An article by Adel Al-Saleh, Member of the Board of Management Deutsche Telekom AG and CEO of T-Systems.
Whether against pandemics, storms or hacker attacks: If you want to protect your company, you should start with your supply chain. Adel Al-Saleh is convinced that creating value in post-Corona times must become more local, sustainable, transparent and intelligent. This is a task that companies should not tackle alone, but preferably in close cooperation with partners. And they need to move quickly now.
Corona has put an illusion to rest: the world is not a big, colorful supermarket shelf from which companies can easily and cheaply pick the products and services they need. The Covid-19 crisis has brought home to everyone that global supply chains are fragile. At the beginning of March, the thousand largest companies in the world and their respective suppliers witnessed how 12,000 operating sites were quarantined or affected somehow by Covid-19. The result: empty shelves and halts to production. Because the majority of companies simply do not have a choice of suppliers for their components. They have no supply-chain safety cushion.
With Covid-19 came the reckoning for companies who saw supply-chain optimization as a simple cost-reduction exercise. Due to balance-sheet pressures, many companies slipped into global dependencies and weakened their resilience. All too often, they neglected their digital monitoring and rarely actively managed their complex networks of suppliers and pre-suppliers. They lost the ability to react flexibly to exceptional situations. Production went from lean to the absolute bare bones. We should have been warned about this: The tsunami in Japan in 2011 already forced numerous car manufacturers to cut back their production. But because the natural disaster only affected individual industries, it did not result in comprehensive de-globalization.
More resilience through regional supplier networks
This is different today: Dalia Marin, Professor of International Economics at the School of Management of the Technical University of Munich, expects global supply chains to decline by 34.5 percent in her study "A new era of world trade". This means that we will have to relocate a considerable portion of production back (reshoring), especially in the area of elementary components and assembly. Inventories are also likely to grow again. Above all, however, companies should in future rely more heavily on multiple, regional value-added networks, rethink their single-sourcing strategy and build in redundancies. This is the only way to prevent one-sided dependencies and avoid logistical bottlenecks in the event of a crisis. I am convinced that our European location will also benefit enormously from the synthesis of globalization and localization.
Several companies are already working on this. Large ones as well as smaller ones. According to a McKinsey study, one in four medium-sized company wants to regionalize its supply chain. The advantage: If supply chains are shortened, risks can be spread more effectively; customs duties are eliminated, and CO2 emissions and the overexploitation of our natural resources can be curbed.
Meeting corporate responsibility
The urgently needed reduction of greenhouse gas emissions has also prompted us to think much more carefully about ecological supply chains this year. Even though sustainability in the supply chain has long been a concern of ours, we need to admit that our efforts to date have not been sufficient. However, the Corona crisis reinforced in our minds the importance of this issue. In the meantime, I am convinced that we need to move much faster. Because climate change does not happen overnight. It is already here. We should not let the opportunity pass us by to make an ecologically sustainable recovery from the crisis. Thinking long-term means thinking ecologically: Welcome to the New Green Normal.
The time is right for companies to position themselves more sustainably: 30 percent of the EU's Corona Reconstruction Fund is earmarked for climate and digitization tasks. Many companies have the necessary momentum for change, as they have proven during the crisis: Production facilities were relocated in no time at all, production was reorganized, processes were shortened. So why shouldn't it be possible to quickly make your own supply chains more resilient now?
Our incentive: Faster than the supply chain law
Admittedly, this will take a big effort. But businesses don't have any other choice: it's not just Corona or climate change that is forcing us to review our supply chains and select partners more carefully. The German government has been working for some time on a law for fair supply chains. The aim is to oblige companies to enforce compliance with human rights and minimum social and ecological standards among their global suppliers. Why is this necessary? According to the German government, not even a fifth of the surveyed companies insist that their suppliers comply with environmental and social standards. I was shocked when I read this. So, there is an urgent need for action. After all, sustainability and fairness will soon be mandatory prerequisites for playing a role in the market at all. Anyone who overexploits nature and people will be punished by the customer in future. Investors and the capital market are already demanding compliance with so-called ESG standards. In other words: companies that do not operate in a socially responsible or sustainable manner are rightly gambling away their reputation. It may well be some time before the Supply Chain Act made into law. We should not wait for that, but rather drive change ourselves. Let us set an example: With supply chains that are resilient, sustainable and social.
Supporting globalization locally
To avoid any misunderstandings: I do not want to start a new round of protectionist segregation. I appreciate the advantages of the international division of labor and consider a national compartmentalization to be an aberration. International trade not only promotes global growth, but has often been the foundation for geopolitical stability. But we should flank globalization with a stronger local component and meet ecological and social criteria if we want to be better prepared for crises. And, for example, we should more often produce our products where we sell them and establish a safety net of regional suppliers.
Better risk management thanks to digitization
However, such globalization alone will not suffice. Value chains are complex structures with many participants, goods and services, which can no longer be controlled in an analogous way. Digital technologies such as Machine Learning, the Internet of Things or block chain, as well as active risk management of supply chains, make a decisive contribution to crisis resistance. Companies that already had digital supply-chain risk management in place were able to deal with the corona pandemic much better.
Looking to the future with digital platforms
Why? Because digital supply chains enable them to better manage unforeseen events. Offerings such as the DHL Resilience360 software platform help to assess all risks in multi-level and networked supply chains. With digital solutions like these, data becomes resilience. Not for free, of course: They require the willingness to share one's own information with others via open platforms and interfaces. FENIX, a project of the European Commission's Executive Agency for Innovation and Networks (INEA), uses Deutsche Telekom's Data Intelligence Hub (DIH) and its functionalities to build a federal network of transport and logistics players throughout Europe. This digital network with the neutral data hub of the DIH enables data exchange and interoperability while maintaining data sovereignty. I know that many companies still have concerns about the security of internal company information, but crisis resilience cannot be achieved on its own. Transparency is always a joint project.
Put an end to the optimization mania
What does Corona teach us? We should abandon the dogma of short-term efficiency increases and cost optimization. After all, every new supplier must be integrated and certified – the latter not only according to quality specifications, but absolutely also according to ecological and social criteria. In the long term, however, sustainable supplier-management also pays off economically. I am therefore convinced that the crisis will strengthen our sense of responsibility, that we will develop a new awareness of more localized and resource-efficient value creation – and much more openness to digital technologies.