Supply Chains Face New Demands after Covid-19: Digital Transformation, Climate, and Security

Business, government, and civil society leaders are focusing on the need for supply chains to work much more effectively, to meet high-level societal objectives, and to protect against data theft and cybercrime.

President Biden’s February 2021 mandate for a government review of vulnerabilities in U.S. supply chains was a wake-up call in this regard. The executive order outlined concerns about severe shortages of key supplies, dependence on foreign sourcing of some critical products and materials, and suppliers’ inability to deal with surges and shifts in customer demand of the sort seen during the Covid-19 pandemic. The 100-day review is expected in early June.

Improving supply chain management is now front and center for governments and in c-suites and board rooms. It is thus an opportune time for companies not only to review and update their supply chain flows, but more broadly to manage their supply chain risks more proactively to build better resilience and efficiency; meet societal goals, including low-carbon commitments; and incorporate better physical and digital security into the tangible and intangible links throughout their supply chain.

Resilience and Efficiency

More than 80 percent of supply chain leaders surveyed by Capgemini in late 2020 reported that their supply chains were negatively impacted during the pandemic, and 66 percent said that supply chains will need to change significantly in order to adapt to a new normal after the pandemic.

To do this, many companies will need to undertake a major digital transformation of their supply chain management—not only to get better oversight of their supply network, but also to move their data on requirements, suppliers, inventories, and deliveries to integrated computerized systems that can evaluate demand and supply end-to-end in real time and allow a rapid response in case of changes or problems. Increasingly, artificial intelligence is augmenting capabilities to identify, forecast, and meet demand and supply.

Many other practical changes may be needed, from changing the location, diversity, or duplication of supply chain partners, and managing, ordering, inventorying, and monitoring differently to deal with problems in real time, to developing regional strategies to enhance productivity in key markets. But robust risk analysis and digitally transformed implementation are fundamental to ensuring that any and all such changes optimize resilience and efficiency throughout a company’s supply chain.

Environmental Issues

Updating supply chain practices is also necessary to manage a company’s environmental impact and to meet a growing number of sustainability standards and commitments, including low- or zero-carbon energy usage, biodiversity, water conservation, waste and pollution reduction, and natural resources conservation.

Companies’ management of these issues typically will require adoption of new supply chain practices, given that most of a company’s environmental impact may in fact arise in its supply chain. McKinsey & Company estimates that a typical consumer company’s supply chain has a far greater environmental impact than the company’s own operations, accounting for more than 80 percent of overall greenhouse gas emissions and 90 percent of the impact on air, water, and other resources.

Many companies are already working closely with the small and medium businesses in their supply chains to reach net-zero or negative carbon emissions before 2050. The focus on these efforts will only intensify as more companies make net-zero carbon commitments in advance of the 26th UN Climate Change Conference (COP26) in November.

Dealing with these issues will require new data and ongoing communications with suppliers to help them quantify, manage, and reduce their environmental impact, and to acknowledge or even reward them for doing so. This needs data-driven processes whereby baseline and ongoing measurements of impact are collected and reviewed, even if actually implementing environmental improvements in the supply chain may not be low cost or simple.

Security

Recent digital security breaches, such as those at information technology suppliers Solar Winds and Accellion in 2020, have highlighted how broadly supply chains and customers can be affected by a security problem at even one point in the supply chain—numerous government agencies, banks, companies, and others were hacked via the security breaches at these two suppliers alone. The even more recent ransomware attack on Colonial Pipeline impacted tens of millions of people in thirteen states and the District of Columbia, including through the movement of goods.

Regular risk assessment and review of a company’s own physical and digital security and that of its supply chain are vital elements of modern supply-chain management. As with environmental issues, working to integrate security into every level of a company’s supply chain cannot reduce these problems to a zero level of risk. But more intelligent and technologically assisted risk assessments, implementation of needed management processes, data collection and review, and ongoing communication can produce measurable improvements and substantially reduce such security risks and improve the integrity of the supply chain.

The upcoming reports required by the executive order will likely have specific policy recommendations for key manufacturing and defense-related sectors, including reshoring, enhancing domestic supply options, building redundancy, and cooperating with allies to find alternative supply chains. Business leaders and boards of directors now have a major opportunity to ensure that any redesign of their supply chains also seizes the opportunity to digitally transform, decarbonize, and secure each link in their supply chain.

Pamela Passman is a senior associate (non-resident) with the Economics Program at the Center for Strategic and International Studies in Washington, D.C. She is also senior adviser, Office of the Executive Chairman at APCO Worldwide.

Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

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