Supply chain and unforeseen events: risk management
The spread of the Covid-19 pandemic, the ongoing war in Ukraine and the interaction of these with other unforeseen events have caused and are continuing to cause serious problems for global supply chains.
To survive in a world where de-globalization drives are becoming more insistent, companies must improve safety stock management, reinvent their supply networks, revamp their supply chain risk management plans, and identify new geographies to ensure business continuity. It is then necessary to lean on technology solutions that strengthen the business organization, enable supply chain risk factors to be lowered, and support collaborative safety stock and supplier management, thereby promoting a resilient and economically sustainable supply chain.
Unforeseen events as supply chain risk factors
A linear and sometimes naive idea of progress might lead one to think that the development of an innovation or process is bound to improve constantly, if not continue indefinitely. Sometimes the possibility of pauses, blockages or even backward marches is not considered at all.
Supply chains are no exception to this argument: as a result of the market integration due to globalization and the consequent acceleration imparted to technological development – elements that have been fully deployed for a few years now – it has been assumed that the long-standing problems that had affected supply chains and logistics in the past would arise less and less until they disappeared altogether.
This has not happened; in fact the opposite has occurred: the continuation of the Covid-19 pandemic, the geopolitical tensions later resulting in the war in Ukraine, the high volatility in global markets especially in energy and raw materials, the shortage of shipping containers noted by exporting countries, the ill-timed availability of raw materials that has put the just-in-time paradigm into deep crisis, the difficulty of finding skilled labor, and soaring inflation are some of the elements that, occurring synchronically, have caused and are continuing to cause serious problems, severe delays and even integral blockages to global supply chains.
Getting down to specifics, let us consider the case of China in late 2021 and early 2022: Shanghai, a city of more than 26 million people and one of China's largest manufacturing and export hubs, is under an indefinite lockdown¹. Factory operations stalled, shipping rates declining, ports working at a reduced pace, millions of people forced into strict quarantine measures as the country grapples with the largest Covid outbreak since the pandemic began. In this situation, the problems for logistics are greatly exacerbated: on the one hand, some truck drivers are avoiding Shanghai altogether for fear of being quarantined, and at the same time some cities are reluctant to let Shanghai truckers in; on the other hand, the volume of goods shipped by sea from Shanghai dropped 26% between March 12 and April 4, while the volume of goods leaving the port by truck fell 19% during the same period². In addition, indexes on services and manufacturing – among the most reliable indicators of the health of the country's economy – have plummeted in the past two months³.
Another example of the risk factors being faced by supply chains due to unforeseen events may be the following: according to David Beasley⁴, executive director of the U.N. World Food Program, the world is facing "a multi-year problem" in food supply as the war in Ukraine drives up global prices and disrupts the production of staple crops. Beasley issued his warning at a press conference in Rome after French and EU officials met April 11, 2022, to discuss a food security initiative in response to the conflict.
The management of safety stock and suppliers
In this context, the importance of supply chain risk management is clear, especially with regard to safety stocks and the ability of companies to diversify their supplier network.
Safety stocks need to be monitored very carefully in this particular period, if only because of the necessary propensity on the part of all supply chain actors to manage a stock component for "safety," to deal with any unforeseen contingencies. The health emergency and war have a major impact on this attitude from all stakeholders, producing significant effects on the supply chain. Attention must be paid, however, to the fact that the changes that come from the tendency to stockpile to cope with unforeseen events do not necessarily correspond to a structural change in consumer choices, but may be contingent effects of the emergency: one cannot simply assess how to deal with them in the immediate term, but must carefully anticipate the impact afterwards, that is, at the end of the emergency, when all actors will return to managing safety stocks under conditions of newfound normality at the level of consumption.
Regarding the supplier network, companies often rely on a single supplier, a large customer or sales market, a main supply chain partner.
"Experience during the health emergency showed companies that alternative partners, differentiated market presence, and better third-party monitoring are needed to manage both supply risks and externalities such as cyber-attacks or product counterfeiting."
Companies can bring greater flexibility and resilience to their supply chains by partnering with providers that offer their technologies in Software as a Service mode – such as collaborative platforms to improve supply chain risk management and data planning and analysis capabilities. This helps create a stronger, more diversified supply chain capable of managing risks and costs.
Resilient supply chain: flexibility, organization, technology investment
Over the past two years, many companies have invested in technologies to digitalize and automate key supply chain nodes such as warehouses, factories, and transportation assets. In 2022, these investments will see a surge, as 67% of CEOs want to increase spending on innovation to prevent disruption and modernize processes⁵. Enterprises need to enhance their ability to respond to unforeseen events through the adoption of advanced digital solutions for supply chain risk management such as predictive analytics based on Machine Learning and AI, or Robotic Process Automation (RPA) – which helps organizations automate work processes using "smart" software that can automatically perform repetitive tasks for operators.
"Investment in advanced supply chain visibility technologies will also increase, in order to strengthen logistics visibility and security and to make companies faster in responding to crises and variability in local and international supply chains."
Collaborative digital platforms that provide the ability for operators from different companies and with different business functions to work simultaneously on the same stock of data and processes will increasingly be the differentiator between companies that will be able to navigate the crisis and those that will not be able to keep up.
By following this logic of technology-driven flexibility, companies will be able to refine their internal organization and greatly speed up their response to unforeseen events.
In a recent survey of more than 3,000 CEOs conducted by the consulting firm Alix Partners⁶, less than half said they took longer-term actions to alleviate supply chain challenges and improve business organization, while the majority said they relied on short-term measures. Regardless of their approach, more than three-quarters of CEOs were skeptical about the effectiveness of their plans – which speaks volumes about the general uncertainty in global markets.
Today, there is a clear need for all market players to return to a focus on their supply chain, network, hubs and participating partners (the extended supply chain), making sure that the execution of the processes that make up the supply chain itself happens nimbly, timely, error-free and as quickly as possible.
In this scenario, those who will have the technology that is most functional for their business organization and best suited to managing risks due to unforeseen events will enjoy a crucial competitive advantage over their competitors.
1. See the Guardian article titled Shanghai’s ‘grim’ Covid outbreak threatens more global supply chain disruption
2. All the references are available in the article from the business magazine Quartz intitolato Shanghai’s lockdown is making the supply chain look like 2020 again
3. See the Open article titled Lockdown a Shanghai: a rischio la catena di approvvigionamento globale e l’inflazione potrebbe aumentare ancora (available only in Italian)
4. See this note from the Reuters news agency.
5. See the KPMG 2021 Ceo Outlook, p. 5.