Need for supply chains data
Events are currently occurring that appear to be regional or country specific, but each can interact in some way, with emerging but unknown outcomes. How could these events affect or influence your organisation’s supply chains?
- Inventory levels are increasing in excess of orders as they were placed many months ago, due to long lead times for items
- Some spending is being redirected to services, which should ease the demand for products and so relieve pressure on supply chains
- The threat to energy supply in Europe and grain supply for the Middle East could affect consumer willingness to spend on anything beyond the basics
- Inflation is accelerating in the US and their interest rate increases could flow to other economies. Will there be deflation or recession in some countries in 2023?
Senior management want to know the potential affect on supply chains through scenario planning and analysis. The LAL blogposts in 2022 have emphasised the need for knowledge of your organisation’s Supply Chains Network and now is the time to map the supply chains with sufficient data to enable analysis.
Trust and Vulnerability go together
If trust in the other party is reduced, so the perception of vulnerability increases. Although technologies are introduced to improve transparency about the movement and storage of items, governments and businesses have reduced their trust in the effectiveness of supply chains and are more concerned about vulnerability.
Trust between countries and companies operates the same as between individuals. We want to believe the other party will do and behave in the way they have stated or contracted. If they do not ‘walk the talk’, then distrust starts to build, which may be accelerated by responses to the bad behaviour. An example in business is extending the time to pay suppliers. Here, larger buyers want their suppliers to provide some (or all) the working capital, but it breaks the trust between buyer and seller. The distrust can then be magnified by the perceived differences between the parties: nationality; ethnic group; language and belief system and at the personal level concerning clan; caste; family.
Vulnerability at the country and company level is concerned with:
- Geopolitical risk for the country from which an item is supplied
- Availability of materials considered to be critical
- Concentration of suppliers, including those at Tiers 2 and below
- Trade regulation limitations
- Disruptions caused by climate change and natural events in supplying countries and along trade routes e.g. the Philippines now plans for six super sized typhoons per year
- Supply Chains cybersecurity risk
It takes time to re-establish trust. To improve trust requires positive actions that parties may not wish to take, as the actions can infer a weakness. So, in parallel, plan to reduce vulnerability, recognising that it takes time and resources.
The scenario planning activity should identify the greatest vulnerabilities for the business. Some of the actions to reduce vulnerability are:
Change the supply base: Review how your organisation restricts the scope for sourcing items. Understand where power and dependency resides in the supply chains, as Procurement relationships are influenced by these factors. Consider implementing Vendor Managed Inventory (VMI) agreements, whereby suppliers maintain safety stocks at your premises. VMI suppliers should be more aware of changes in the market for materials and so take protective action.
Change supply chain links and routing: For example, the China-Europe ‘northern corridor’ rail service via Russia and Belarus is unable to operate as freight settlements are paid in US dollars. However, the ‘Middle Corridor’ Trans-Caspian International Transport Route (TITR) is available. This multimodal freight transport route operates between Yinchuan in China, through Kazakhstan, the Caspian Sea, Azerbaijan, Georgia, Turkey and then to European countries, avoiding Russia in both directions. It also shortens the China to Europe transit time by15 days compared to the Northern Corridor.
To remain profitable over the long term, businesses in the commodity material (e.g. iron ore) and service (e.g. transport) sectors must become larger, with few competitors. This has happened in the Courier, Express Parcel (CEP) sector and continues in container shipping, This scenario will result in continued higher rates and different business relationships with shippers.
Change the Bill of Materials for products: Critical materials have supply vulnerability due to political and economic instability, concentration of supply and limited potential for substitution. For example, batteries to power electric vehicles are currently lithium-ion. The critical materials are sourced from a few geopolitically sensitive countries, providing supply chain vulnerabilities. As demand increases, so do the risks, requiring R&D effort to change the mix of ingredients, such as developing lithium-sulphur batteries.
Consider the ownership of waste and end-of-life materials at customers, especially if they contain valuable or critical raw materials. As a business closes a critical material loop, it becomes more resilient against supply shortages.
Change the energy mix for the business: Use electricity throughout the business that is generated by the sun, wind, tides, hydro and geothermal. As it becomes available, use ‘green hydrogen’ (produced using renewable energy) for energy intensive industries such as steel, cement, chemicals and for large interstate trucks.
Reduce complexity: Organisations generally become less resilient as they (and their supply chains) grow more complex. Organisations can have an over-reliance on centralisation. Change to a regional model, with supply and production closer to customers in consuming countries. Each region to have a trading hub where excess inventories are held, that support delayed deliveries from other regions.
Technology investment in business operations (production and logistics): This requires suppliers that intend to provide technical support over the long term – for large projects that are built from many small trials and investments. Implement blockchain technology if the material buying and movement processes justify the investment.
As all these initiatives take time. In the short term, actions may be required that are not viewed as providing ‘efficient’ supply chains. These include: holding additional inventory, accessing more suppliers and buying domestically at higher prices. While they may increase costs, it can assist the business to provide customer service.