How can businesses mend broken global supply chains?

Black-swan events are meant to come about rarely. We often talk of once in a gen­er­a­tion occur­rences that bat­ter and derail the glob­al econ­o­my and the way the world works. But, they’re often more com­mon than that. 

In the past two years, we’ve been buf­fet­ed by a pan­dem­ic, sev­er­al key sup­ply dis­rup­tions caused by cat­a­stro­phes at sea that blocked impor­tant trade routes; the impact of the UK leav­ing the Euro­pean Union trade body; and, most recent­ly, a war in Europe that scat­ters sup­ply chains through phys­i­cal dis­rup­tion and sanc­tions.

It’s enough to blow even the best-planned sup­ply chain off course and lo and behold, it has. As Chi­na, the world’s fac­to­ry, strug­gles with Covid-enforced port clo­sures, sup­ply chains that were already tight have reached a break­ing point. The world is redraw­ing its eco­nom­ic activ­i­ty to cut out Rus­sia after the coun­try invad­ed Ukraine – an action which is affect­ing sup­plies of grain and cook­ing oil, as well as the oil we use to pow­er our fac­to­ries and cars. Cat­a­stro­phe is being piled on top of cat­a­stro­phe. “The expand­ed glob­al nature and con­tract­ing diver­si­ty of sup­ply chains have exac­er­bat­ed this effect,” says Tim Mor­ley, direc­tor at ISG.

“Most sup­ply chains have some ele­ment of pro­tec­tion built-in to com­bat dis­rup­tion, whether it’s extra capac­i­ty, extra inven­to­ry, alter­na­tive sup­pli­ers or dif­fer­ent routes to mar­ket,” says Dave Food, head of sup­ply chain at Board Inter­na­tion­al. Doing so is sim­ply being pre­pared – a sen­si­ble pre­cau­tion in the event of issues. “The prob­lem is, dis­rup­tions are occur­ring in mul­ti­ple loca­tions, on mul­ti­ple routes of the sup­ply chain, from source to con­sump­tion point –high­light­ing that the exist­ing pro­tec­tion isn’t enough. It’s not one big event but mul­ti­ple micro-black swans.”

Those mul­ti­ple micro-black swans have a mean­ing­ful impact on our lives because of their chaot­ic effect on sup­ply chains. In July 2020, 100% of food and con­sumer goods com­pa­nies said they had expe­ri­enced prob­lems with pro­duc­tion and dis­tri­b­u­tion because of the Coro­n­avirus pan­dem­ic. And that was just the start of the calami­tous two years the world has faced.

“The issue is how organ­i­sa­tions pro­duce fur­ther capac­i­ty when they already have a lim­it­ed sup­ply,” says Food. “We’re cur­rent­ly stuck in a world strug­gling to catch up and until we cre­ate the capac­i­ty to do that, fur­ther black-swan lev­els of sup­ply chain dis­rup­tion are inevitable.” He pre­dicts that we’re like­ly to see issues with sup­ply chains in years to come, because of the inter­con­nect­ed­ness of the glob­al world and its many mov­ing parts. 

But what’s caus­ing the sup­ply-chain bot­tle­necks that we see in our day-to-day lives? What’s behind the emp­ty shelves, the long lead times for deliv­ery of items, and the reduced range of prod­ucts in shops? It’s not sim­ply the black-swan events that have stymied the steady flow of con­tain­ers across the plan­et. Demand also inter­acts with sup­ply in a way that can make a mean­ing­ful dif­fer­ence.

“Dis­rup­tion is a reg­u­lar occur­rence in sup­ply chains but the recent chal­lenge has been that demand has increased sig­nif­i­cant­ly,” says Mark John­son, pro­fes­sor of oper­a­tions man­age­ment at War­wick Busi­ness School. “Nor­mal­ly, sup­ply chains rebound when demand is rel­a­tive­ly sta­ble. That has not been the case recent­ly.” Infla­tion­ary pres­sures could change that, but for the past two years at least demand hasn’t slowed. Instead, it has shift­ed: the same mon­ey we would spend in-store is now spent online.

Fix­ing things is tricky. There is a fun­da­men­tal imbal­ance and prob­lems keep pil­ing on top of prob­lems, mak­ing them dif­fi­cult to resolve. “Ships aren’t run­ning all routes, there isn’t enough port capac­i­ty and there aren’t enough dri­vers, trucks, trail­ers, con­tain­ers or chas­sis for this sit­u­a­tion to resolve any time soon,” says John­son. He fore­casts that the sit­u­a­tion will take time to unwind and won’t hap­pen eas­i­ly. “Unless coun­tries and firms are seri­ous about build­ing resilience through hold­ing inven­to­ry and excess capac­i­ty as well as restor­ing indus­tri­al capa­bil­i­ties that have been off-shored, we will con­tin­ue to see dis­rup­tions,” he says. “I don’t see this hap­pen­ing due to the pri­ma­cy of finance and accoun­tan­cy in deter­min­ing invest­ment deci­sions in firms.”

The big ques­tion that con­sumers, busi­ness own­ers and ana­lysts will all ask is a sim­ple one: are we stuck in this sup­ply-chain dis­ar­ray for years to come? And if dis­rup­tion is the norm, how should busi­ness­es respond?

There are sev­er­al schools of thought on how best to respond to the cur­rent cir­cum­stances. One is to gen­er­ate the best vis­i­bil­i­ty over your sup­ply chain – not just your own, but from key part­ners, sup­pli­ers and cus­tomers. “The fur­ther up the sup­ply chain you can see, the bet­ter deci­sions you can make,” says Food. “Enlarg­ing your business’s periph­er­al vision to be able to make a data and insight-dri­ven deci­sion could save you tens of thou­sands of pounds. Apply that across the tens and hun­dreds of deci­sions tak­en in organ­i­sa­tions every day and sud­den­ly your prof­it mar­gins have increased.”

Once you have that infor­ma­tion, you can act to rem­e­dy issues. For larg­er busi­ness­es, with greater cap­i­tal reserves, that’s eas­i­er. You can build capac­i­ty that helps you over­come some of the most press­ing issues and leaves you avail­able to run your busi­ness as smooth­ly as pos­si­ble. In the first year of the pan­dem­ic, 61% of com­pa­nies said they had increased their inven­to­ry of crit­i­cal prod­ucts, while 55% were now dual-sourc­ing raw mate­ri­als to cre­ate redun­dan­cy in the event of sup­ply dis­rup­tion. 

Of course, that’s not pos­si­ble for every organ­i­sa­tion. “Busi­ness­es with less cap­i­tal can move for­ward by being more col­lab­o­ra­tive, using intel­li­gent con­tract­ing and shar­ing resources – both inter­nal­ly and exter­nal­ly – with part­ners,” says Food. Regard­less of how you fix things, it’s vital to act quick­ly to head off issues before they com­pound and become even greater. Time is of the essence – and with dis­rup­tion fore­cast long into the future, sim­ply ignor­ing the prob­lem isn’t the answer. “The pan­dem­ic is still the biggest threat, with some coun­tries worse affect­ed than oth­ers by ill­ness and absences, caus­ing a sub­stan­tial impact to inter­na­tion­al trade,” says Mor­ley. “Oth­er threats con­tin­ue to loom, while new and dif­fer­ent threats are as yet unseen.”