Will it be able to handle unforeseen events better than its predecessor?

Many are excited and working diligently toward enabling Factory (Industry or Tech) 4.0 to dramatically change their manufacturing and business environment, but maybe we should focus instead on Supply Chain 4.0, as that may change the manufacturing and business environment more – and not in a good way!

Businesses are currently operating within Supply Chain 3.0. Supply Chain 3.0 has taken decades to refine into a highly efficient, cost-effective, global supply chain. We know how we got here. Companies sought lower-cost skilled labor and a cost-friendly operating environment in which to build manufacturing facilities. As manufacturing shifted to these lower-cost areas, governments invested in infrastructure and education to attract ancillary businesses to invest there as well. Shipping and logistics improved thanks to the advent of containerships, larger aircraft, better roads and rail, and countries opening their borders to trade. The result was a global supply chain in which components and parts are made almost everywhere and transported “just in time” to assembly sites, before finished products are shipped to customers.

As impressive is how product development now occurs globally with teams from different countries collaborating 24/7 to develop the next great product. This efficient, cost-effective collaboration is again made possible thanks to the development and refinement of communication. Supply Chain 3.0 is robust – a winner for all companies and countries involved. After decades making Supply Chain 3.0 nearly perfect, what could go wrong?

As it turns out, a lot.

It started with tariffs. Government economic saber rattling in the form of tariffs levied on certain goods incented manufacturers to reallocate resources to reduce the financial impact. A single tariff levied on a single item, in a single place, ricochets across the globe, negatively impacting the entire supply chain. No one saw these coming. Tariffs were viewed as highly improbable in the contemporary world, where all economies are connected through a global supply chain. Supply Chain 3.0 suddenly caused considerable stress, especially on logistics and transportation.

The next unforeseen event was a pandemic. Covid put a tremendous burden on all aspects of society. Daily disruptions have been roiling global economies for over two years. The result has been component and product shortages. Some of these shortages have been local. Others have impacted entire industries. Some governments have resorted to shutting down entire cities, leaving manufacturing facilities idle. Working remotely became the norm. Too many were infected with Covid, were too sick to work, or decided to retire early to avoid contracting the virus at their workplace. With everyone hunkered down, travel ground to a halt, further disrupting global transportation and logistics, compounding the problem. The pandemic sucker-punched Supply Chain 3.0, and it is still reeling.

A third unforeseen event was war. Wars have taken place during the evolution of Supply Chain 3.0. Most, however, have been in relatively obscure locations or between countries whose only strategic export is oil. This time the battles are on the border of Europe and between two countries with significant minerals and natural resources, which are – or were – exported globally. With 90% of the world’s helium exported by one of the countries and a significant percentage of palladium from the other, the impact on our industry in particular could be dramatic. A lack of helium negatively affects the already stressed chip manufacturing sector. Palladium shortages will further drive up the cost of some surface finishes used in electronics. The war is affecting scores of items. Equally, air and sea transportation have been impacted with no-fly zones in place. “Risk” of a cascading effect on other materials, minerals and resources used in the global supply chain is real. As recently as six months ago, most could not have predicted such an event taking place so close to Western Europe. Once again, an unforeseen event is challenging the robustness of Supply Chain 3.0.

Which brings us to Supply Chain 4.0. What will it look like? While many believe recent events mark the end of a global supply chain undoing, something so complex and bedded in so much infrastructure most likely will not happen, at least not anytime soon. Rather, Supply Chain 4.0 may be a much more bloated, much less efficient, and less cost-effective version of Supply Chain 3.0.

"Just in time" parts distribution may now be a thing of the past. Expect increased inventories and expense at all levels. Geographic investment in factories will shift. All players regardless of nationality will likely diversify and build facilities, probably smaller ones, in a variety of countries to hedge geopolitical and logistics risk. All this will take time, especially as all involved will look at “risk” very differently in a world with less global economic dependency. We are entering a period when supply-chain disruptions will be more the norm than not, and prudent businesspeople will be forced to add cost and time within supply-chain calculations.  

So, as we deal with unforeseen events of the past half-decade, we’ll have to adapt to a “new” supply chain. Hopefully the next one will be more efficient for a world filled with unanticipated events.

Peter Bigelow is president and CEO of IMI Inc.; pbigelow@imipcb.com. His column appears monthly.

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