Global Trade • January February 2023 • BATTEN DOWN THE HATCHES

For decades, international supply chains have grown longer and more convoluted in pursuit of operational streamlining and cost cutting. In truth, many of these efforts have come at the cost of resiliency. Now, our extended global supply chains—characterized by long distances and limited sourcing control—are failing under the turmoil of unceasing global disruptions.

Today’s global supply chains are sensitive to disruptions near the source level and beyond— disruptions which have an undeniable ripple effect. As we continue to experience economic fallout from recent events—such as the COVID-19 pandemic, Russia’s war in Ukraine, and geopolitical tensions between the U.S. and China, among others— companies must rethink their approach to supply chain management.

DISRUPTIONS AND THEIR IMPACT ON SUPPLY AND FULFILLMENT

Global disruptions come in many shapes. On the supply end, organizations are sourcing from distant, hyper-regionalized producers, each with limited raw materials and resources. This approach comes with serious risks:

REGIONAL DISRUPTIONS: Geopolitical issues at the supply level can have a devastating impact on supply chains. For example, a recent outbreak of COVID-19 in China cut off one of Apple’s key sources of iPhone components. Russia’s invasion of Ukraine, one of the world’s largest distributors of grain, temporarily inhibited their exports; even those short-term delays put global populations at risk of starvation. Countless organizations and consumers rely on these countries, but their exports are not necessarily exclusive to these regions. It’s a question then of economics, where sourcing from distant shores produces cost benefits—so long as nothing goes wrong.

AN ALARMING SPEED OF FAILURE: Of course, things do go wrong; and when global supply chains fail, they fail big and fast. Companies, consumers, and whole societies may struggle to bounce back. Global crises such as the COVID-19 pandemic “lead to irregular flows of goods, shortages, reduced operations for extended periods, or complete shutdowns by individual suppliers,” as Deloitte describes.

LOOMING RECESSIONS: Recessions create a whipsaw effect that causes unexpected congestion in supply chains. This drives up supply costs as goods become stuck in storage or on ships; many sensitive products expire. Companies in many industries struggle to anticipate or even survive recessionary environments. On the distribution end, organizations must increasingly deliver on new promises of next-day delivery, greater supply chain visibility, and both sustainability and ethics in supply chain management behaviors.

EVOLVING CONSUMER EXPECTATIONS: Evolving consumer expectations blur the lines between B2B supply chain management and B2C fulfillment. Consumers expect immediacy in the form of two-day shipping and next-day delivery. Today’s consumers also expect immediacy in terms of information—about their orders, but also about activity within the merchants’ supply chains.

DEMAND FOR ENVIRONMENTAL AND SOCIAL RESPONSIBILITY: Consumption habits typically don’t change very quickly; but as consumers learn more about global supply chains, they are pressuring companies to rethink the environmental and social impacts in their sourcing. Many consumers are ready to pay more for their favorite products if producing and sourcing them are less damaging than others. Companies that wish to raise their profile in these areas will prioritize these factors as well.

THE ECONOMIC IMPLICATIONS OF SUPPLY CHAIN DISRUPTIONS

Now, we must consider whether we will continue to rely on sources where global disruptions, such as geopolitical tensions, are more likely to upset the supply of essential materials. We’ve reached a point where minimizing recurring costs when supply chains are calm is not as important as maximizing resilience when supply chains are not.

We may find, then, that a new wave of supply-chain de-globalization is appropriate. Organizations need some redundancies in terms of their sources; or they need to change their sourcing strategy altogether. They must ask themselves, how can we …

• reduce risk in the ways we source products and manage our supply chains?
• transform as our business focuses more on direct-to-consumer?
• source and fulfill in a way that’s meeting new consumer and business demands?
• increase visibility, ensure accountability, and improve how we anticipate future crises?

A NEW WAVE OF DE-GLOBALIZATION AND RESHORING

Now, supply chain leaders who acknowledge these realities are leading a new wave of deglobalization. They are shifting their supply chain management strategies and, in turn, the economics of supply and demand. They are reconsidering diversification and investing locally as often as possible; even if those moves lead to an increase in recurring operational costs, they can enable resiliency in the face of otherwise business-busting disruptions at global levels.

Again, the reason is clear—the real cost of supply chains is less in the everyday costs of sourcing. The real cost comes from the vulnerability of supply chains in the face of disruption and an organization’s inability to anticipate when those disruptions will occur.

It’s going to be more expensive in the near term to do things the right way. There are economic and political consequences to this, but it’s necessary to enhance the readiness of supply chains to weather unstable economic conditions. New, strategic requirements include:

HYPER-LOCALIZATION: As often as possible, companies can rely on local supply, supply from nearby and smaller suppliers, or sourcing closer to end-customers.

A STRATEGIC SHIFT TO RETOOLING: Smart business leaders will take advantage of slowdowns by retooling and reinvesting in their supply chain operations; when supply chain activity resumes its rapid pace, they will be equipped with the tools they need to succeed.

ADAPTIVE SUPPLY CHAIN MANAGEMENT: Success in the future depends not on static, unchanging supply chains but from sensitivity and responsiveness to volatility: sensing a new change and being agile enough to adapt to that change.

A PLATFORM APPROACH: Digital platforms that allow for efficiencies in addition to these capabilities will become part of the new, positive equation for the supplying and fulfillment of goods and materials.

A RIGHTSIZING OF SUPPLY CHAINS IS UNDERWAY

These last few years have been the most volatile, most disruptive period we’ve faced as supply chain leaders. The theme we’ve witnessed is that old habits die hard. But we must acknowledge that our age of disruption continues. Already, we’re facing a new wave of volatility—including tariffs, nationalization, geopolitical crises, and rapidly evolving consumer expectations. And so, we see that it’s volatility itself that is here to stay.

There is a better way. Retooling processes and infrastructure and systems to accommodate these realities are not inconsequential feats; but this is the right time to invest in changing systems. If we succeed, it may be a “rightsizing”—something that should have been happening in supply chains and fulfillment all along.

Mark J. Bentler serves as chief financial officer for Tecsys, a a global provider of cloud-based supply chain solutions that equip organizations for growth and competitive advantage. He possesses a wealth of knowledge in financial management with a focus on technology and software honed through decades of international experience at companies like Aptos Retail, Epicor, and KPMG.