14 Supply Chain Trends to Watch in 2023 (2024)

Sustainability

Going forward, environmental sustainability issues and extreme weather, such ashurricanes and wildfires, will keep them in the public eye, as people experiencemore weather-related damage to their communities and disruptions to the supplychains they depend on. Calls from climate experts and policymakers are growinglouder, demanding that businesses both reduce supply chain contributions to globalwarming and adapt supply chains to withstand extreme weather events.

The business case for sustainable supply chains is stronger than ever. Beyondgoodwill, companies have tended to cost-justify their steps toward sustainability asbrand-burnishing exercises to appeal to customers’ sensibilities, become moredesirable employers and meet investors’ environmental, social and governance(ESG)standards. These concerned stakeholders are growing in number and expanding toinclude business partners and lenders.

The drivers for businesses to be more sustainable are also changing. For instance,companies now face government regulation of supply chain emissions and operationalresilience. Global agenda-setting proposals include:

• The Securities and Exchange Commission’s pending rules requiring publiccompanies to disclose greenhouse gas emissions in financial statements.
• The White House’s proposed Federal Supplier Climate Risks and ResilienceRule,which adds operational risk mitigation on top of emissions reporting.
• The European Union’s forthcoming Corporate Sustainability ReportingDirective,for which some companies have already begun reporting and many more will beginas early as 2023.

Two digital mandates arise from supply chain regulation. The reporting data neededfor compliance will require ever greater visibilityinto supply chain sustainability — well beyond Tier 1 supply partnersintoTier 2 and beyond. And achieving mandates for greater supply chain resilience in theface of extreme weather events will require advanced analytics to identify variablerisk and achieve supply chain agility.

Supply Chain Agility

Nearly all supply chain trends for 2023 align with the uber-trend of agility.Decades of driving toward leaner supply chains to cut costs ultimately ended upcatching many companies flat-footed as volatility surged during the pandemic andbeyond. Times have changed — so much so that the very reference model forsupplychain operations recently underwent its most significant update in over 25 years,with a new emphasis on digitization.

The model — the Association of Supply Chain Management’s Supply ChainOperationsReference Digital Standard (SCOR DS) — covers processes, metrics, skills andpractices across industries, aiming to provide the foundation for digitalinvestments through 2030. It emphasizes market drivers, end-to-end visibility andbuyer-seller collaboration in supply chain design and operations, replacing linearthinking and lopsided buyer-supplier relationships with a more agile, orchestratedapproach to supply chain management.

Agility circa 2023 is embodied in new physical and digital models, especially thosethat are modular, micro and composable, as in:

• Microsupply chains: To flex with changes in market demands andsupply chain stressors, some companies are evolving from heavily integrated tomore modular, coordinated operations that address different business streamswith self-contained, microsupply chains running in parallel. This modularapproach lets businesses customize products, work processes and other aspects oftheir operations more responsively. For instance, generic and customizedproducts could each have their own supply chains.
• Microwarehousing and fulfillment: Warehousing and fulfillmentare also going micro. Smaller warehouse capacities in more locations are beingcalled into service, in everything from conventional logistics companies’centers to existing retail stores to spaces subleased from ecommercegiants’overbuilt supply networks. Highly automated and often located closer to densecustomer markets, microfulfillment centers can enable faster delivery at lowercost, as well as options including the popular consumer alternative to buyonline and pick up in-store (BOPIS).
• Microservices: The rise of microservices is adding agility todigital supplychain strategies. Loosely coupled microservices enable modularchanges, linked into larger platforms via application programming interfaces(APIs). They make it possible to fulfill a specific business requirement withoutall the dependencies and complexities inherent in incorporating newfunctionality into a complete application. Some refer to this development ascomposable applications, for adding functions, such as intelligent ordermanagement or spend management to enterprise resource planning and customerrelationship management systems.

Localized Supplies

Localizing supplies can reduce a company’s exposure to today’sgeopolitical risks,transportation costs and delays. The 2020s’ much heralded switchover fromglobal tolocal suppliers will gain ground in 2023, if not entirely as expected. While 92% ofexecutives express positive sentiments toward onshoring and near-shoring supplychains in the industry’s latest “Reshoring Index,” experts say thechange will begradual and only partial.

