Have we created a global supply chain that is financially beneficial yet not resilient? All signs point to yes. A recent article in The Economist cited an industry estimate that it takes 29 companies from 18 different countries to bring us our morning cup of coffee. This works well for the companies involved and ensures that we’re able to buy our favorite coffee blend at a low cost, but even the most inexperienced buyer knows this is not efficient.
Any natural disaster, industrial action or, as is the case today, pandemic affecting just one of these companies within the supply chain risks the availability of that daily caffeine kickstart. Add to this the 20-30% increase in demand through panic buying for some essential items, and we see spikes in commodity prices that either mean less margin or increased out-of-pocket costs for the consumer.
The High Risks of Interdependence
Today, most procurement functions are set up to capitalize on low cost manufacturing, minimize inventory and apply just-in-time principles to cut billions from costs, improve margins and ensure profitability for their organizations. While these are enticing propositions for many organizations, the risk of failure is high. Complex interdependencies within the supply chain are often hidden below the surface, jeopardizing stability and slashing contingencies to the point that they are unable to withstand external change.
Mapping the entire supply chain can mitigate these risks, but it’s also a massive task. For Airbus, it took five years to map the entire supply chain, at which point the aerospace giant had to start all over due to the number of supply chain changes that occurred within that five-year period. This is no simple task.
To fully map the whole supply chain, organizations must drill down to tiers three and four. Gaining that level of visibility is a process most companies don’t have the resources to explore, and re-engineering supply chains is neither quick nor easy.
The Impact of COVID-19 on Supply Chains
This weakness flows both ways. As companies face disruptions in supplies, manufacturers who have become overdependent upon a single sector or product find themselves in tough spots. A survey by Penn State’s University Center for Global Workers Rights found that more than half of Bangladesh garment suppliers have had nearly all of their orders cancelled since the pandemic struck Europe and North America. The effect of the fashion industry cancelling $3 billion worth of orders within an eight-week period will be far reaching for textile and garment manufacturers. These industries will take many years to recover.
COVID-19 has closed factories and interrupted distribution networks. Throw in closed borders, export restrictions, and protectionist governments putting their own country’s needs first and you’ve got a recipe for global supply chain disaster.
What’s Likely to Come Next
To build in greater reliance, expect a lot more localization, regionalization and decentralization of supply chains. This coupled with the growth of innovation and automation within the supply chain and the lower distribution costs and carbon reductions that are fueling sustainability, expect to see a very different spread of suppliers than we’ve seen over the last 10 years.
Re-engineering supply chains can be daunting. INWK recently sat down with Carlsberg in a unique virtual event to discuss the supply chain challenges facing brands today and what they can do to mitigate these while setting themselves up for success.
Strategic Sourcing Director, EMEA & APAC