Dr Wanrong Zhang & Prof Jan Godsell discuss the importance of supply chains for the region, the issues affecting them, and why we should develop a regional ‘supply chain productivity’ goal.
This blog post was produced for inclusion in the Birmingham Economic Review for 2021.
The annual Birmingham Economic Review is produced by City-REDI, University of Birmingham and the Greater Birmingham Chambers of Commerce. It is an in-depth exploration of the economy of England’s second city and a high-quality resource for informing research, policy and investment decisions.
This post is featured in Chapter 1 of the Birmingham Economic Review for 2021, on Birmingham’s economic recovery and resilience following the coronavirus crisis.
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Supply chains play a key critical role in improving the Midlands’ productivity and resilience
The supply chain (SC) is the glue that links all firms in the business to deliver value to end customers. Industry has long recognised that today ‘it’s SCs that compete not individual firms’, with operational synergy a key competitive advantage.
To maximise competitivity in a globally connected, constantly evolving global market, regional SCs must demonstrate both resilience to external shocks and high productivity.
Global disruptions such as COVID-19 and Brexit brought unprecedented challenges to the regional SCs, which in turn become critical inhibitors to the productivity goal. Resolving this requires a high level of resilience – an ability to recover from external disruptions.
Equally, productivity disparities at different points in the SC (i.e. large vs. SMEs, West vs. East Midlands) can limit whole sector competitiveness. As SCs have their roots in manufacturing, this creates an opportunity for sectoral and cluster groups in the region to take a coordinative approach in improving SC productivity (the aggregated productivity of all entities across the end-to-end (E2E) SC), improving and sustaining regional productivity growth in the long term.
This means SC resilience and productivity are both key considerations for regional growth, as firms need to retain operational continuity (high resilience) to deliver customer value at the lowest possible cost (high productivity).
A regional ‘supply chain productivity’ goal should be established to align the development goal at the firm and regional level
Our recent study on the Midlands indicated that the value created by SCs is perceived differently at the firm and regional levels. From the firm perspective, having a resilient and efficient SC enables the firm to be more competitive in terms of cost, quality and time. From the regional perspective, the development of SCs creates social value through skill development and increased employment opportunities, as well as economic value by attracting more foreign direct investment.
To align the interests of the two levels, a ‘regional SC productivity’ goal could be established, enabling firms to unlock the benefits of integrated industrial SCs and allowing them to improve overall visibility through data sharing, make better decisions through effective cooperation and achieve the sustainability goal through resource optimisation across the SC.
Midlands is experiencing challenges in its physical SC network and the way it is being managed
Within the current Midlands SC network, multiple challenges for resilience and productivity growth were identified:
From the supply chain management (SCM) perspective, regional firms face three enduring issues, including:
- Visibility – Firms often struggle to establish visibility beyond tier 1 suppliers and customers due to underdeveloped digital capabilities, data security concerns and the lack of trust in the SC relationship.
- Integration – As firms are organised around ‘functional silos’, it is difficult for them to form cross-functional engagement (internal integration) and strategic alignment with suppliers and customers (external integration). This results in slow and lumpy flows and poor utilisation of inventory and production capacity.
- Sustainability – Net-zero agenda urges firms to reconsider the adoption of circular economy (CE) in the business, which would require a paradigm shift from the linear to circular business model by increasing recycled contents and factoring carbon in the SCM.
At the firm level, our research identified specific challenges which limited resilience and productivity:
- Skill shortage – Regional firms, typically SMEs, struggle to recruit and retain skilled labours, and high reliance on immigrant labours could lead to a high turnover rate in the business.
- Insufficient SC investment – Large firms often have easier access to external support such as business loans and government incentives, which provides them with advantages to improve productivity at the cost of its suppliers (mostly SMEs).
- Poor cash flow – Cash flow is an enduring issue in the SC that is often caused by poor buffer management (i.e. too much stock), late/slow payment by customers and other uncertainties (i.e. supply shortage).
- Early development of digital infrastructure – Digital infrastructure in the Midlands region needs further development to support the digitalisation of local firms particularly in the post-pandemic era.
- Overseas supply base – Many regional firms have a supply base in low-cost countries, which can be a potential barrier to achieving sustainability goals considering the carbon footprints embedded in the SC.
Effective solutions for these challenges have the potential to significantly improve the SC resilience of the region and therefore improve overall productivity.
Regional growth opportunities
To improve the regional SCs, a set of practical and political considerations is proposed to support future growth.
At the firm level, six SC resilience practices – planning, visibility, collaboration, buffer management, supply flexibility and adaptability, can be adopted to create a high degree of SC flexibility in terms of SC network configuration and SCM. The key to this is to build SC integration within and across SC entities so that business activities can be managed by taking a coordinative approach.
At the regional level, organisations such as Midlands Engine could take a coordinator role to leverage resources across different stakeholders to provide support around SC investments, skill upscaling, and infrastructure development.
To grow sustainably in the long term, the adoption of CE provides the biggest opportunity to tackle rooted issues, such as resources sacrifice and carbon emissions, by encouraging the reuse, remanufacture and recycling of existing materials, rather than mining from the ground.
This blog was written by Dr Wanrong Zhang & Prof Jan Godsell, WMG, University of Warwick
Disclaimer:
The opinions presented here belong to the author rather than the University of Birmingham.