Is the current reality just transitory?

Forecasting is a worthy activity, because it requires people to think about the future. However, be careful about accepting forecasts until you know how the forecast is structured and source of the data used.

For supply chains, which are geopolitical in structure, the forecasts say that changes will happen, but the unknown is where and when. As George Friedman has written:

• On the one hand, if you take a snapshot of the world every 20 years or so, the reality of how the world works and what matters will have shifted dramatically, compared with the previous snapshot.
• On the other hand, at any point in time there is a general belief that the world as it is at this moment will remain in place for a long time.

There is a need for Supply Chain professionals to evaluate whether the current ‘reality’ is transitory – a temporary modification of activities in response to events, or part of a trend to a different reality. Herein lies a challenge. A business invests in a model and strategy in response to the situation and facts at a point in time. It is therefore difficult to accept contradictory facts that indicate an emerging reality, therefore the new facts are considered as transitory and not worth responding to.

For example, it was identified in the 1990s that having multiple suppliers was not as effective as having a single ‘partner’ supplier, but for ‘security of supply’ reasons, there is now a return to having multiple suppliers. Or the concept of ‘Just in Time’ and the elimination of waste, that was viewed by commentators as perfection at the time of introduction; yet ‘Just in Case’ has been revived as an approach to inventory management.

Additionally, Supply Chain professionals should assess geopolitical changes for the potential effect on their organisation’s supply chains and the trade lanes that service them, including those used by Tiers 2, 3 and 4 suppliers that could disrupt an organisation’s business. In addition to the physical flows through supply chains, also consider the financial flows that can be affected by trade policies of countries, which may include preferences and sanctions.

Transitory or new reality?

Trust is required for a complex, multi-tier supply chains and consumer consumption structure to operate. But this is difficult to establish and maintain, due to perceptions in a supply chain by the buyers and sellers of their power and dependency. When disruptions occur in the chain, whether internally or externally caused, it is easier for the blame to be apportioned by the parties that have power, which can lead to possible disengagement by those parties considered to be dependent on that supply chain.

Building trust between countries has been an objective of international agencies, partly through reducing trade barriers. These have helped to improve the flow of materials through global supply chains. However, a global system is complex and has the potential for disruptions. As shown with COVID19, nations acted in their own interests to secure medical supplies and there was limited to nil co-ordination; actions of one nation could negatively affect the plans and actions of other countries. This undermined trust.

Subsequent events around the globe have provided for increased fears about national security and defence. Also, access to ‘critical’ materials and products. These attitudes may see an increase in the relocation of production from current locations (called on-shoring, near-shoring and friends-shoring) and for procurement to become more domestic and region focussed. However, while individual supply chains may change in the short term for specific reasons, for all supply chains, change will be slower – globalisation took about 20 years to reach its peak.

Some options under the new reality

Building scenarios about possible options and potential action by your company are necessary activities. Looking forward over the next seven years, some options that may influence your trade lanes are:

• Regionalisation of sales, production and procurement, with shorter supply chains that may have fewer disruptions
• Changes in geopolitical relations enable countries in Central Asia to promote increased rail freight services across the Eurasian landmass to offer quicker deliveries than by sea freight
• Investments in supply chain technologies and automation accelerate where incomes are high or are expected to rapidly increase. Reduction in unit costs provides the potential for more products to be made close to customer, thereby reducing imports
• Companies with operations in China accelerate the policy of China+1 or 2, whereby lower Value Added products are moved from China and produced in countries of Asia, Eastern Europe or Central America.
• Reduction in reliance on single countries or areas for materials and intermediate goods. Investment in country based production capacity for materials and items deemed to be ‘critical’
• In Asia, the Added Value is increased in finished goods and intermediate goods (including technology-based) destined for global markets. With population increase and a growing middle class, Asian consumers buy more products manufactured in Asia, therefore inter-country trade within Asia increases.
• Asset intensive sectors less likely to change supply chains until the investments in a country have been depreciated
• Apparel manufacture moves to other low cost countries (LCCs) when current LCCs increase labour costs

Driver of change after 2030

Approaching 2030, the focus for supply chains should be governments and businesses providing Adaptation against Climate Change. The world is already experiencing severe climate influenced weather events and these will only get worse. But how will these types of events (severe storms and heatwaves) affect your company’s supply chains? Do you know where your supplier’s suppliers and customer’s customers are located? And where will the most serious effects of Climate Change be felt?

To indicate the scope of work required to address these questions, the news agency Bloomberg has undertaken a comprehensive review of Apple’s supply chains. As explained by Andreas Wieland, Bloomberg selected Apple because the company has invested considerable effort to understand their supply chains and importantly, publish the findings. The review provides an excellent overview of the work required to understand climate risks for a company and could be used to help convince senior management of the urgency and need to budget for the resources and work required.