Uncertainty in Supply Chains
For the past twenty plus years, the economies of developed countries have been based on low inflation and the three ‘low costs’ – labour (as a percentage of Value Added), goods (increasingly from China) and energy (especially gas from Russia to Europe). Following the pandemic, there is a now a new era, which has commenced with phase one – Inflation.
For at least the early part of the new era, Supply Chains will experience continuing disruptions. Those already known are:
- Port and shipping disruptions, with a low ‘on-time’ delivery to importers
- Labour shortages in developed countries may be short-term or remain due to demographic changes
- Over the northern hemisphere summer, countries have experienced heat waves and falling water levels in economically important rivers
- Droughts are affecting food yields.
- East Asia typhoon season and Caribbean hurricane season are unleashing high damage in their regions
- Winter gas shortages in Europe will cause disruptions and cost consumers and businesses dearly
- The war in Ukraine is causing disruptions to the supply of food and items in the automotive and electronics supply chains
- The southern hemisphere has also had its share of weather induced problems and
- COVID has not gone away, with new variants able to appear at any time
Hanging over all of this is the increasing geopolitical tensions and subsequent political instability that have the potential to influence changes in demand and supply patterns through the supply chains.
Over the duration of the pandemic, unplanned consequences caused questions to be raised about the total cost and risks of outsourcing production to ‘low-cost countries’; together with the drive to maximise supply chain cost efficiencies, that include holding small inventories. This led to much discussion about building Resilience through the supply chains, including ‘on-shoring’ or ‘near-shoring’ production, together with developing regional or domestic sources of supply for inputs.
However, only some enterprises will invest the resources and time to understand the process to become more Resilient, which, if not planned from the viewpoint of being effective, comes at the cost of additional capacity and inventory.
From this background is the question that should concern supply chain professionals. The extent of possible changes within your organisation’s supply chains and the time scale for change to occur.
Change in supply chains
Moving to a new supplier due to poor performance of the current supplier in a normal part of business relationships. The new situation is where the decision to move is not due to actions by the current supplier. The reasons can be due to geopolitical actions and decisions by governments concerning bans, sanctions, quotas and tariffs on goods (and/or the materials used) imported from designated countries; the on-going supply of critical materials and to avoid delivery problems due to climate change events.
Geopolitical actions and decisions by governments: While the previous era had an overriding theme of ‘Globalisation’, the new theme appears to more likely be ‘Security’. Therefore, political and commercial decisions are more likely viewed through the prism of domestic security, considering risks, such as vulnerability and threats, but also opportunities. This approach will most likely result in fewer trade agreements between countries and a possible increase in trade barriers that reduce imports.
Supply of critical materials: Current alarms concerning critical materials for production of products are gas supplies into Europe for the manufacture of fertilisers and the materials required in the production process for semiconductors. Review the locations for purchase and inventory of materials deemed ‘critical’ to the business (or country), with outcomes such as:
- Production and storage capacity for ‘critical’ materials and items to be located within a country
- Reduce the level of reliance on any one country for materials, components and finished goods
- Encourage (through investment or industry protection) new businesses involved with the critical material to establish and stay within a country
Climate Change events: There are likely to be more severe weather events across the world that businesses must be prepared to withstand. For example, in the recent typhoon and hurricane events, countries and locations experienced reduced lead-times for warnings concerning speed and intensity of the storms, so agility to new scenarios is required.
Be prepared for a change
To respond when there is a need to protect the continuity of supply, through a change in supply chains requires information. For your business, this requires the production of a Supply Chains Network Design map, through each Tier of suppliers and defined at the location/item level. When an event occurs that affects a material type or location, a search of the map details enables your business to know which materials and/or intermediate parts could be affected.
Recognising that all aspects of a Supply Chains Network are connected, the Network Design map is developed from Flows – the transfer of materials/items, money, transaction data and information by the Links between physical Nodes of each supply chain in the Network.
Obtaining details about suppliers at Tier 2 and below will require extensive detective work, which can be provided by retired librarians and analysts or selected university students. To save the time and effort, there are companies that provide supply chains information services. There are also IT applications available to assist the structure and organisation of the data and then enable models to identify risks when considering changes to the bill of materials for a product, the supply base at Nodes or routings via Links.
Only when the base information and supporting data are available can a Scenario Analysis exercise be undertaken that enables different supply chain scenarios to be structured that enable ‘what-if’ questions to predict likely outcomes.