Many companies are expanding single-source, single-region strategies with a relianceon two or more sources from as many regions to avoid single points of failure. Aspart of this development, and especially with Asian suppliers setting upmanufacturing in Mexico, some American companies are buying components closer tohome and doing final assembly in the U.S.

2023 should clarify how far and how fast companies will rebalance their onshore,near-shore and offshore sourcing. Localizing a supply chain can give companiespause, though, if they require a big upfront investment, higher labor costs or thecreation of a new supply network from scratch. Meanwhile, some of the immediatepressure to localize may be off, with transportation congestion largely expected toclear up in the coming year and ocean freight rates declining from record highs. Andnotably, even if a company and its suppliers are not global, there’s oftenresidualglobal risk to manage from suppliers’ suppliers on distant shores.

“We are only at the beginning of finding a best-practice maturity model forglobalsupply chains,” according to the S&P Global survey. In the midst of thisrebalancingact and the tumultuous market forces that catalyzed it, supply chain agility isbecoming more important than ever.

Increased Inventory Reserves

Much like the trend to localize supplies, recent supply chain stressors led toinventory stockpiling. Going into 2023, though, economic forecasts show thatmarkets, such as retail, may face a surplus of inventory combined with a potentialdecrease in consumer purchases due to inflation. So companieswill be paying close attention to their inventoryreserves as a key financial mechanism for estimating the percent ofinventory that ultimately won’t be sold.

Whether for raw materials or finished products, inventory reserves areforward-looking and fluid expenses allocated to the cost of goods on a balance sheet(compared to write-offs, which are only taken after the fact). The better managerscan factor in historical inventory patterns and current market conditions to projectthe percent of goods that’ll never move, the more accurately they cancalculateinventory reserves and roll them up into their net inventory — all of which isessential to understanding a company’s net worth and future revenueopportunities.

Volatility will mean calculating inventory reserves more often, but it will alsoplace other aspects of inventorymanagement under continual scrutiny this coming year. For instance, whilestockpiling inventory can provide a hedge against inflation, that’s only trueifrising storage costs and the cost of financing that inventory don’t cancel outthepotential benefits of buying low today and selling higher tomorrow.

Among other inventory balancing acts, some experts advise against the recentlypopular view that supply chain managers should dispense with years of just-in-timeoperational experience for “just-in-case” overstocks. Instead, theyrecommendrefining just-in-timeinventory systems with limited, strategic stockpiles, backorder planning andeven the identification of substitutable products.

These and other inventory considerations make inventorymanagement software an increasingly valuable tool for companies to keep upto date and agile.

Flexible Contract Integrations

Volatility is the bane of supply chains that rely on big, long-term fixed-pricecontracts for volume savings on cost. New-model contracts aim to support thesuccess of both supplier and buyer in more fluid relationships, with flexiblecontracts that let buyers split orders into smaller blocks with the option ofchanging orders if the market shifts. Buyers and suppliers, who face many of thesame volatility issues, are also incorporating new contingencies into contracts,such as clauses for inflation.

It’s certainly not easy for companies to achieve this flexibility while at thesametime widening their range of suppliers to avoid single points of supply chainfailure. That’s what makes contract management more critical than ever in2023,relying on digital supply chain techniques that draw data from IT and operationaltechnology systems to deliver greater visibility for managing growing complexity.

Increased Ecommerce

B2C ecommerce continued to grow in the runup to 2023, following an unprecedentedsurge in online shopping early in the pandemic. Now the question is, which will winout in the coming year: consumers’ newly ingrained online habits or theirrediscovered yen for “real life” in-store shopping, travel andentertainment? Orwill inflation tamp down consumer spending across the board?

Uncertainty about consumer behavior will keep supply chain managers on their toes.Question marks hover over sales volume, to be sure, but also over preferencesincluding in-store shopping, ecommerce marketplaces, direct-to-consumer (D2C) salesand subscriptions, speedy delivery of online purchases, BOPIS and online/in-storereturns. For instance, customer expectations for hassle-free returns puts pressureon retailers’ ability to manage reverse logisticsin the supply chain.

