Each feature and video presents other aspects with a focus (again) on Industrial Supply Chains, the second feature is entitled “Cautious consumer in Australia”, both items are from authors of Mc.Kinsey and the two videos on post covid-19 and what sustainability is going to change or has to change are of J. Safra Sarasin Banking Group.
We recommend each item to read and watch carefully, because these entail some exact facts and figures and the videos contain excellent hints to what the future might bring. The first video is entitled “Targeting a Carbon Neutral Outcome by 2035” and the second video bears the title “Imagining our Post-COVID-19 World on the aspects of Sustainability”.
Here starts the first item:
Reimagining industrial supply chains
By guest authors Thomas Baumgartner, Yogesh Malik, and Asutosh Padhi from McKinsey Company
For organisations that understand the vulnerabilities in industrial supply chains, there is an opportunity to prepare for future shocks and build resilience without hurting efficiency.
In recent months, structural supply-chain fragility has been catapulted to the top of the news cycle as the ongoing repercussions of the COVID-19 pandemic echo around the world. Government-imposed orders to stay at home, international and domestic travel restrictions, and the need for physical distancing have stretched supply chains and laid bare the key bottlenecks in products’ value chains. Shortages have occurred in areas ranging from basic grocery items to electronic components.
The current pandemic is the type of event that is only likely to occur once in a lifetime. In recent years, however, supply-chain risk management has become more of a pressing issue for CEOs across industries. Vulnerabilities have been exposed by trade tensions, natural disasters, and other geo-economic disruptions.
The complexity of global industrial supply chains exponentially increases their risk. On average, an auto manufacturer has around 250 tier-one suppliers, but the number proliferates to 18000 across the full value chain. Aerospace manufacturers have an average of 200 tier-one suppliers and 12000 across all tiers. Finally, technology companies have an average of 125 suppliers in their tier-one group and more than 7000 across all tiers.
Companies that cannot successfully manage those complex and, at times, opaque supply chains are at high risk, especially if they cannot mitigate the risk of increasing disruptions. Even a short disruption of 30 days or fewer can put 3 to 5 % of EBITDA margin at stake. Recent research from the McKinsey Global Institute (MGI) has found that as much as 45 %of one year’s EBITDA 1 can be lost each decade because of disruptions.
While we cannot predict exactly when big shocks will occur, we can make a good assessment of their frequency, the severity of their impact, and the time that organisations will have to prepare for different category disruptions, including global crises, surprise catastrophes, anticipated disruptions, and idiosyncratic events (Exhibit 1).
An analysis by MGI shows that some organizations are already attempting to improve resiliency, particularly with regard to dual sourcing and holding more inventory. In December 2019, 70 % of respondents to a major MGI research survey expected to change their globalisation and sourcing strategies, with 32 % planning to move their operations closer to their consumers. In addition, 24 % expected to diversify their supply chains across countries.
During the COVID-19 crisis, the need for action has elevated in priority. When MGI reconnected with its survey respondents in May 2020, it found that 93 % of supply-chain leaders were planning to increase resilience and that 44 % would increase resilience even at the expense of short- term savings.
That trade-off does not need to occur, however: the traditional wisdom that resilience can only be achieved at the cost of productivity and efficiency no longer holds true. Employing a range of digital and analytics solutions, including Industry 4.0 tools, can help achieve resilience balanced on the twin pillars of productivity and flexibility.
Rethink the business model
Companies can rethink their traditional business models to provide continuous or new sources of revenue. Some businesses, particularly those that are currently based on one-off asset sales, can offer subscription-based or pay-by-usage models for machinery and plants. The result? New payment options that turn capital expenditures into operating expenditures, creating a continual revenue stream. For example, a material-handling equipment, warehousing, and material-flow engineering company leveraged technology to expand beyond traditional equipment sales. For customers who preferred limited-term equipment use, a 12-month contract gave them access to equipment via a pay- by-usage model.2
Business models based on intellectual-property rights can also provide a basis for new opportunities. Recurring revenue models can be found through either sourcing fees for data standards or using add-on services for primary products.
