The Supply Chain Services working group at the Fraunhofer Institute for Integrated Circuits IIS has been analyzing supply chains and developing innovation tools for the strategic digital transformation of companies for more than two decades. What is the working group's view of current trouble spots and what solutions are being considered? We asked Uwe Veres-Homm, Deputy Head of the Risk and Location Analysis department.
Mr. Veres-Homm, faltering supply chains have been posing serious problems for the PCB industry and EMS service providers for some time now. In your opinion, was this already foreseeable before the well-known crises (Covid, Ukraine war) - and if so, since when?
Uwe Veres-HommSooneror later, we could have seen it coming - but not that it would be so severe, so global and with such major disruptions. From our point of view, the logistics system, not just in relation to the PCB industry or electronic components, worked very well until the outbreak of the coronavirus pandemic: An order directly triggered a delivery, there were reliable partners in the chain, the process was easy to plan and cost-effective. But the system was sewn to the edge in terms of efficiency. Now we are experiencing various cogs jamming: when ports in China close down, the Suez Canal is blocked, there is a lack of AdBlue in Germany or it is no longer possible to drive through Ukraine. The war situation in Ukraine is even worse for European supply chains than the pandemic. These must now be restructured for several sectors because it is not foreseeable in the medium to long term that trade with Russia will be possible again or that it will be possible to transport goods through crisis areas.
Were there no corresponding crisis forecasts?
Although there is the discipline of supply chain risk management in companies, this remained abstract in many places. Some companies have actually relied on individual suppliers from individual source countries, although it is company policy to avoid this, and they suffer long-term losses because they had put all their eggs in one basket. Now, restructuring is taking place across all sectors in order to parallelize and shorten supply chains. The automotive industry in particular has been hit hard because individual processors or cable harnesses have been missing. The initial response was to buffer the missing preliminary products. Although buffer stocks cost money, they bring more stability and therefore security to the logistics system. But it will take time to rebuild these structures.
How should this restructuring take place?
You have to look at the supply chains: What exposure is there on the procurement side in certain source countries or with certain companies? What would it mean if this one supplier were to fail for whatever reason? Each company and its risk managers must decide for themselves how great this risk is. If, for example, in order to avoid a low single-digit default risk, another supplier has to be set up with correspondingly higher costs, the question arises as to whether it is actually worth it. This is precisely where many companies are now rethinking their approach. Previously, a low risk was accepted ... now the mantra of unconditional cost efficiency in logistics has turned towards safety.
Did this rethink start as soon as these crises became apparent?
A large part of the German automotive industry had relied on Leoni's two wire harness production sites in UkraineLet's take Leoni's wire harnesses as an example. The company had two production sites in Ukraine. Interestingly, a large part of the German automotive industry relied on these two sources for its components. With the Russian invasion, production was cut off. However, it only took a few weeks for Leoni to switch to production sites in Romania. Nevertheless, the loss of supply at the German automotive sites led to plant closures. This would be even more fatal for semiconductors. That is why efforts are being made to diversify production capacities.
This is now to be accelerated through subsidies ...
Individual intermediate goods - including semiconductors - are so essential for the functioning of an economy that we need our own capacities. If not in Germany, then at least in the EU. Germany currently has its own issues when it comes to personnel and energy availability. But at least in the EU, we should create our own production capacities again in the areas of pharmaceuticals and electronic components.
Logistics, transportation and mobility are undergoing a comprehensive 'digital transformation' - but the human resource remains a bottleneck ...
This is currently one of the biggest challenges for operational logistics. When it comes to digitalization, we are in the lower midfield compared to the rest of the industry, with many companies struggling to secure and manage their own data and make it available for AI solutions so that they can use it to create forecasts, for example. But a look at the inverted age pyramid clearly shows the bottleneck of the growing staff shortage. It is still people who handle, tranship, pick and transport goods. Who will still be doing this in the future? In my view, this can only be ensured by offering more attractive working conditions. I don't just mean higher pay, but also better planning, training and apprenticeships, not to mention a higher appreciation of logistics professions. Just think of the problems truck drivers have finding places to stay overnight. During the pandemic, we had to realize that functioning logistics also has a high social value.
How do we make these professions more attractive?
This is where digitalization comes into play. Ultimately, it means more data transparency in order to improve capacity and resource planning. We need to move away from the principle of working overtime and filling in for colleagues at short notice when more transport volume is required. Employees must also be able to plan and control their resource utilization if, for example, less work is required after rush hour. Flexibility is required here - also in the transport sector. Additional transparency and optimizing algorithms will enable employees to plan their time better. Perhaps they could even become their own dispatchers at some point. That would make the jobs more attractive. We have to go down this path: Who else is going to do this work in ten years' time when the baby boomers have retired?
Have the realities of people's lives perhaps changed so much that flexibility becomes unavoidable?
If we look at inner-city express delivery services, for example, we see that there are surprisingly few problems filling vacancies - even though the work is no better paid than in the traditional parcel sector, for example. However, employees are offered a high degree of flexibility: recruitment is carried out via 'Whatsapp', for example, and all it takes is a quick question as to who would like to work as a 'Ryder' for a few hours and then not ... But the question is: can such flexible models work in industrial logistics?
What is the answer?
To be honest, no: No. Precise planning is essential here. However, it is foreseeable that machines will take over some of the work. In transportation, we are still years away from this - keyword autonomous driving. Warehouse logistics is already further along, especially with standardized packaging sizes. The wage discussion is not the decisive factor here, but rather how flexibly an employee can organize their working hours. This is not easy for logistics service providers. They were used to everything being trimmed for maximum efficiency. But now they will have to make sacrifices in terms of cost efficiency and the costs per transport unit will rise. Logistics will become more expensive.
Can digitalization help to design such flexible working time models?
We are running projects on this. Based on historical data and current influencing factors such as throughput times in the warehouse, we are trying to forecast how many staff are needed on the floor - on a daily basis. It may soon be possible to say whether two people can stay at home on a particular day or come in two hours later. Some people want to be flexible, especially when two or three people are asked who has time and can come in for three hours. In any case, forecasting methods can be used to improve capacity distribution and load management in logistics processes.
How do you rate the laws already passed or planned on corporate due diligence obligations in supply chains?
On the one hand, the necessity is recognized and understood by companies. But I also hear loud groans and moans from the field. From a purely practical point of view, it may still be possible to check and assess the T1 supplier - i.e. your own supplier in the chain. But it is extremely difficult to get an overview of the entire supply chain. The information situation, especially in Asia, still leaves a lot to be desired in many areas.
There is also the question of how compliance with the rules can be monitored ...
There are a few clever approaches to this - start-ups that check where a supplier is based, what the local environmental conditions are like or whether there is any suspicion of child labor. Satellite images are also evaluated and local news about industrial estates is translated. But in any case, the law entails an additional regulatory burden that should not be underestimated.
How should companies react to these laws?
The point at which companies will have to provide information is already foreseeable. This is why you should deal with it internally at an early stage. Corresponding guidelines already exist. Otherwise, the consultants who specialize in this area can expect big business ...
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