Why Fixing Global Supply Chains May Be a Long Haul
Supply chains are in flux like never before, and boardrooms the world over are having to reconsider long-settled procurement strategies. Inflation across the globe makes smart, swift decisions more important than ever - and whilst disruption is a challenge today, those that pivot well will reap the benefits of their shift tomorrow.
Disruption is usually a good thing in business, but when it comes to supply chains, that’s not always the case. The past year has seen unprecedented upheaval around the world - and businesses are responding at pace.
Four decades of offshoring, outsourcing, and overriding cost-consciousness produced efficiency but left global supply chains overextended and vulnerable to disruptions like the pandemic and the war in Ukraine.
Companies are responding by moving from a “just-in-time” mentality to “just in case;” and putting a fresh emphasis on resilience. This can reduce risk in the medium term but may add to inflationary pressures in the short run, especially as rising interest rates make it more costly to finance higher inventories.
The recent trend of nearshoring or friend-shoring – sourcing goods in friendly countries closer to North American and European markets – is real, but it takes time for these incremental changes to make a macro impact. Chinese exports to the United States jumped nearly 17% last year, and the country won’t be replaced as the world’s manufacturing hub anytime soon. A European Chamber of Commerce in China survey showed a growing number of firms seeking to invest more, not less, in the country. Production will relocate at the margin, especially in the consumer goods sector. Strategic industries like pharmaceuticals and semiconductors are also under pressure to move. But for more capital-intensive sectors, it will take years for large parts of the supply chain to relocate.
The challenge for companies is clear. They must elevate supply-chain strategy to the Board level in recognition that disruption will be ongoing. Whether localizing production closer to core markets or building greater resiliency in the global footprint, dealing with suppliers is no longer just about costs.
When Uncertainty Breeds Opportunity in the US Market
We discussed pricing in our previous edition, and now we explore the other side of the inflation story: procurement.
While the employment market is strong, the price of raw materials and procured goods and services have been a major source of stress for managers and business owners.
In our globalized economies, the current geopolitical landscape has driven plastic prices to rise by more than 70% above its pre-pandemic level in the United States and 112% higher in Europe, and that of aluminium 98% above March 2020 levels on the London Metal Exchange. Add to this situation the exploding overseas shipping container rates (+822% pre-pandemic, according to the Freightos Baltic Index of China/East Asia to Northern Europe) and you get a potent mixture, enough to create a pressure-cooker environment around boardroom tables across the world.
When previously somewhat predictable cost bases display this kind of upward volatility and planning becomes even more complex, how can companies evolve strategically to maintain or even drive incremental enterprise value?
- By being proactive rather than taking a wait-and-see approach
- By rethinking their procurement strategy around items with meaningful value-add steps versus components that are 80% or more raw material-dependent. Relying less on these fluctuating products and optimizing the cost of procured materials, or even proceeding with some acquisition, will lead to long-term value-creation and stronger inflation resilience.
Some of the biggest openings for an innovative business approach will come on the value-add side of manufacturing, where companies can tap their growing workforces to optimize cost structures
What’s clear is that the drastic changes to global supply chains are forcing businesses to reconsider strategies that have been decades in the making. But in crisis lies opportunity, and those firms that pivot effectively will reap the benefits both today and tomorrow.
Read more in Apurva Nair’s How Persistent Inflation Is Causing Procurement to Adapt.
Inflation is triggering broad transformations that have been pushed back for too long. Check back in with the Inflation Shift to discover how the public and private ecosystem could aim for better production, better consumption, ESG mindsets, transformed organizations and more.