John Denslinger explores the idea that the cost savings offered by smart factories, Industry 4.0 and AI lay the foundations for a new generation of localized supply chains.
Since the early 1980s, global supply chains were developed with cost minimization as the driving force. Given that as the prime metric, success was commonplace and adoption flourished. In the decades that followed, combined advancements in systems, communication technology and transportation modes helped spearhead more complex multinational networks further lowering operational and procurement costs. The ability to build anywhere, in any country, across any region seemed limitless.
It was limitless until a series of unrelated disruptions eroded confidence in global supply chains. First there was an earthquake and tsunami in Japan, then extensive flooding in Thailand, followed by a US-China trade and tariff rift that continues to this day. Covid 19 hit next. Country after country locked down and rules of engagement differed greatly. It soon became abundantly clear the old metric of cost minimization wasn’t nearly as important as sustaining supply at any cost. The final and most devastating disruption surfaced with the Russian invasion of Ukraine. The conflict is a sad reminder of growing geopolitical risk.
Foreign sourcing has always been a supply necessity. Typically, we think in terms of production and assembly, but the war and resultant sanctions highlighted a raw material risk as well. Crude oil and natural gas aside, Russia is a major exporter of critical minerals. Deloitte Insight notes 30 per cent of the world’s supply of platinum/palladium, 13 per cent of titanium and 11 per cent of nickel comes from Russia. The war also closed two massive neon producing plants in Ukraine curtailing gas exports. Neon, used in lithography, will not immediately impact semiconductor production (adequate reserves reported), but a prolonged disruption could aggravate already long lead times. All this to say, products like electronic components, automotive parts, battery assemblies, etc rely heavily on these upstream commodities. Since critical minerals are usually negotiated in multiyear contracts, sourcing alternatives may be possible, but at what price?
Mitigating geopolitical risk by securing our industrial supply chains is gaining high-level attention. Raphael Bostic, Atlanta Fed president, recently said: “The tragic war in eastern Europe will further momentum towards reorienting production and supply networks away from pure cost minimization and more towards resilience and risk tolerance.” Mr Bostic foresees production moving closer to final markets, bringing with it maximum reliability and supply assurance.
Adam Posen, economist and president of Peterson Institute, goes even further stating: “It now seems likely the world economy will split into blocs, each attempting to insulate itself.” It would seem both gentlemen see security, resilience, sustainability and risk dominating the decision-making landscape in the near term.
So, does it really have to be an either/or proposition? Can resilience, risk and security co-exist with cost minimization? The answer could be yes if replacement supply chains are localized.
Smart factories! A 2019 Deloitte survey concluded companies achieved 10 to 12 per cent average gain in manufacturing output, factory utilization and labor productivity investing in smart factory technology. With additional advances in AI plus Industry 4.0, results should be even better.
The solution seems clear: localizing can offset much of the escalating international transport costs and global risk; and smart factories in markets served can offset most, if not all, cost minimization loss. Resilience, risk and security are secured without losing cost minimization. Perhaps, the unravelling of global supply chains is just the catalyst needed for smart factory acceleration.