remains key to configuring value chains to be more powerful and making data-driven decisions to mitigate risk.

Digitization goes on and on

Meanwhile, there are global networks with enormous complexity. It is hardly possible to evaluate their performance or risks. So-called "digital twins", i.e. the digital representation of a material object from the real world in the digital world, not only create greater transparency about the performance of networks, but also offer new possibilities for scenario analysis. Software programs support this, by exact optimization procedures or by heuristics, which solve problems within short computing time. With their help, companies can take timely action to ensure material availability and service levels even in fragile networks.

For example, structural changes such as the loss of a production site or the closure of a distribution center are simulated in terms of their impact on service levels and cost structure. In doing so the programme identifies foreseeable capacity bottlenecks and system limitations.

Simulation programs have been used for a long time and provide useful information that significantly improves decisions. In the coming years, they will be rapidly developed. The technological future, especially in logistics, lies in Machine Learning and artificial intelligence. With both, it is possible to constantly improve analyses, forecasts and risk management through automated self-learning processes.

In the Corona era, at the latest, even top management became aware that it is better to have early warning systems and contingency plans for the supply chain up your sleeve than to stand there unprepared. Until now, the practice regarding the resilience of logistics networks has been rather lax in many places, which was also shown by our customer survey.

Outsourcing trend broken

Outsourcing has been a long-standing trend for realizing cost potentials. Companies could and wanted to focus on their core competencies and outsource parts of the value creation to external partners. The use of synergies and the bundling of know-how enabled greater efficiency in production and thus cost advantages for the downstream stages of the value chain. This trend seems to be broken. Outsourced business units will be closely scrutinized in the future. When making Make-or-buydecisions, companies now have to give much greater weight not only to cost factors but also to the risks associated with material availability. In a holistic view, it is important to evaluate the negative aspects objectively. Outsourcing leads to losses of know-how, while at the same time the demands on the stability and flexibility of the supply chains increase.

Companies must take into account higher planning costs as well as interruptions in the supply chain if suppliers experience material bottlenecks. The more critical and complex a component, the greater the risk of failure that offsets the cost benefits. If an important cog is missing somewhere, the entire machine park will not work.

The same mindset is required the greater the geographical distance between supply partners. Global supply networks are faltering and material shortages are the order of the day.

It is inevitable to question already today and even more in the future whether the outsourced areas are still optimally allocated there. The outsourcing strategy, which has often been a management reflex, needs to be rethought. One possible answer is the backsourcing of components that have not been considered as core competencies so far, but which have a production bottleneck relevance due to their importance in the supply chain.

The total value of ownership consideration always remains important. Only it ensures that all relevant cost drivers and risk factors are objectively compared and evaluated.

Workforce development

In order to master the complex challenges of value chains in the future, organizations must strengthen their focus on and develop their own workforce . With the SCM challenges outlined above, the demands placed on employees will also change.Classic logistics knowledge and operational know-how are no longer sufficient. The ability to prepare data correctly, interpret it intelligently and derive value-adding measures from it is becoming increasingly important. The potential of new technologies can only be exploited if someone knows how to use them.

This is a major challenge for companies and their managers. They must ensure that their employees receive the necessary support in good time, with internal training programmes and external training opportunities. They must also allow them the necessary development time. At the same time, it is important to present the upcoming requirements and future job profiles in a transparent manner for junior staff. Because tomorrow's SCM activities will be more demanding than today's, but also more varied and responsible.

For future work systems to function, employees must also make their contribution. In addition to being open to new processes, ways of working and technologies, they will need to engage in continuous development. Only when they have the necessary skills in using digital tools, whether logistics or collaboration tools, will it be possible to exploit their technological potential and take the supply chain to a new level. It is clear that every transformation triggers enthusiasm in some and fear in others at the same time. It is therefore important to find the right pace so that all those involved (or at least as many as possible) are able and willing to go along with this change.

Paradigm shift after all

Global supply chains mean global dependence. Global networking means global risk. In the past, the focus was often on cost reduction, which proved to be critical, especially in times of crisis. If the complexity of a supply chain is increased, the stability must be increased at the same time.

"Global supply chains mean global dependence. Global networking means global risk."

In most crisis scenarios to date, only individual supply failures are taken into account. However, port closures, for example in China, material bottlenecks, for example chips, or worker protests, for example in Mexico, have become a permanent state of affairs, resulting in delivery delays and price increases for customer companies and end consumers.

Companies must therefore strategically transform their supply chains. They will increasingly return to Local instead of global sourcing. Cost savings due to wage differentials in distant countries may in future be subordinated to the availability of materials "through proximity". However, it will not be possible to focus completely on secure availability, since important or future significant factors such as cost degression, supply chain legislation, environmental protection and global political trades constantly challenge the strategic orientation of the supply chain. The solution lies, as so often, in the correct prioritization or in the balance of different approaches. And in this, but this should no longer have to be said, especially for logistics, to implement technological improvements instead of sinking into the mire of old and rigid processes and systems.

Internally, companies are also experiencing extensive transformation in terms of their workforce. Their needs and requirements have changed and it is in the hands of the management to create a productive and efficient working environment also in the future.

Thomas Schmölzer is partner and managing director of Kerkhoff Consulting based in Vienna. Its core competencies include scheduling and inventory management and the optimization of complex logistics networks.

Boris Prodanovic is manager at Kerkhoff Consulting, also located in Vienna. His consulting focus is on scenario-based network optimization for availability and inventory optimization as well as cost reduction initiatives in purchasing.

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