Meanwhile, as sales on B2B marketplaces soared in the early 2020s, B2B is primed tobecome a larger ecommerce market. This sea change is not just about buying officesupplies and other essentials for running a business, but will also increasinglyinclude B2B marketplace purchasing of the actual raw goods and components that gointo final products. Both suppliers and buyers stand to benefit, but they’llalsoneed to manage significant transitions in their digital supply chains.

Customer-Centricity

Supply chains play an increasingly important role in customer experience (CX), asconsumers have become more digitally connected to brands. It’s telling thatseemingly every consumer and business these days wants to know where their purchaseis in the supply chain, at the click of a link.

According to Gartner, more than 60% of supply chain leaders are investing in CXmetrics and customer data analytics to improve their supply chain’s ability tosenseand respond to what their customers want, need and think. Investing in CX andcollaborating across company departments not only help to grow the business, butthey also support classic supply chain functions, such as forecasting and optimizinginventory.

One development to watch in 2023 is the D2C model. In the early 2020s, some of thebiggest winners in the CX race were D2C brands online. Unlike the B2B move towardmore marketplaces, described above, this B2C model tends to circumvent onlinemarketplaces to engage customers more directly, using a hyper-focused,customer-first approach that often relies on subscriptions and social mediamarketing. D2C brands collect a wealth of customer data. But with ecommerce andsocial growth slowing, many of these brands are now diversifying channels, even asmore conventional brands have looked to add a page from the D2C playbook in theirown omnichannel strategies.

Customization

Customer demand for greater choice and customized options seems to only grow. Butdelivering such product variety in 2023 could require new supply chain models andconsiderable attention to cost and complexity, with supply chains already undersignificant strain in the current environment.

One model for filling this demand is mass customization, which combines massproduction with customization to provide unique products on a relatively largescale, but at low cost. In this case, technology enablers like 3D printing couldplay a role in adding finishing touches to customize a product toward the end ofproduction.

Another model calls for spinning out microsupply chains, as described earlier, tooptimize handling of customized orders without impacting primary supply chainsegments. Order processing could likewise be segmented for customized products.

Internet of Things (IoT)

The rapid rollout of new higher speed, lower latency wireless technologies —fromubiquitous 5G cellular to in-building Wi-Fi 6 and 7 — is driving billions ofnew IoTconnections, and the supply chain is a primary benefactor. Working with other widearea wireless networks and in-building networks, 5G will continue to expandcloud-based networks’ capabilities with sensors and edge computing to gatherandprocess data on operations and logistics closer to thesource. Gartner predicts that 25% of supply chain decisions will be made acrossintelligent edge ecosystems by 2025.

Applications range from drones and robots to devices that can track the productionof a packaged food product, for instance — from sourcing ingredients,producing theitem, shipping it and selling it retail, while monitoring environmental and workingconditions along the way.

Cloud-Based Solutions

The cloud is now the standard platform for most supply chain software, according toan annual survey by MHI, a supply chain industry trade association that projects a40% adoption rate of cloud computing and storage in 2022 to reach 86% in 2027.

Pervasive cloud computing is laying the foundation for several supply chaininnovations. For example, so-called mesh technology enables the capture andcombination of data from multiple supply chain systems to create a “digitaltwin,” avirtual replica that can be used to facilitate decision-making and intelligentorchestration of operations. In practical terms, for example, inventory data can becombined with transport schedules and allocated transport vehicles to avoidstockouts.

At another level, the cloud enables supply chain managers to access criticalinformation wherever they, themselves, happen to be — not inconsequential inwhat isoften a 24/7 operation. Companies can also benefit from a growing range ofcloud-based software-as-a-service (SaaS),such as packaged solutions that let users compare freight forwarders and managestorage.

Advanced Automation

In 2022, the recognition has sunk in: The labor shortage is not going away. Nowonder nearly 80% of supply chain leaders have accelerated their digitaltransformation, with the adoption of supply chain robotics and automation expectedto nearly triple in the next five years, according to the MHI survey.

Surveys show that supply chain leaders are looking to automate using everything fromrobots in the warehouse to artificial intelligence (AI) in the back office. The goalis to elevate operations from the automated to the autonomous supply chain, definedby Capgemini as “an integrated, frictionless and customer-centric supply chainfunction that delivers cognitive, touchless operations and transparent data-drivendecision-making.”