A third option for new business models involves providing access to technology platforms (such as ecosystems for developers based on open systems) and to brokers’ platforms with industrial spot markets that connect third parties (such as those with excess production capacity and the ability to provide services). Data-driven models can use crowdsourced data for the direct monetisation of collected data, as seen with a number of large tech players. Insights from collected data can also be indirectly monetized through microsegmentation for pricing and customisation.
Secure value-chain competitiveness
Many sectors are seeing rapid disintermediation of their customer relationships. Large technology platforms, now boasting billions of monthly active users, attract businesses seeking to sell to those users—making the platforms even more attractive to the users, all in a virtuous cycle.
One effect of this tech-enabled transformation of customer access and experience is to make outbound supply chains more complex to manage. Another is the potential loss of direct customer connections.
Organisations that fail to address key value-chain points often experience difficulties, as illustrated when proprietary data eventually became the de facto standard for entire categories of digital services.
But companies can also protect their customer relationships by taking end-to-end, clean-sheet views of their future value chains to secure competitiveness against potential disintermediation. Taking actions to improve customer access, implement proprietary technology platforms, help set new industry standards, and leverage domain know-how can provide crucial support. Recognizing the potential danger, other players have invested in securing algorithms that build on the same data as competitors, and use the experience curve so that page-rank algorithms can yield better search results. Recommendation engines that leverage scale provide another avenue for designing individual offerings.
2 Fabio Buschle, Fabian Klüser, Ricardo Moya-Quiroga Gomez, Vendla Sandström, and Erik Sjödin, “Future-proofing operations: Low-volume/ high-complexity industries,” July 2019, McKinsey.com
Another method of building supply-chain resilience is digitization. Several disruptive technologies are accelerating the process. For example, following Moore’s law, a 50 %reduction every two years in the size of semiconductor process nodes brought them down to five nanometers in 2020 (the rate
of reduction has slowed in recent years, however). The computational power used to train the largest artificial-intelligence models has increased twofold every 3.4 months since 2012. Industry 4.0 technologies are also driving big changes in all areas of operations (Exhibit 2).
The value of analytics, as well as the intelligence it provides, is also increasing. Similarly, the cost of Internet of Things nodes, such as security and temperature sensors, has declined dramatically—by 50 percent—and is expected to fall still further. The digitisation of manufacturing processes is also providing increased interaction between humans and machines, with sixfold growth expected in the virtual-reality market, resulting in a compound annual growth rate of around 35 %.
Additionally, there has been an improved digital to physical conversion thanks to the greater power of additive manufacturing, often referred to as 3D printing. That includes a 60 %reduction in cost per part in 3D printing since 1990.
Companies can also rethink their future plant archetypes (Exhibit 3). Smart plants enabled by digitisation and automation offer cost-efficient mass production, while customer-centric plants use digital to offer ultraresponsive, single-piece flow and allow for mass customization. Advanced- technology use, and manufacturing excellence are underpinned by a digital backbone and agile, lean operations that offer increased flexibility, productivity, and collaboration.
Industry 4.0 technologies, including automation, can also enable new footprint decisions while achieving a similar—or even improved—cost position. The technologies can be applied to manufacturing processes, such as with automated testing and packaging.
Several mature economies show significant potential for the adoption of Industry 4.0 methods and technologies. With comparatively high levels of investment, innovation, and workforce capabilities in these locations, their capital-labor trade-off may look quite different once Industry 4.0 is taken into consideration.
We estimate that as much as USD 4.6 trillion in trade flows may be rebalanced across geographies in the coming years, driven by economic factors such as capital intensity (share of capital compensation in total value), knowledge intensity (percentage of labour force with college degrees), product complexity, and trade-weighted distance (Exhibit 4). Noneconomic factors that influence trade flows may include increased interventions intended to further national security, national competitiveness, and self-sufficiency.
