Questions for a government

This first blogpost for 2022 will note some changes that could occur, but over a longer horizon, than one year. These are not ‘trends’, but matters for consideration concerning how, if they gain momentum, they may affect your supply chains.

For 2022, national governments have limited strategy options. Over the past two years it has become evident that the health of a nation provides the basis for a healthy economy. The strategy options that will influence the operations of a country’s supply chains are likely to be:

Health

• Maintain zero tolerance for COVID 19 infections or
• As the vaccinations rate increases, learn to live with COVID19

Economy

• Achieve or exceed pre-COVID 19 economic growth rates or
• Pursue long-term economic goals to change the reliance on fossil fuels, which may reduce short-term economic growth

The most common strategy will be to go with points two and three. As the COVID 19 variants have infected populations, societies have experienced the effects of reduced labour availability, including product shortages. As the Omicron variant takes hold, the work days lost in an economy could double for that period.

Governments are now taking more notice of items that appear to be ‘critical’ and the actions of supplying countries. Aggressive geopolitics, nationalism, desire for self-sufficiency and incentives to ‘on-shore’ production are likely to increase, changing the pattern of some supply chains. This approach is likely to be even more pronounced for any material and intermediate goods required for the move by countries, industries and individual businesses from fossil fuels to renewables and the planned reduction in emissions.

Questions for a business

Who do we miss most when they do not arrive for work? The CEO or finance director? Or is it the warehouse staff, truck drivers, supermarket staff, nurses, childcare workers and aged care workers? These are the people we actually value as essential in a modern economy, but only when things go wrong. It is evident that automation, IT application and AI software are of little use if knowledgeable people are not available to drive them, so who and what is more important in your business?

A discussion concerning productivity and employment will also include a policy on working from home for employees engaged in non-physical tasks – is this an international trend or confined to a few developed countries? Will attitudes concerning health and social mixing and travel influence how the business operates?

Other headings on the agenda should be:

• Meaning of the term ‘responsive’ in your business
• How does your organisation consider risk in supply chains and the elements that provide resilience – visibility, redundancy and flexibility?
• Is there a justification to change from a global approach in Procurement to region based supply chains?
• What is a critical item in supply? The pandemic has highlighted materials and intermediate goods that were easy to obtain becoming difficult and expensive.

Disruptions to supply chains could continue for all of 2022 and even into 2023. As discussed in earlier blogposts, an imbalance between demand and supply causes the ‘lead time syndrome’ and a correction requires either less demand or more supply. However, demand for items has yet to slow and suppliers and logistics services providers are reluctant to invest in more capacity. The ‘solution’ could therefore be an economic slowdown, caused by consumers reducing their purchases, as confidence is eroded by price increases (caused by inflation) and continuing delivery delays.

In addition are the disruptions caused by natural disasters – floods, cyclones, typhoons, wildfires, volcanoes and earthquakes. In 2021, the cost of natural disasters has been estimated at a third more than in 2020 and the effects of future climate change will likely increase that figure.

Changing Power in supply chains

The negotiating power of suppliers must increase in the transport sector, because the elements (containers, trucks, rail systems, container ships) are basically the same and usually available, with only price as the main focus. A commodity material or service is naturally price sensitive, therefore for businesses in the sector to remain profitable they must become larger, with few competitors. This has happened in the Courier, Express Parcel (CEP) sector and has been happening in container shipping, as acquisitions of shipping lines continues. There is the possibility of three container shipping companies controlling about 80 percent of international trade by 2030 or earlier.

For consumer goods, about eight percent of purchases from physical shops are returned. This increases to at least 30 percent for purchases made online, a figure that could well increase due to the ease and low cost of returns for the consumer. This is unsustainable for suppliers without a disincentive applied to consumers or used as an incentive for sellers to better understand and respond to the problem. The situation could also encourage more manufacturers to adopt a Manufacturer to Consumer (M2C) direct online model to better control their sales process. This could influence their supply chains and influence the centralised inventories approach at retailers.

Over the past two years, the perception of supply chains and logistics has gained a new prominence in government, the media and companies – from generally viewed as just a cost centre, to being the cause of all our troubles and which requires the best people as providers of solutions to difficult challenges.

Will there be a change in attitudes and approaches within business and their supply chains? While some organisations will change, unfortunately it will be too easy for others to revert to how it was in 2019. Do not let that be your organisation.