A recent business cartoon showed that it was not the CEO, the CTO or CIO who was responsible for large-scale digital transformation being initiated in every organization; but it was another ‘C’; theCOVID-19 virus. The pandemic forced the world into a remote-everything contactless world. From telemedicine, online-education, to work-from-home, everything was being carried on over digital platforms. Technologies that were to have taken three years to mature and become mainstream were happening in three months. Digital Transformation was on steroids. COVID-19 has become an inflection point for global economics, trade and commerce and geopolitics – the world has been reset for good.
Unprecedented supply-chain shocks
It has also unleashed a set of supply chain shocks which completely dislocated business models. Compared to other disruptive events like the earthquake in Japan in 2011 or the 2008 global financial meltdown, the COVID-19 shock is radically different and has impacted nearly every link in global supply chains. Earlier disruptions have always been discrete, involving only individual companies, countries, or industries – this was all encompassing and worldwide.
A major Asian telecom and a mobile phone manufacturing company is facing severe shortage of semi-conductors that is upending its business lines in 5G and mobile handset manufacturing. European automobile manufacturers stopped production as global supplies of spares were disrupted. Shelves in departmental stores in the US went empty and people rushed to stock up on essentials. Europe went into a complete standstill.
This was an unprecedented event. Given the magnitude of this shock, full recovery is expected to take at least six to nine months even after the situation stabilizes. COVID-19 was a wake-up call for countries and global companies to de-risk their supply chains and has opened up new opportunities for countries like Mexico, Vietnam, Thailand, Indonesia and India which of course is the most attractive, and is already witnessing a flurry of investments from GAFAM (Google, Apple, Facebook, Amazon, Microsoft). Headline grabbing investments were promised by Foxconn, the maker of Apple’s iPhones which is expected to increase its India investment by $1 billion. Harvard Business Review stated in a recent article:“…we look at India as a sourcing partner for goods, becoming a partial replacement for imports from China.”
New supply-chain imperatives
While these are encouraging signs, we need to be hard-nosed realists to understand the business imperatives of the new global supply chains, take stock of what will work for India, and what more needs to be done. Let’s look at the principles of the new supply chain model that will be highly digital and networked:
- Digitizing the buyer-supplier relationship is now a fundamental element for building sturdy supply chains and will make identifying and recruiting new suppliers far less time-consuming.
- Adoption of digital twins of the end-to-end supply chain to allow companies to mirror operations digitally across the entire supply network – at any level of detail – and uncover risks that were previously hidden. Faster adoption of Blockchain to authenticate source of supply and suppliers.
- Nimble supply chains that would quickly switch to alternative providers, when regular suppliers face disruption, using technologies like artificial intelligence and the Internet of Things.
- The future will be a blend of outsourcing parts of the supply chain while in sourcing the critical components like semi-conductor design and manufacturing, which is the brain of every electronic equipment.
- Policymakers in developed world will increasingly be pressurised to consider whether certain products need to be manufactured in the country or the region.
- Create a diversified supply chain to de-risk it from geopolitical tensions, climate change impact, dramatic regulatory changes, threat of future pandemics and trade wars among other factors.
Why India:The US is the biggest trading partner
The US is now India’s top trading partner, showing greater economic ties between the two countries. According to the data of the commerce ministry, in 2018-19, the bilateral trade between the US and India stood at $87.95 billion. Similarly, during April-December 2019-20, the bilateral trade between the US and India stood at $68 billion. This offers a foundation to build upon. Recent mega investment announcements by GAFAM proves that it is working.
While India is known as an IT outsourcing destination in the US, a lot of Indian exports other than IT or spices, goes unnoticed but is nevertheless important for the US economy. This phenomenon is known as “India Inside”. The cabin of Marine One, the presidential helicopter is fabricated at Lockheed Martin’s Sikorsky unit in India. The Ford EcoSport is manufactured in Chennai, India for the US market.
NASA’s Jet Propulsion Laboratory in Pasadena, California is collaborating with the Indian Space Research Organization on the most expensive imaging satellite ever to be launched, NISAR. This probe will be built and launched in India and will study hazards and global environmental change more accurately than ever before.
Factories in India can scale up volume production to meet the domestic Indian, American and global demand for devices, disposables and drugs to diagnose, treat and vaccinate against Covid-19. India already provides almost 40% of the generic drugs sold in the United States, produced at factories inspected and approved by the US Food and Drug Administration.
If one analyses the imperatives of the new supply chain architecture, not only focused on the US but also looking at Europe,Japan and Australia, we will notice that to play a prominent role in this ecosystem, suppliers who are digital natives enjoy an edge. They will be able to quickly pivot around and take advantage of the emerging trends and lock on to the new supply chains.
Digital natives and companies that started early on their digital transformation journeys have often better withstood the current crisis and adapted faster to new human and societal needs. Even before COVID-19hit, digital leaders were seeing twice the revenue growth of laggards, a trend expected to accelerate. According to research by Deloitte, some 47% of incumbent companies who pivoted to competing in new digital ways have achieved organic growth greater than 10% over the past three years. Only 30% of traditional incumbents have done the same.
