Supply Chains and the need for resilience
The length and complexity of supply chains has grown as companies expanded around the world in pursuit of margin improvements. But when shocks occur, such as natural disasters, these margins are eroded or even cancelled out.
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Companies can now expect supply chain disruptions lasting a month or longer to occur every 3.7 years, and the most severe events can have a major financial impact (McKinsey Global Institute). Companies can expect to lose more than 40% of a year’s profit every decade due to supply chain shocks (McKinsey Global Institute), though a single, extreme event could have a much greater impact. Industries where production is concentrated in just a few countries and which are heavily traded are most exposed.
Where critical supply chains are concerned, such as those for food or energy supply, or related to security or health, the impacts can be even more detrimental than financial costs, with a risk to lives, the economy and national security.
The unfolding of a supply chain crisis
The Global Supply Chain Pressure Index (GSCPI), from Federal Reserve Bank of New York, which uses data from shipping, purchasing managers’ index surveys and manufacturing to chart disruption across the globe, spiked to unprecedented levels in 2020 and again in 2021.
Covid-19 exposed the fragility of current global supply chains and highlighted vulnerabilities in supply chain linkages. It has not been the only catalyst for supply chain issues recently, though its extremity, in both scale and length left few supply chains unscathed.
The onset of the Covid-19 pandemic led to both demand and supply-side shocks. Many factories halted production, due to raw materials shortages or a dramatic fall in orders, cargo ships reduced their journeys and import and export volumes were impacted. However, as lockdown restrictions eased, demand surged. With factories closed or running a limited operation, the supply-side was unable to react. Producers, particularly those with long and lean supply chains, faced lengthy delays in getting their operations functioning again. The disruption to production and trade flows meant the flow of shipping containers was disrupted leading to shortages and a spike in shipping costs. Ports become supply chain pinch points, and congestion and delays drove up lead times.
Once again, as the Suez Canal became blocked when the Ever Given ran aground in early 2021, one of the world’s busiest maritime trade routes became paralysed. The Suez Canal is the fastest and most direct maritime trade link between Asia and Europe and approximately 30% of all global container traffic passes through it according to Egypt’s Suez Canal Authority (SCA). At present, there are no suitable alternative routes.
The war in Ukraine has once again tested supply chains, demonstrating the impacts that geopolitics can have on our supply linkages. The war itself has impacted the production of Ukrainian exports while the conflict also impacted trade routes. The cooling relations with Russia has further impacted the supply and prices of food and energy imports from Russia and both the EU and the UK have banned Russian ships from docking at ports.
Tensions over Taiwan have also escalated over the last 18 months, with some questioning whether these posed a risk to the Taiwan Strait; the primary route for ships taking goods from factories in East Asia to markets in the US and Europe. Almost half of the global container fleet and 88% of the world’s largest ships by tonnage pass through this waterway, according to Bloomberg.
88% of the world’s largest ships pass through the Taiwan Strait
Source: Bloomberg
All of these events have exposed just how complicated, and in many cases fragile, contemporary supply chains are. Numerous events have driven a breakdown of First Mile, or business-to-business logistics across the global supply chain in the past few years, and the impacts have been severe. When one level in the supply chain experiences delays and problems, it impacts the abilities of downstream members of the supply chain to serve their customers.
Upstream operations have been neglected, with operators focused on competing to perfect their Last Mile distribution. While delays and diversions in the Last Mile of the supply chain may result in delays in the magnitude of minutes or hours, delays and diversions in the First Mile can mean days, weeks or longer, and can result in spoiled produce. Driving efficiencies in the Last Mile is futile if goods are held up further up the supply chain.
The drive to shorten supply chains and improve their resilience will have a bigger impact on the first part of the distribution chain, with the Last Mile largely untouched by these shifts. To avoid single points of failure bringing a collapse of the supply chain, manufacturers and retailers are looking to diversify their supplier base, which is driving changes to the First Mile of distribution. First Mile logistics has tended to rely on long term contracts and fixed routes. However, the need for greater resilience means the First Mile landscape needs to become more dynamic, with greater investment, innovation and competition.
Building Resilience
Ways in which the supply chain issues can be strengthened and the potential for disruption reduced
There are various ways that businesses and countries can look to protect their supply chain infrastructure, to lower the risk of shocks and improve resilience. Broadly speaking, these fall into three categories, they can improve existing supply chains, through investment in technology or infrastructure, they can move or diversify their production bases, or they can change their supply chain or distribution model, this may mean holding more stock or moving their distribution base.