The regionalisation of supply chains has already started and could create both risks and opportunities across regions. Changes enabled by Industry 4.0 can deliver results, such as an approximate 65 % labour-efficiency increase, a 30 to 40 % unit-cost reduction for manufacturing overhead, a more than 200 % increase in output, and an approximate 50 % reduction in quality issues.
Stress-test industrial supply chains—yesterday
Typically, industrial companies have vulnerabilities that are not obvious. Organizations can immediately undertake stress tests of their supply chains to reduce such issues. In a complex, fast-changing, and unpredictable environment, C-level engagement is critical for assessing and mitigating supply-chain vulnerabilities. Recent research on the subject emphasizes that a stress test is an important first step in developing a resilience blueprint.
A general stress test considers five factors: industry attractiveness, corporate resilience, supply-chain exposure, operations exposure, and customer exposure. Its holistic approach allows for comparison both within business units and with competitors. An in-depth look at the global industrial supply chain can identify vulnerabilities at both tier-one and other levels by considering a range of risk factors, such as the density of spend associated with suppliers and geographic locations. An examination of supplier interconnectivity and operational and financial impact, and they can understand where they can focus their efforts to reduce overall value-chain risk (Exhibit 5). supply-chain depth can help leaders understandthe often-vast expanse of subtier suppliers. For instance, companies may discover that some smaller sub-tier suppliers are likely to be at risk because of their size or their dependence on a single company. By analyzing the potential for shock exposure and sources of vulnerability, organizations can illuminate unexpected value-chain disruptions that can cause
For organisations that act now, there is an opportunity to build resilient industrial supply chains. The first big step involves taking the time to understand where potential risks exist. Will your company be one of the first movers?
Here is the first video:
Targeting a Carbon Neutral Outcome by 2035
Climate change remains one of the largest global challenges of our times and will have substantial financial, social and environmental impact on current and future generations. As a pioneer in sustainable investing, J. Safra Sarasin Asset Management strives to be an industry leader in tackling climate change and pledges to aim for a carbon-neutral outcome in assets under management by 2035.
Here starts the second feature:
Australia’s next normal: The cautious consumer
COVID-19 has elicited a clear worry among many Australians about their household “wallets,” and this concern is having an impact on overall sentiment and behaviour.
By guest authors by Eleanor Bensley, Jenny Child, Thomas Rüdiger Smith, and Joseph Tesvic..Eleanor Bensley is an associate partner in McKinsey’s Sydney office, where Jenny Child is a partner, Thomas Rüdiger Smith is an associate partner, and Joseph Tesvic is a senior partner.The authors wish to thank Chris Bradley, Resil Das and Karthikeyan Swaminathan for their contributions to this article.
Given everything that 2020 has thrown at Australia so far, no one could blame its consumers for being a touch nervous. If you look below the surface however, they appear to be more than a touch worried.
Since the beginning of the COVID-19 crisis, Australian consumers have consistently been more concerned and cautious than consumers in countries that were far less effective at handling the health crisis. Our previous research showed the stark gap between the optimism of Australian consumers compared with those of the United States and China in particular—countries that are and were experiencing substantially worse health scenarios from COVID-19 (Exhibit 1).
Consumer spending: A time of volatility Australia saw a bit of cheer with the positive upticks in consumption and sentiment in May and June, perhaps because it was a much-needed sign of hope. A closer look suggests this rise was a sigh of relief that worse health outcomes had been avoided to date as well as a stimulus-boosted sugar-hit of pent-up demand in some spending segments. As this demand is released—and as Australians sink into the reality that battling COVID-19 is a marathon, not a sprint—the intent to make spending cutbacks and frugal, recession-like behaviour are showing up in our data across all segments and categories (with the exception of groceries, which have trended positively since more home-centric behaviour started).First, it is important not to be too distracted by the recent consumption upticks as we remember that our consumption and many of our businesses’ livelihoods are still on government life support. In fact, for some people, this life support has actually surpassed their pre-COVID-19 income. For example, Curtin University’s analysis reported that around four in five part-time workers in industries affected by COVID-19 are better off under the government’s JobKeeper Payment.2 Millions more Australians have also received one-off payments, targeted at lower-income households precisely because these households are more likely to spend the money and stimulate consumption.
