Why digitalizing the supply chain requires a fresh approach
Co-founder and GM at Tradeshift
Wise people learn from others’ errors, and smart supply chain operators can take an invaluable lesson from one of the biggest business blunders this century: the Airbus A380, the bold, beautiful, brilliant disaster that nearly bankrupted the world’s biggest airliner manufacturer.
Airbus’ mistake was to place a $10bn bet that passenger aviation would continue to follow the hub-and-spoke model, right at the moment the industry was moving towards flying people anywhere in the world they wanted to be. Meanwhile, its deadly rival Boeing developed the smaller 787 Dreamliner, perfectly-suited to the new paradigm of air travel.
Businesses today are running Dreamliner supply chains on A380 technology. Global trade today comprises an infinitely complex web of relationships crisscrossing the planet, where success depends on collaboration and transparency. Yet the digital systems underpinning these relationships almost always follow the hub-and-spoke model, where software only supports one-to-one relationships, and where all the benefits of digitalization remain a distant dream.
The pandemic has shown how far this model has failed, depriving businesses of the agility and insight they need to respond to disruption. The answer is not to pursue expensive and ultimately futile efforts to digitize one-to-one relationships, but to embrace online platforms that enable them to build a worldwide partner network – one where relationships are fully digitized right from the outset.
How did it come to this? Simple: digitization is difficult. Most businesses have a string of failed digital projects behind them, so when an enterprise hits upon a system that works for them – for submitting invoices or POs, say – it’s in their interest that their suppliers adopt it too. What’s more, buyers have the financial clout to demand that they do.
In short, it’s a buyer’s world; suppliers just live in it. But that doesn’t mean enterprises always get meaningful benefits from mandating their own portals. When it’s done well, buyer portals can afford value to both sides; more often than not, however, digitization efforts fall short. Instead of bringing smoother processes and greater efficiencies, businesses end up relying on manual processes to query, clarify, amend or cancel a significant proportion of invoices, making a mockery of the effort spent on creating a digital portal in the first place.
The problem is much greater than the perpetuation of manual processes, though. Under the hub-and-spoke model, every 1:1 relationship becomes a project in itself, requiring significant time and effort from both buyer and seller. It’s costly, cumbersome and inherently inefficient; what’s more, it rarely if ever delivers the benefits digitization is supposed to bring: greater accountability, enhanced regulatory compliance, transparency, real-time insight, or a holistic view of relationships.
Given the deficiencies of today’s supply chain software model, businesses might be tempted to stop dreaming of digitization and return to entirely paper-based and manual processes. But there’s no need for such a defeatist, backwards step. They just need their very own Dreamliner: a technology platform that enables them to forge a network of all-digital relationships with any business, anywhere in the world.
The Network Effect
If businesses are serious about getting rid of paper, they would do well to take inspiration from social networks, which foster a digitally connective ecosystem that makes it incredibly easy to connect and share information.
Take LinkedIn. This isn’t just a space for people to share their CVs: it’s really a place to build and grow your own professional network. What’s great about LinkedIn is that there is no barrier to entry: you just need an email address and away you go. That’s exactly how supply chain relationships should be. No need for investment or new infrastructure; just plug into a universal platform and start digitizing any and every aspect of your relationship, from invoicing to purchasing to payments.
This easy, low-cost and modular path to digitization might be “carrot” enough to encourage suppliers to join a digital supply chain ecosystem, but it only scratches the surface of what such platforms can bring. Just like LinkedIn, businesses can build their own trading networks, recommending suppliers and buyers to each other, offering preferential payment terms and other incentives to trusted partners.
Digital ecosystems mean businesses no longer have to spend 100% of their time onboarding and managing the 20% of their relationships that bring in 80% of their revenue. Instead, they can take a far more holistic view of their entire supply chain ecosystem, including ‘long-tail’ suppliers, without adding an unmanageable amount of extra work.
Meanwhile, these supplier ecosystems will finally bring all the long-promised, never-delivered benefits of digitization. Buyers and sellers alike, will gain unprecedented transparency and visibility throughout the entire supply chain – not just their Tier 1 suppliers, but their suppliers’ suppliers, enabling them to prove their sustainability or Environmental, Social and Governance (ESG) credentials beyond doubt. They can create online marketplaces, and even pioneer new methods of supply chain finance: with between $7-9 trillion-worth of payments outstanding at any one time, businesses can spin this into new lines of credit, to the benefit of every company in the global supply chain.
The hub-and-spoke model is a relic of a simpler time, if it was ever relevant at all. Modern supply chains represent an incredibly complex worldwide infrastructure of relationships, both visible and invisible. Trying to manage these multifarious strands is like air traffic controllers only being able to see or communicate with one aircraft at a time: to avoid disaster, you need to see movements in totality and in real-time. With the right digital platform, enterprises can tease these threads into a coherent whole, enabling them to build and orchestrate an ever-growing, worldwide network: a Digital Dreamliner that enables businesses to take flight into a whole new world of opportunity.