Autonomous operations are the opposite of manual processes based on siloedinformation shared by email — all of which can slow supply chains and limitagilityin response to disruptions. For example, an advanced order management applicationcan help aggregate and stage shipments using just-in-time rules and algorithms. Andautonomous equipment, such as drones, will augment tasks that were heretoforemanually intensive, as they work independently and in networks.

Increased Visibility

The cloud, IoT and other advanced technologies can together deliver unprecedentedsupply chain visibility. Two developments to watch in 2023 will involve how digitaltwins and control towers make the most of this visibility to tame the vicissitudesof today’s environment.

A digital twin, as described above, provides a virtual replica of supply chainassets and their interactions based on data compiled from real-time visibility intothe supply chain, other internal departments and external sources. It’s builtwithmultiple technologies, from sensors and cloud computing to AI and visualizationtools.

A supply chain control tower enables cross-functional teams to formulate anorchestrated response to what is observed, increasingly by applying decisionssuggested by AI tools applied to this “single source of truth.”It’s enabled by dataanalytics, collaboration platforms and other digital tools fed with metrics, keyperformance indicators and controls.

In practical terms, these two models could help answer questions as simple as whatto do when a shipment is delayed. But perhaps their ultimate expression is scenarioplanning. This is where all the moving parts, from buildings to rawmaterials to finished products to customers, are combined and recombined with a viewtoward possible events, variables and desired outcomes to produce alternatestrategies to meet customer expectations at minimal cost. For instance, a virtualstress test could probe whether facilities and operations are adequate for a holidayseason.

But there’s still a big barrier to break before realizing the full promise ofdigital twins and control towers. Research shows most companies still have progressto make in achieving supply chain visibility, especially beyond Tier 1 suppliersinto their suppliers’ suppliers and on down the line to the next tier and thenext.And therein lies the source of many supply chain disruptions.

Improved Forecasting

Greater visibility will continue to sharpen companies’ demand forecastingcapabilities. Traditional forecasting techniques based on historical sales datacan’t sufficiently predict supply and demand in a fast changing world. Eachinput tosupply chain planning is subject to wider, more rapid swings today — fromsales tosupplier lead times, shipping schedules, warehouse availability and storage costs.

With the combination of greater visibility and advanced analytics, a more advanceddemand forecastingmodel is designed to make predictions over the long, medium and short termsand adjust to continual fluctuations. For instance, if demand is dropping, companiesthat can monitor internal and external demand signals to make more frequentforecasts can cut production on a timely basis and avoid inventorywrite-downs. Advanced demand forecasting can even improve responses toincremental factors that might impact demand, such as a slight change in the weatheror an extra ad placement.

The upshot is that supply chains employing advanced demand planning provide continuallyimproving accuracy of forecasting and alignment withplanning — essential attributes that have become harder in practice intoday’s volatile market.

AI and Machine Learning

If agility is the motivational force behind supply chain trends in 2023, AI andmachine learning are the accelerators. AI is expected to see the fastest growth inthe next five years among all advanced technologies ranked in the MHI annual survey— in use by only 15% of respondents today but rising to 73% over the next fiveyears.

Yet even companies that have already invested in AI have so far failed to realizeits full potential, experts say. They’ve largely employed its predictivecapabilities to forecast demand for planning purposes, a BCG report found, butcoming years will give AI a larger role in supply chain operations, as supply teamscome to trust its autonomous decision-making capabilities.

Supply chain managers face a kaleidoscope of potentially concurrent disruptions atvarious levels of the supply chain, from demand to supply and out to theirsuppliers’ suppliers, across geographies, channels and climates. Unassisted,nosupply chain team can keep on top of all the potential inefficiencies and faultlines, let alone take decisive action fast enough.

AI, on the other hand, can learn from the team’s past decisions, correlateinformation across departments and recommend actions for similar situations. It canthen continually analyze resulting data to make recurring decisions that optimizeperformance and provide recommendations to enhance the supply chain — much ofwhichgradually takes place more autonomously.

In what Gartner calls “analytics everywhere,” use cases includeself-drivingvehicles, in which the AI algorithms have been trained to react to unforeseen eventsin the warehouse to avoid sudden obstacles and accidents on their programmed routes.In another context, AI can identify unfolding weather disasters and how they impactroutes, correlating that information with the location of suppliers, warehouses andother assets to activate backup plans.