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Lights and Shadows of Covid-19 on Digital Transformation – XVI

A macro view of the computer supply chain identifying the exchange of materials, components and final product. Notice how China is the main aggregator, at the core of the supply chain. Image credit: Supply Chain Management Research

Supply and delivery chains are possibly some of the most complex and successful achievement of modern society. The computerisation of their management has made possible an unbelievable effectiveness.

With quite a bit of simplification (over-simplification possibly) we can recognise these stages:

  1. Innovation and streamlining of transportation
  2. Creation of warehouses and distribution hubs
  3. Integration of the supply chain in the manufacturing process
  4. Integration of the distribution chain in the manufacturing planning
  5. Industry 4.o
  6. Global supply chain intelligent workflow

When we look at a container ship we appreciate the kind of standardisation and optimisation that goes into shipping. Big ship can carry over 20,000 TEU (Twenty-foot Equivalent Unit, an ISO standard, containers are either 20 or 40 foot in length). 1 TEU can contain over 50 refrigerators or 400 42″ flat screen televisions. By using container shipping load time has decreased by 90% and can be completely automatised. Robotic cranes pick up containers from trucks and load them onto trucks at the destination port. There is plenty of software in the filling of containers, you don’t want to ship a half full container, at the same time the stuff you place inside has to be compatible and should make sorting easy at the destination point. You also need to know the time it will take a specific container to reach the destination hub and make sure that something will be available to pick up the content.

The whole transportation chain has been progressively standardised and automatised with a hub and spoke structure, warehouses that are more and more automatised. Shipping a playstation from Shenzhen, China, to Italy is likely to take the package first to the Netherland to a warehouse conveniently located near Schiphol airport. From there it may be loaded on a truck reaching a warehouse in Lombardy, after rolling through Germany and Switzerland and from there on a different truck to a local warehouse serving the regional area of destination where it will be picked up for final delivery by a small van whose driver receive the driving instruction from a computer that optimise delivery. In the meantime the end customer can track the position of her package that is updated in real time.

Warehouses cost and letting packages dormant immobilises capital, thus increasing the overall cost. That is why in the last decades computers have been used to synchronise the production needs with the availability of components so that these become available “just in time” to feed the assembly lines with no warehouse storage required. The mantra in the last two decade has been  “just in time” and no warehousing. This requires a high reliability of the supply chain (you don’t want to run out of components feeding the assembly line, that will create a huge loss of productivity -and money). Again, the use of computer and sophisticated applications more and more making use of artificial intelligence has been crucial. We simply could not run a manufacturing plant today without computer networks connecting the plant to the suppliers.

Huge progress has also been made in connecting the distribution chain to the manufacturing plant to make sure that what is being produced is immediately taken to the market and in particular to the market spots where that product is needed. This has required the development of applications and market sensors that can forecast the changing needs of the market. The Internet of Things, product tagging, electronic inventory at cash out are more and more integrated to provide an almost real time pulse of the market. Furthermore, machine learning and forecasting leveraging artificial intelligence (as an example to take into account the impact of advertisement campaigns) are being used to finely tune the distribution chain. Just im agine prepare the manufacturing processes for the release of a new iPhone. How many million pieces should be produced in advance of the announcement? We are talking about million of pieces that will have to reach stores all around the world in a week-time to meet customers demand. What will that demand be? Will it be a stampede or a low uptake? The distribution chain shall connect effectively with the factory (ies) and with the retail stores around the world.

We are now in the next stage of logistic sophistication, the one of Industry 4.0. Here the customer (as a single and as a community of customers) is connected to the factory and influence the factory processes. The idea is to merge customisation with mass production, on one end maximising the perceived value (hence the price that can be charged) and on the other hand the advantage of scale (minimising cost). This requires a rethinking of the way a product is manufactured, most of the time enabling customisation at the retail point although in some cases customisation may also take place in the assembly line through robots that are fed with specific instructions resulting from specific customer choices. All of this should maintain the overall manufacturing and supply/distribution chain efficiency.

If we look back it looks almost unbelievable the level of efficiency that has been gained in the supply/manufacturing/delivery chain. This has led to an integrated system that is only possible through massive use of computers and software. At the same time this efficiency has now clashed with the unprecedented situation created by the lock down of entire areas and countries.

The continuous flow of components is crucial to the functioning of todays’ world economy. This is well known and any company makes sure that there is always a “plan B” in case a disruption occurs at any stage in the value chain. There are alternative providers, alternative transportation means, alternative resellers… However, no one could have predicted (or considered worth to take into account) a whole Country lock-down. Here the issue is that there is no alternative! If you need a sensor for your car or for your watering system you will have to turn to a company in Wuxi, China. Yes, you have several alternatives, there are hudreds of companies in Wuxi that can meet your demand. However, 90% of sensors are produced by companies in Wuxi, just 10% by companies in other parts of the world.

A recent analyses has shown that close to 90% of Fortune 1000 companies have their supply chains involving tier-2 suppliers  the Wuhan region. When the Chinese Government locked down that area to contain the epidemics they also blocked the supply chains feeding factories around the world. In 2003 when the SAAR epidemic started, China’s GDP represented 2% of the world’s GDP. Today it represents close to 20% and a good portion of this GDP is in delivering “stuff” to the rest of the world. No.one was actually prepared for such shattering of the supply chains.

This is why everybody is scrambling now to rethink the supply chains, making them less vulnerable and here again the world is turning to digitalisation and to a digital transformation of the supply chains, to what is known as digital workflow.

If you are interested in this area read the latest report from the World Economic Forum on how global supply chains will change after the Covid-19.

About Roberto Saracco

Roberto Saracco fell in love with technology and its implications long time ago. His background is in math and computer science. Until April 2017 he led the EIT Digital Italian Node and then was head of the Industrial Doctoral School of EIT Digital up to September 2018. Previously, up to December 2011 he was the Director of the Telecom Italia Future Centre in Venice, looking at the interplay of technology evolution, economics and society. At the turn of the century he led a World Bank-Infodev project to stimulate entrepreneurship in Latin America. He is a senior member of IEEE where he leads the New Initiative Committee and co-chairs the Digital Reality Initiative. He is a member of the IEEE in 2050 Ad Hoc Committee. He teaches a Master course on Technology Forecasting and Market impact at the University of Trento. He has published over 100 papers in journals and magazines and 14 books.