Expert Column Digital Transformation for Supply Chain Risk Management

Supply Chain Risks in the Post-COVID Era 1. Geopolitical Risk
After COVID-19 was first reported in 2019 and subsequently spread into a global pandemic, stimulus measures implemented by various countries led to an increase in consumer demand, which in turn caused a surge in cargo volume. This resulted in a shortage of labor and equipment, leading to a decrease in ship turnaround rates and a significant drop in punctuality. Consequently, the Shanghai Containerized Freight Index (SFCI), a key ocean freight index, dramatically rose from 942 points in January 2020 to 4,969 points by January 2022.

Before the impacts of COVID-19 had fully subsided, the Russia-Ukraine war broke out in February 2022. This conflict led to the suspension of the Trans-Siberian Railway (TSR) services and the control of Odessa Port, the largest port on the Black Sea coast. This was a significant blow to companies that had been using the TSR to avoid the heightened maritime freight rates caused by COVID-19.

Recently, the global shipping industry has been thrown into significant turmoil again due to attacks on civilian ships in the Red Sea by Houthi rebels, which have been ongoing since November 2023. These attacks occurred near the Suez Canal, a critical chokepoint in the Red Sea, prompting shipping companies to begin rerouting around the Cape of Good Hope. As a result, the Shanghai Containerized Freight Index (SFCI) surged from 1,028 in November 2023 to 2,181 by February 2024.

As of May 2024, the Houthi rebel attacks are still ongoing. The Suez Canal is a crucial ocean trade route that handles about 30% of the world's annual container traffic and 12% of goods traded globally . When disruptions occur at such a critical juncture like the Suez Canal, essential for international trade, vessels traveling from Asia to Europe must seek alternative routes. Disruptions in vital supply chain passages like the Suez Canal have immediate and extensive impacts on global logistics.

2. Global Supply Chain Restructuring
After COVID-19, the complexity of global supply chains is increasing due to strengthening protectionism, reorganization of industrial structures, and changes in supply chain strategies. Governments of each country that experienced the pandemic strengthened protectionist policies to protect their industries and secure a stable supply chain. Additionally, these policy changes served as an opportunity to promote the diversification of companies' supply chains.

For example, the United States is protecting and strengthening its semiconductor industry through the CHIPS Act. This legislation primarily involves providing subsidies to companies that invest in semiconductor manufacturing facilities within the U.S. The goal is to encourage domestic semiconductor production and reduce reliance on global supply chains.

The supply chain vulnerabilities and geopolitical instability triggered by COVID-19 have led many companies to reconsider and restructure their supply chain strategies. In particular, companies are adopting strategies to relocate production facilities closer to demand centers to minimize production delays and respond quickly to market needs. For example, to meet the demand in the U.S., many companies are establishing component and electric vehicle factories in Mexico. However, these changes also led to a reconfiguration of global supply chains, increasing their complexity.

3. Climate Change
The world is increasingly facing numerous risks due to climate change, making it imperative to prepare for regulations related to carbon emissions. The logistics industry is no exception. Extreme weather events such as heatwaves, heavy rainfall, and droughts caused by climate change are having a significant impact on global logistics.

In 2023, the worst drought to hit Central and South America severely impacted the Panama Canal due to extreme water shortages. The Panama Canal, a crucial artery connecting the Pacific and Atlantic Oceans, handles approximately 5% of global ocean trade. In 2023, Panama experienced its lowest rainfall since 1950. According to the Panama Canal Authority(ACP), the water level of Gatun Lake dropped from 88 feet (27 m) in December 2022 to approximately 79 feet (24 m) by July 2023.

In response to such climate change risks, many countries are strengthening carbon emission regulations. A prominent example is the European Union (EU), which announced that starting in 2024, it will implement the Emissions Trading System (EU-ETS) for foreign ships over 5,000 GT operating in European ports. Major shipping companies have announced plans to impose surcharges in response to the application of the EU-ETS.