1Jenny Child, Thomas Rüdiger Smith, and Joseph Tesvic, “The curse of ‘The Lucky Country’: In search of economic antidotes to COVID-19,” mckinsey.com, May 4, 2020.
2JobKeepers and JobSeekers: How many workers will lose and how many will gain?, Bankwest Curtin Economics Centre, March 2020, www.bcec.edu.au
While such support makes spending possible now, there is a looming understanding that it is not sustainable. As it steps down, the full economic impact of COVID-19 will be more evident (Exhibit 2). When considered along with other temporary support, such as loan relief from banks, dips into superannuation funds, and childcare relief, the masking of true consumption patterns is significant. Recent announcements to extend more targeted, lower-value JobKeeper payments until March 2021 will smooth the withdrawal of stimulus, but it won’t cushion the full impact of COVID-19 on household incomes. Looking at other economic metrics gives a better sense of what’s happening. For example, while consumption and confidence rose in May and June, hours worked did not (Exhibit 3). Australians may have seen people back at shops, but in the businesses they worked for, or those of their 3 Labour Force, Australia, Jun 2020 (6202.0), Australian Bureau of Statistics.friends, hours worked were falling steadily—often negotiated with employees as a compromise tactic for businesses that might otherwise have had to take more drastic action. As a result, the headline unemployment rate masks a reduction of hours (and often pay) among workers still counted as employed. In addition, more than 350000 Australians had left the labour force from February through June, which doesn’t show up in headline unemployment numbers either.3What does that mean for consumer optimism? It suggests the consistent worry about the economy seen in our consumer data is well placed and may track down as stimulus dissipates. From early April, roughly 60 %of Australians in our survey report they are very or extremely concerned about the economy, which has since remained the top concern (Exhibit 4).
Note: 3Labour Force, Australia, Jun 2020 (6202.0), Australian Bureau of Statistic
Using consumer insights to increase preparedness
Because of these artificial cushions to the economic blow of COVID-19, it could be that we are, as a nation, like a patient still in shock from an injury. We are only just now gradually feeling the adrenaline wearing away, with the dull reality of recovery and a long road ahead settling in. The upside is we have good data all around us that can help us build the right preparedness—if we move quickly and study and mine it properly. We know from history that Australian consumer sentiment does, in fact, tend to harden. When consumer sentiment declined in the early 1990s, it remained negative for many years, lagging well behind macro indicators as the economy technically recovered. We also know that the cautious mindset of Australians shows up in spending pullbacks that, in aggregate, are disproportionate to the actual drop in household income. We have seen this trend since the start of COVID-19 in our data—with every pulse check, more Australians are reporting reductions in spending than those whose household income has declined (Exhibit 5).
We are also moving beyond looking at consumer data in aggregate. In our most recent analysis, four distinct segments have emerged:
1. Making ends meet: those who were struggling financially pre-COVID-19 and continue to struggle.
2. Optimistic but cautious: those who worry about health and the economy but are more secure financially.
3. Stable and consistent: the highest-income segment, which has experienced a small amount of financial impact but remained relatively stable in mindset and behaviour.
