by Laura Michelon, Marketing Manager, Resilience First
Supply chains have recently been facing increasing pressure from multiple stressors, including the global Covid-19 pandemic (and Brexit in the UK), and in 2023 these strains do not seem to be slowing down.
The global supply chain model that we all rely on has arguably aggravated shortages, and Russia’s invasion of Ukraine in 2022 put a halt on many exports, and pushed up oil and gas prices.
The increase in demand, in addition to a shortage of labour and materials are exacerbating the problems faced by many businesses around the world.
A senior industry representative commented: “The last few years have seen unprecedented supply chain disruptions which have impacted organisations in a number of ways, as production has struggled to keep up with demand volatility, products have been delayed getting to customers, and a loss of consumer confidence has followed. For example, disruption in the automotive sector was significantly caused by the scarcity of semi-conductors. As a result, the shortages limited overall output volumes and suppliers faced 20-30% less revenue, low planning certainty and various other challenges (see report: how to tackle supply chain challenges and thrive). The business costs associated with this disruption can have lasting effects, and of course, the impact of third-party disruption goes beyond simply the financial realm and can have operational and reputational impacts, among others.”
In what follows, we delve into the top supply chain challenges, and what businesses are doing to address them, remain resilient, and not only survive, but thrive in 2023 and beyond.
Global labour shortages: 85 million workers needed by 2030
47 million Americans quit their jobs in 2021; the pandemic and subsequent lockdown prompted many to reconsider their lifestyles. Remote working, higher pay, family time and a general passion (or lack thereof) were key to career decision making. This wave is still ongoing, and staff shortages all over the world inevitably lead to delays in the system.
Poor working conditions for remaining staff have resulted in strikes around the world, for example in vital services, such as transport and healthcare. In the shipping industry, workers are asking for pay increases to keep in line with inflation, and with 15% of seafarers coming from Russia and Ukraine, this only adds to the staffing pressures. Online shopping has created a higher demand for warehouse and delivery workers, and since 2016, according to a study by job search site Indeed, 36% of foreign employees left the UK after the Brexit vote. Roughly 1.3 million foreign employees are thought to have left the UK since late 2019.
As of January 2023, there is little sign of resolution to any of these issues. A report published by management consultants Korn Ferry has estimated that there will be a worldwide shortage of 85 million workers by 2030, equal to the population of Germany. If nothing is done, the lack of staff could amount to $8.5 trillion in unfulfilled annual revenue.
These labour issues are clearly here for the long term, but governments and businesses can work to incentivise, train and educate workers to fill these necessary roles.
Benefit of using new technology in supply chains
According to SAP’s study Tomorrow’s Supply Chain: Disruption Around Every Corner, 70% of UK businesses plan to adopt modern technology to help overcome supply chain challenges in 2023/2024; these will aim to be resilient to potentially unknown macro-factors during that time.
Keeping cost in control has always been a supply chain management priority, however that makes it neither flexible nor resilient. A shift from ‘just in time’ models to ‘just in case’ is expected to be implemented across various sectors. By doing so, businesses hope to build agility and resilience in their operations.
A senior industry representative said: “We are seeing a significant trend towards professionalising the use of technology to help with supply chain risk management. Our clients are looking to significantly enhance their ability to gain real time visibility of their supply chains; organisations are looking to integrate network mapping capability with risk sensing across suppliers, commodities and geographical risk in the end-to-end supply chain. Historically many companies have taken siloed approaches to managing risk, sustainability and resilience across the network, but are recognising the benefits of bringing more holistic visibility to supply chain operations. This has been difficult for a lot of companies largely due to the quality of data typically available, but we are seeing ever more concerted efforts to address these challenges in order to realise the strategic advantages that this insight can bring.”
As reported by McKinsey, businesses who were early adopters of AI–enabled supply chain management have seen an improvement in the costs of logistics by 15%, inventory levels by 35%, and service levels by 65%, compared with slower moving competitors.
In order to be resilient, supply chains need to embrace sustainability in all aspects, including technology and infrastructure.
Decarbonisation to battle climate change - a main supply chain disruptor
Alongside the Covid-19 pandemic and war in Ukraine, climate change is one of the main disruptors of supply chains; it can cause material/component shortages, in addition to shipping congestion and delivery delays or losses.
We all saw in 2022 how the heat waves, droughts, fires and storms weakened not only supply chains but the economy too; therefore a sustainability driven approach is needed to ensure the resiliency of supply chains and of our communities.
Looking at the World Economic Forum’s report - Net-Zero Challenge: The supply chain opportunity, in an ironic twist, the supply chain is actually a major contributor to the climate change issue. The supply chains of just eight industries account for more than 50% of global emissions; food alone accounts for around a quarter (the most of any supply chain in the world). Construction has the next-biggest footprint (at 10% of global emissions) followed by: fashion, fast-moving consumer goods (FMCG), electronics, automotive production, professional services, and freight.
“Supply-chain decarbonization will be a ‘game changer’ for the impact of corporate climate action”, commented Nigel Topping, UNFCCC’s High-Level Climate Action Champion.
A senior industry representative said: “Organisations are looking for solutions to both understand and manage all aspects of ‘sustainability’ in their supply chains, both social and environmental. Blockchain enabled solutions are increasingly being used to provide a verified chain of custody. One good example being used by Volvo is Circulor. (See video: Age of Change | Circulor). Not only does this allow for management of social issues, like eliminating child labour, but it also provides a reliable carbon footprint as it tracks the flow of actual materials along the supply chain. What is important to remember though, is that the solution needs to be matched to the organisational sustainability and business context, and one size definitely does not fit all.”