Manufacturing 4.0 –Digitized technology, talent, & process
Supplier organizations in India must quickly initiate digital transformation of their people, process and technologies if they hope to match the requirements of buyer organizations. This calls for adoption of Manufacturing 4.0 by Indian suppliers. Adoption of technologies like cloud, edge computing, IoT, Blockchain, analytics, embedded systems (sensors), robotic process automation, advanced engineering like 3D printing, nano particles and use of alternative energy – will be critical elements of the technology stack.
It will create end-to-end transparency, agility of production, demand forecasting capability, efficiency and productivity gains, significant quality improvements and create a resilient supply chain. A recent McKinsey survey of manufacturing and supply-chain professionals found that 93% plan to focus on resilience of their supply chain, and 90% plan to invest in talent for digitization.
As buyer organizations will migrate to a digital platform connecting their customers, stakeholders, employees and machinery, devices or equipment in an IoT ecosystem, the need will be for a digitally dexterous workforce. The new workforce should be trained to work on these digital platforms, must be data literate to understand the dashboards being created by inputs from the sensors in the thousands of connected devices, and be dexterous enough to use augmented and virtual reality, supervise robots or in other words be experts in human-machine collaboration.
Investment in developing digital talent therefore becomes essential. This will also call for a change in our education curriculum to foster greater industry-academia collaboration and make apprenticeship an essential element of the learning process right from school to the college levels.
Having the latest technology stack, or a digitally dexterous workforce must lead to improved and integrated processes from demand forecasting, production planning, operations planning, logistics, warehousing, to sales and marketing.Interrupted global trade flows and value chains have forced companies to break the silos to improve end-to-end visibility.
As a result, the potential impact from optimized planning is more evident. But it also requires a more sophisticated analytical approach, and collaboration across multiple functions and stakeholders.
Traditional forecasting algorithms rely on relatively simplistic statistical tools to extrapolate previous demand, based on the assumption that the relationship between independent variables (such as previous sales) and dependent variables (future demand) will likely remain unchanged.
Moreover, companies usually have used only internal data, perhaps in combination with past sales trends and customer signals for future orders. Any external shock ofCOVID-19’s magnitude, wouldcripple such a traditional demand-forecasting process.
In contrast, autonomous planning relies on artificial-intelligence and machine-learning algorithms, which are supplemented not only by internal data, but also by external datasets from suppliers, customers, weather forecasters, demographic sources, and broader economic indicators. Incorporating these additional variables helps organizations respond to changing dynamics and external shocks more effectively. Advanced analytics can also optimize planning across the entire value chain in a way that wasn’t feasible under a siloed approach with traditional analytical tools.
Leading with MSMEs
India NeXT cannot happen unless we focus on the Micro, Small and Medium Enterprises (MSMEs). These are amongst the strongest drivers of economic development, innovation and employment. The MSME sector contributes in a significant way to the growth of the Indian economy with a vast network of about 63.38 million enterprises. The sector accounts for 45% of manufacturing output, more than 40% of exports, over 28% of the GDP while creating employment for about 111 million people, which in terms of volume stands next to agricultural sector. The pandemic has hit these small and medium units the hardest.
A separate program needs to be drawn up to support and help MSME to survive the crisis and thrive in a post-Pandemic world. Right now the government is providing them with the much-needed financial support. However, there must be a strategy to make these MSMEs an integral part of the new global supply chains. To do that there needs to be a cohesive plan to infuse digital technologies, train their people and forge linkages with big industries.Mittelstand& Fraunhofer model
The German model of Mittelstand (small and medium enterprises) should be a good one to adopt to upgrade MSMEs and reskill their workforce. The Fraunhofer institutes of Germany, which has been adopted by over 50 countries, should provide an ideal collaboration platform with Europe’s largest economy. The institute works on the latest technologies in collaboration with large organizations and infuses these technologies to the Mittelstandswhich adapt these and become strong suppliers to the big engineering companies. Fraunhofer-Gesellschaft, based in Germany, is the world’s leading organization for application-oriented research. With its focus on future-relevant key technologies and the exploitation of results in business and industry, it plays a central role in the innovation process of the country.
While US is India’s biggest trading partner today, India should also look around the world to accept the best and forge sturdier relationships with countries like Japan which already has a strong automobile presence in the country. South Korean companies like Samsung, LG are major players in consumer electronics, and they are also exploring diversification of their supply chains.
If India is to ride on these opportunities, it needs to reform its legal system, which has been cited as a challenge because of the extremely slow pace at which cases proceed. Further economic reforms, including labour, product mixed land, and others, and additional infrastructure investment are necessary, to attract even more investment, and to ensure sustainable and more inclusive growth in India. India has to do much more work in terms of revamping its education system, enhancement of the skill sets of its workforce, availability of abundant quantity of different manufacturing skills at identified locations, better logistics connectivity, a simplified and friendly tax regime, land and labour reforms, etc., if it is to play a major role in the global supply chains. COVID-19 is an opportunity to unleash these reforms and make India an attractive destination for global players now looking for alternatives. Digital transformation must be accompanied by these reforms to yield the best outcome.