4. Income in jeopardy: those who have had a significant change in household income as a result of COVID-19, with a fear of it worsening.These segments help us get to more granular insights and implications of how to respond (Exhibit 6)
Across all of the segments, the data show a net intent among consumers to pull back on spending. This tightening isn’t a lower-income issue; it’s a non-discriminating socioeconomic trend. However, there are significant differences in magnitude of tightening, with the quarter of Australians whose income is in jeopardy showing the biggest planned cutbacks and, understandably, the lowest levels of optimism (Exhibit 7). With the recent spike in cases and a lockdown returning in Victoria, these planned cutbacks are expected to be even more significant across the board (again with grocery being the only category to move in the opposite direction). Taking a closer look at behaviours across these four segments, we see important but well-known recession trends. The first is a spike in “planfulness” when it comes to shopping, which we see in our quantitative survey data and ethnographic research. While we have been referring to COVID-19 as the “great acceleration” of consumer change, there are some exceptions, and this is one of them. Pre-COVID-19, we saw a multiyear rise in just-in-time, convenience-driven behaviours and preferences that seemed correlated to an increasing use of all things digital—a channel synonymous with immediacy. What we are seeing now is a spike in more planned buying and purchases, which is a reversal in direction. This pattern appears to be caused by a handful of factors, ranging from wanting to avoid crowded shopping spaces to needing to think through budgets and spending more deliberately. Whatever the reason, we expect to see the re-emergence of rituals such as the weekly shop for the foreseeable future.
We also see more traditional, frugal behaviour emerging across segments (Exhibit 8). Unsurprisingly, the income in jeopardy segment is signalling a strong shift to price and value. For example, more than 50 %of this segment plans to buy more products on promotion, and more than 40 %intend to look for cheaper products going forward. Other consumer segments show a similar trend, with about one-third of respondents saying they will look to buy more products on promotion compared with pre-COVID-19. The other well-known marker of recessionary behaviour to watch with consumers is the shift to shopping in discount channels; more than 20 %of Australians are already reporting this shift.As consumers wean off the stimulus and support mechanisms, these frugal patterns will only increase. When aggregate consumption tracks downward, and consumers become more price conscious, many B2C companies will find it difficult to navigate this landscape. It becomes impossible to navigate without the right focus on consumers and proper forward-looking scenarios. The big headline from these insights is about building the approach to move nimbly and get ahead of the needs of consumers, so they become part of retailers’ growth plans versus a deficit to budget.
Meeting Australian consumers where they are
As we look ahead, three factors will shape the spending patterns of Australian consumers: —Spending capacity will continue to be radically and unpredictably affected as government support is progressively wound back.—Rise in ‘planfulness’ in what, how often and how much households will buy.—Price consciousness is on the rise. Several recommendations can help companies triage. To start, get to know your consumers anew and understand them in light of COVID-19. Their needs and spending patterns have changed. Many businesses will need to fundamentally relearn what to expect from consumers in 2020, as insights from 2019 will no longer be relevant. Generate insights in real time and more frequently. Rather than the annual or biannual segmentation study, a more frequent and nimble approach to understanding consumers is needed as our context continues to rapidly evolve—and so will consumer segments.
The coronavirus, still menacing Australian communities, is now fully infecting the Australian economy and consumption. Retailers and B2C companies must adapt now to this new reality. As we’ve seen, waiting for the impact to show in the mainstream news means you have already waited too long.
Here starts the second video:
Imagining our Post-COVID World on the aspects of Sustainability
The coronavirus crisis has dramatically altered many aspects of our lives, from health and lifestyle to the economy. Looking ahead, will these changes help foster sustainable development in the years to come? In our latest video, J. Safra Sarasin’s Sustainable Investment Research team discusses what our post-COVID world could look like. Watch the video to find out more.
Key points include:
• The COVID-19 crisis is bringing about new sustainable financing solutions, triggered by a rise in financial innovation.
• The green energy transition is likely to accelerate, and strengthening biodiversity is crucial to mitigating the shock of future risks.
• This pandemic has exposed the limits of lean manufacturing principles and global supply chains will be re-engineered following this crisis.
• Remote working has become increasingly common, aided by technology, while resilience plays a key role for cities and real estate
These are your presenters:
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