A number of workers unload various basic necessities from KM Bukit Raya to a smaller boat in the waters of Anambas, Riau Islands, (Antara Photo/Joko Sulistyo)

Supply Chain Evolution in Indonesia: a CEO’s Guide

BY :ALEX DOLYA, CHITTARANJAN JHA

OCTOBER 26, 2022

As Southeast Asia's largest economy, Indonesia's economic growth over the last few decades has been remarkable and reflective of its G20 Presidency. The country is amongst the newly industrialized nations. The government has ambitious plans to boost its competitiveness in the Fourth Industrial Revolution (4IR) through its Making Indonesia 4.0 roadmap, focusing on food and beverages, textiles and clothing, automotive, electronic, chemical, pharmaceuticals, and medical devices sectors.

But many of these industries were unprepared for the massive supply chain disruptions caused by the COVID-19 pandemic. Indonesia was amongst the many industrial economies that felt the blow of the global semiconductor crisis, with shortages weakening productivity in related industries. Original equipment manufacturers (OEM) and distributors were unprepared without backup plans to deal with the shortage of semiconductors.

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Although Indonesia's manufacturing sector reportedly expanded at the start of 2022 owing to increased demand from foreign markets, stronger purchasing activity, and improved supplier delivery times compared to recent years, it is not completely out of the woods. There are lingering supply chain issues ranging from order backlogs to longer wait times and higher input costs due to supply shortages and higher transportation costs. Repeated increases in subsidized fuel prices, most recently by 30 percent, are causing logistics costs to soar, raising the cost of imports, and impacting production, cash flow, and bottom lines amidst a depreciating Rupiah.

With prolonged disruptions on the horizon, businesses in Asia are rethinking a just-in-time supply chain strategy by stockpiling and diversifying their suppliers. Others are considering near and reshoring to increase supply chain and logistics resilience. But these adjustments can be timely and costly. Suppose companies are going to weather external shocks. In that case, they need to adopt supply chain strategies that go beyond cost savings to tap every other key source of competitive advantage, including innovation, quality, sustainability, speed, and risk management. And it starts right at the top with the CEO.

Eliciting maximum value from supplier relationships

In the past, CEOs generally spent just one percent of their time with suppliers. But in today's volatile times, every C-suite has had to become an expert in the movement of goods and associated services. Today's CEO must be in the driver's seat of a company's supplier relations, and our latest book, "Profit from the Source," provides a blueprint of how to win.

It begins with CEOs forging strategic relationships with their heads of procurement like never before. This is the one business function that has a complete 360 view of the company from its raw materials suppliers through to buyers and ends consumers. Bringing procurement into high-level decision-making can help CEOs tap into the company's competitor movements, future product and market trends, and smarter ways to source or manufacture products. President Joko "Jokowi" Widodo has underscored the need to accelerate procurement.

Now more than ever, CEOs must guide their companies to engage not just with their suppliers but with the broader network of suppliers to strengthen and evolve the ecosystem in their respective sectors. Profit from the Source outlines ten practical principles to help business leaders deliver these changes, a few of which we'll explore here. 

Forge dynamic relationships with the most important suppliers: The relationship between procurement and suppliers must be mutually beneficial rather than be an arm-wrestling match to see who can squeeze the best deal. Working with suppliers rather than against them can make all the difference in times of disruption, where only the most vital relationships will see the company through.

Achieve breakthrough innovations by pooling R&D resources with suppliers: Business leaders are facing increasing pressure to offer 'the next best thing in terms of products. As the company and its suppliers engage in R&D, why not invest in it together to co-develop innovations that give them a first-mover advantage in the market?

Deliver unbeatable quality by joining forces with suppliers to wage war on errors: Achieving a "zero defects" goal that applies to every stage of the product lifecycle from design to production and distribution is best achieved through collaboration with suppliers. 

Become truly sustainable by allying with suppliers to meet environmental, social, and governmental (ESG) standards: Companies that work with their suppliers to develop sustainable products and services are more likely to avoid sustainability breaches and prosper in the new ESG-conscious world.

Go twice as fast by collaborating with, not competing against, your suppliers: The same-day delivery and instant gratification era call for working closely with suppliers to reconfigure the procurement, supply chain, and product development processes.

Winning Industry 4.0 with Supply Chain 4.0

Building the competitiveness of extended supplier networks will optimize the entire value chain, including domestic supply chains, and help better prepare for challenges and market volatility. Supply chain strategies that combine expertise, prioritize innovation, and expand capabilities can generate extraordinary value throughout the supply chain ecosystem while being resilient in the face of future shocks.

This is especially important in the Making Indonesia 4.0 journey, which will no doubt demand, at a greater rate, a shift from traditional supply chains to digital supply chains to support new production models, transportation modes, customer experiences, and relationships. This shift is at the heart of Supply Chain 4.0. It represents a massive opportunity for Indonesian manufacturers and businesses to improve their competitive advantage, product availability, and market share even in volatile times.

A study involving Indonesian manufacturers found that companies and supply chain stakeholders can win on the road to Supply Chain 4.0 by being outward-looking and fostering supply chain collaboration with external networks. This requires being technologically ready, flexible, innovative, and efficient in integrating digital business processes.

As it stands, Indonesia has some way to go in providing Supply Chain 4.0 infrastructure and adoption. Still, in its quest to become a top 10 world economy, Indonesia aims to double its industrial productivity, build local innovation capabilities, and invest in research and development. It is keenly focused on supporting industrial downstream to increase the added value of national export commodities. These are fascinating times for Indonesia's industrial future, and business leaders with the foresight to invest in the country's supply chain evolution have a real opportunity to lead the charge.

Alex Dolya is the managing director and partner at Boston Consulting Group. Chittaranjan Jha is a partner and associate director at Boston Consulting Group.

 

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