Over the past 20 months, two words have come into virtually every newscast and our daily conversations, and no, they’re not “coronavirus” or “pandemic”.
We’re talking about Supply Chains – often accompanied by stock shortages, factory closures, depleted inventory, port backlogs, labour strife, empty containers, and price hikes.
Supply chains have one objective: to ensure that what is needed gets where it is needed when it is needed, efficiently and cost effectively. Yet, in a Gartner Inc. survey of 1,300 supply chain professionals undertaken in the second quarter of 2020, 97 percent of supply chains had experienced a disruptive event in the two years leading up to COVID-19’s declaration as a pandemic.
Climate has also played a significant role. There were natural disasters: typhoons in Shanghai—home to China’s largest port—and this year, hurricanes as well as offshore pipeline leaks in the U.S. Gulf Coast—the site of petrochemical plants that churn out plastics for every conceivable widget and its packaging. This year also saw memorable bottlenecks: the stranded mega-ship that blocked shipping through the Suez Canal, one of the world’s busiest sea lanes, and the flotilla of hundreds of container-laden ships waiting to unload cargoes at the Port of Los Angeles.
Less obvious, perhaps, were the unanticipated shifts in demand that occurred once the pandemic was in full force. Consumer and corporate purchases of laptops soared, as might have been expected, early in the work-from-home era; so too for desks and chairs and sweatpants. The bigger surprise may have been that consumers who couldn’t spend as planned on services, like travel and eating out, instead increased their spending on stuff – and that stuff had to be manufactured, packaged, and shipped at unprecedented volumes. E-commerce soared as in-store sales plummeted.
Shipping volumes in 2021 followed suit: Loaded imports at the Port of Los Angeles totaled the equivalent of 6.9 million containers between January and August 2021, an increase of 23 percent compared with the same period in 2019, according to research firm Beacon Economics. It seems that “just-in-time”, low-inventory practices to drive down costs were unable to flex to fill surging demand – production, shipping, and ground transport all broke under the strain.
So, what does this mean for our global supply chains in 2022?
Resilience is the New Watchword in Supply Chain Management
Cost factors have historically driven most sourcing decisions: supply chain managers have searched for where they could be guaranteed a supply of quality computer chips or shoelaces or hubcaps at the lowest cost. Now, however, supply chain leaders are focusing on “resilience” – the need to mitigate the risk of disruption to production caused by a lack of inputs.
In some companies, this has moved the “supply chain” function from the Procurement arm to the Risk Management one, or even to Corporate Strategic Leadership. Supply chain management (SCM) today requires a more nuanced view of corporate risk and strategy than when purchasing agents and contracts negotiators managed supply chains in the past. Supply chain is now all about avoiding the unquantifiable-but-exorbitant costs of supply chain disruption. There is no metric for that to take the place of the easy cost-per-unit indicator of effective SCM in the past.
According to the same survey, only one in five supply chain leaders believe they have a highly resilient network today—good visibility into what they are sourcing from where, and the agility to shift sourcing, manufacturing, and distribution activities as needed. However, a whopping 87 percent of those surveyed plan investments in supply chain resilience over the next two years.
Resilient Supply Chains Are Increasingly Complex and Costly
What does a resilient supply chain look like? It varies by sector, but likely involves maintaining higher inventories of parts inputs or developing additional production facilities or contracted suppliers to fill in should their main suppliers or facilities experience a disruption. Many companies have grown increasingly concerned about their dependence on Chinese suppliers, given US-China trade tensions, and soaring trans-Pacific shipping costs. Multi-sourcing and “near-shoring” (sourcing in Mexico and Central America) appear to be on the rise.
Buyers with resilient supply chains must invest in local capacity. They find themselves doing much more than writing purchase contracts with new suppliers; in many cases, they may need to finance suppliers’ expanded production, train on quality control and inventory management, help their suppliers automate, and ensure that supplier labor practices meet the buyers’ standards.
Suppliers may need training to complete environmental audits as part of the buyer’s “net zero” or similar commitments. And capacity building is likely needed on corporate codes of conduct, the U.S. Foreign and Corrupt Practices Act, corporate commitments to diversity, equity, and inclusion, and other topics.
Transforming Supply Markets, not Just Contracting Suppliers across Emerging Markets
As production bases and input suppliers disperse, the resilient supply chain will inevitably also require a proliferation of local shipping, storage, and distribution services in the new source countries.
In many emerging markets, such logistics services are state-owned or highly regulated, and ports are congested or too shallow to berth today’s mega-ships. Solutions don’t come easily and must often be worked out with government agencies or Ministries that are not accustomed to being market responsive. In many emerging markets, buyers are building supply markets, not just suppliers. Some emerging markets have yet to privatise many logistics services, but the introduction of new global buyers and investors and their requirements for speed and reliability in transport and customs clearance may plant this seed.
Finally, for many global manufacturers, their greatest environmental impacts come from their supply chains. Diversifying supply chains could dramatically increase a buyer’s carbon footprint – or decrease it. There is opportunity in this sea of change.
Digitalisation Will Help Integrate Dispersed Supply Chains
Managing a complex network of suppliers and logistics services, with fluid, adaptive supply chains requires new data tools and methodologies. More than 80 percent of organisations surveyed plan to develop their digital ecosystems over the next couple of years. And, new ways of measuring supply chain resilience are under development, along with many new SCM software and database/dashboard applications.
Digitalisation is both inevitable and powerful. Buyer-supplier transactions no longer happen in person, they happen in the cloud. Customers increasingly demand traceability of what they purchase and consume, and buyers follow their lead. Buyers will often need to introduce technology solutions to their suppliers, ensure interoperability of digital systems, facilitate e-payments, or introduce blockchain. As technology continuously evolves, this is much more than a one-time, start-up investment by buyers and suppliers.
Supply chain managers ultimately will insist on knowing where their products are at all times: see them as they move between modes of transport, between companies, and countries. And they will have to be prepared to support this upskilling and capacity development among their suppliers as well as the constant upgrading and interoperability challenges each supplier will have – especially since suppliers will be likely selling to multiple buyers, each with their own digital SCM tools and apps.
Re-Engineering Supply Chains Could Have a Positive Impact on Developing Countries
Just as buyers are rethinking their supplier networks and SCM methods to make them more resilient, developing country governments and their producers are positioning to attract the long-term supply contracts and foreign direct investment that could come be theirs—creating jobs and incomes for their communities.
Eager to integrate into global supply chains (which are often called value chains to those who are concerned with the creation of development value in poorer countries), investment promotion agencies are rolling out the red carpet for global buyers looking to diversify their sourcing and willing to invest in skills development, digitalisation, or supply chain financing.
And buyers are willing to take a look – but they’ll be looking at the fundamentals of an attractive investment climate: a skilled workforce, accessible ports, expedited clearance of goods coming in and going out, low corruption, and access to energy—as has always been the case,
They’ll make choices about relocating footloose industries (garments, footwear, food, and beverages) pretty easily, but it will be much harder to calculate the odds of a payout as they place bets on where to put their (semiconductor) chips.
Erin Endean is Vice President, Economic Growth, for Palladium's Americas Regional Business Unit. A former U.S. trade negotiator and consultant to multinational businesses, she has spent the last 20 years working to help farmers and workers in developing countries improve their earnings and wellbeing by becoming more connected to global markets. For more information, contact email@example.com.