But will investing in sustainability help resolve Supply Chain issues connected to climate change/extreme weather events?
A senior industry representative commented: “This is a systemic challenge. Better understanding of supply chains will help manage transition risks, due to climate change. Likewise, more sustainable supply chains and organisations, with reduced GHG emissions, will in time start to mitigate the effects of climate change and reduce extreme weather events. Thereby positively reinforcing the outcomes we are all striving toward for a healthy planet.”
One way to make supply chains greener is to use local suppliers, as it reduces the carbon footprint and also can help with logistics and costs, and this is what we turn our attention to next…
Relocating supply chains
Reshoring (returning manufacturing back to the home country) or near-shoring (transferring the work to a closer country), are becoming common methods for solving supply chain issues. Resilience First member Deloitte has found that 62% of manufacturers it surveyed have started reshoring or near-shoring their production capacities. In the US, firms were expected to reshore 350,000 jobs in 2022.
The UK government is seeking to become more energy independent in the wake of the Russia/Ukraine conflict, and many companies that previously outsourced to Europe or Asia, despite increased costs, are exploring the idea of shortening the chain. Previously considered too costly, the current disruption could ultimately mean that this could save money, with more stability in supply, and less disruption.
Reduced supply risk and transportation costs are potentially excellent benefits for businesses, but they require a complete overhaul of long-established complex networks, business relationships and transport infrastructure to transition to this. Innovation and developing new partnerships will be key to succeeding in the transition.
Shipping and logistics companies will have to reconfigure and adapt to the new reality.
Transport industry executives estimate that by 2025, 20% of Asia-originated freight will move to closer proximity locations, doubling to 40% by 2030. Manufacturers have a similar expectation, and are already preparing for this: agriculture, clothing, and consumer electronics will be most affected. Governments and industries will need to work to modernise infrastructure and set the future of freight and the wider supply chain on to a more resilient path.
McKinsey’s survey shows that just under half of the companies interviewed were aware of their tier-one suppliers and the risks that those suppliers encounter, but only 2% had an understanding of their suppliers in the third tier and beyond. Great insight about the deeper tiers of their supply networks is crucial for preventing disruptions and anticipating demand, for example the current semi-conductors shortages happen in those deeper supply chain tiers. For a resilient supply chain there is a need for a variety of sourcing options but also reliability and transparency so that you can anticipate issues in securing critical materials.
Role of government
Policy plays a key role in supply chain dynamics and national interests are priorities over global demand.
New laws banning the import of goods produced with forced labour (such as the US Uyghur Forced Labor Prevention Act - UFLPA), which effectively stops Xinjiang-based products entering the country, (unless they can prove that forced labour was not used), will have an enormous impact which we are yet to fully understand. Europe is drafting similar laws regarding the practice. Security tensions between the US and China are affecting trade in advanced components such as semi-conductors, while the risk of further Covid-19 shutdowns remains a possibility.
A senior industry representative said: “Particularly in the government and public services sector, over the past few years we have seen a protectionist approach to supply; for example, undertaking the strategy of mass stockpiling to ensure continuity of supply on a national basis. More broadly protectionism is taking form across the globe, for example with the US Buy American push and the substantial green energy subsidies and tax cuts for US-made products. We are also seeing much ‘friend-shoring’ as companies move their supply chains outside of China and towards less risky markets such as India and south-east Asia.”
SAP’s Tomorrow’s Supply Chain report (published in August 2022), says that 60% of UK businesses want increased collaboration with industry and over half (56%) think the government should monitor the UK's supply chain itself and invest where necessary.
On 16 November 2022, the UK Government published a Supply Chain Resilience Framework, which offers practical advice on how to mitigate the supply chain risks and vulnerabilities for both the public and private sector.
Looking ahead
International supply chains have been badly affected in recent years, focusing on cost saving and just-in-time strategy no longer seems to be working. According to James Rickards, author of recently published ‘Sold Out: How broken supply chains, surging inflation and political instability will sink the global economy’, the global supply chain is now too long.
But 2023 is looking promising. A report from Sea-Intelligence, a supply chain research and analysis provider, says that 50% of congestion that created bottlenecks in the shipping sector is now resolved, and the pace of recovery is improving.
Many things need to change to create a resilient supply chain. Implementing a collaborative and transparent system, training and education, employing and retaining skilful talent, using new technology, putting sustainability at the core of operation, relocating services, and adapting to the geo-political environment will all go some way in resolving the crisis and creating a resilient future for supply chains.
As one senior industry representative commented: “Organisations should focus their resilience investment on identification, engagement with and management of critical supplies and suppliers throughout the network, focusing on those which support the delivery of the organisations most critical services. Pinpointing key points of vulnerability (e.g., over reliance) and implementing redundancy to mitigate these, provides the flexibility and substitutability needed during disruption. Better use of supply chain intelligence and network mapping should be leveraged to enhance the ability of organisations to identify and respond to issues early, and to continuously enhance their ability to mitigation plan. Organisations now need live and real-time data/information on supply chains to make informed decisions early on and at pace, historical or partial information is no longer good enough in a complex and volatile environment. Finally, supplier collaboration is key. Coordinated stress testing and response planning can ensure objectives are aligned and responsibilities are understood.”