Amidst ongoing geopolitical issues, supply chain restructuring, and climate change concerns, the global supply chain is once again facing a severe crisis. Addressing these multifaceted supply chain risks is expected to incur substantial costs, making data-driven digital transformation essential for effective management. Samsung SDS's DT in Logistics Samsung SDS is advancing its logistics digital transformation in three phases. The first phase, "Operational Efficiency," aims to maximize efficiency by optimizing logistics operations. The second phase, "Digital Expansion," focuses on enhancing the customer's digital experience through a digital forwarding platform and sharing the value of these digital innovations with partners. The final phase, "Data-Driven Agility," leverages generative AI to drive hyper-automation and expand visibility from current operations to future logistics flows. This phase aims to rapidly sense and analyze risks to support optimal decision-making. Through these three phases of digital transformation, Samsung SDS is enhancing supply chain efficiency and strengthening its ability to respond agilely to changing market environments.

1. Hyper Automation
In the past, shippers had to call or email freight forwarders to use logistics services. While traditional methods have been digitized with the emergence of digital forwarding platforms, many shippers still rely on phone calls and emails for their operations. However, with the integration of generative AI into logistics services, customers can now receive the services they need through a single conversational interface without the need to use multiple channels. The future of customer communication, enhanced by generative AI, can already be experienced through Samsung SDS's 'Cello Square GPT' implemented in the GPT Store.

Through 'Cello Square GPT', customers can use various services such as quote inquiries, container requirements estimation, and cargo tracking through natural conversation, without the need to log into a separate logistics platform. Information can be exchanged effortlessly through conversation alone, without complex service manuals or guides. This conversational AI-based logistics service is expected to evolve to allow direct booking and shipping through conversation in the future.

The automation of logistics operation processes has been pursued for some time. However, it has mostly been limited to individual tasks, with the inter-task coordination often still handled manually when viewed from the perspective of the entire logistics process. With the use of generative AI, it is now possible to automate not only previously non-automated parts but also the coordination between tasks that were difficult to automate. This significantly improves the overall efficiency of logistics operation processes and enhances operational speed and accuracy.

2. Holistic Visibility
Experiencing supply chain disruptions during COVID-19 highlighted the importance of visibility, prompting its evolution. Historically, visibility focused on real-time cargo tracking, but now the concept has significantly expanded to encompass various aspects.

One of the most important expansions is the concept of "time." Previously, visibility was primarily about determining where cargo was located at a given moment. Now, it includes not only real-time tracking but also predicting future cargo movements. A prime example of this is "Predictive ETA," which calculates and provides the estimated time of arrival for shipments.

Moreover, visibility has expanded beyond cargo movements to include costs, such as demurrage and detention fees, and even future freight rates. For instance, future freight rates are predicted monthly using System Dynamics models, incorporating variables such as historical SCFI rates, container demand/supply trends, and blank sailings for ocean freight rates.

Lastly, the visibility in logistics has evolved beyond merely operational data to include environmental impacts. A prime example of this is the "Carbon Emission Dashboard," which provides a clear summary of the carbon emissions and intensity across the entire supply chain of a client company.

3. Decision Intelligence
The risk sensing system begins its operation by collecting 60,000 news articles from around the world every day. Using machine learning technology, approximately 750 articles that have a high likelihood of leading to logistics risks are selected. From these 750 articles, the system further filters out around 70 risks that require intensive management and assesses the risk level of each. The risk assessment is conducted by an AI that has been trained on about 20,000 past risk incidents and their severity, enabling the AI to automatically evaluate the risk level of new incidents.

After identifying and analyzing logistics risks and their impacts through the system, the risk manager registers the results in the "Risk Dashboard." During this process, the system automatically extracts the affected cargo volumes. Once the information is registered, automated emails are sent to headquarters, regional, and local operations managers, enabling swift sharing of relevant information.

Subsequently, operations managers develop response plans based on the registered risks and share these plans with customers. The response measures can include operating alternative routes, adjusting transportation schedules, and changing service providers. This process ensures effective response to risk situations, thereby maintaining the stability of logistics operations.

Risks have always existed in supply chains and will continue to do so in the future. The crucial factor is how quickly and accurately one can make decisions and respond to these risks. As the importance of risk management in supply chains has recently become more prominent, companies now require high levels of flexibility and agility. In the face of rapidly increasing global risks, the flexibility and resilience of the supply chain will be the foundation and core of a company's stable growth.

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