Supply chains under fire! Why modern supply networks are so vulnerable to disruption.

North America and southern Europe have been hit by an unrelenting heat wave. Fires have been spreading across various countries, destroying millions of acres of forest. Severe storms, particularly in Germany, have led to flooding on an unprecedented scale. There has been a serious explosion at a chemistry industrial park in Leverkusen. The Taliban has conquered one town after another in Afghanistan, finally culminating in the fall of the capital, Kabul, overnight. And yes, we are still in the midst of a pandemic and being overrun by one wave after another. It is 2021, and this is just a small sample of the events that have occurred so far.

When we raised our champagne glasses on New Year’s Eve at the end of last year, relieved to be saying goodbye to 2020,  the unpopular “Corona” year,  none of us would have guessed what the new year had in store for us.

The damage caused by the “Ever Given” incident in the Suez Canal now appears trivial compared with the events listed above. Yet in relation to its impact on the global economy with its increasingly longer supply chains, it is an event that should not be played down. This is because each of these events has a direct or indirect effect on the vulnerable global commodity flow.

What makes modern supply chains so vulnerable?

If we look for the one factor that is quick and easy to point a finger at, then it has to be the unilaterally cost-optimized supply chain. The search for the supplier offering the lowest prices of raw materials and components has taken buyers all across the world. As long as extended delivery times could be anticipated in planning, the system worked flawlessly. In fact, it worked so well that suppliers’ cost drivers as well as redundancies, or even storage space for raw materials and intermediate products were reduced to as low a level as possible. This was not to the same extent in every company or in every sector, but the trend was clear to see.

So is it fair to point the finger at those responsible who failed to see the risk of unilaterally cost-optimized supply chains? Certainly not. Of course we can assume that companies were aware of it. However, things went well for all too long. While there surely were events that put supply chains under pressure, there was never a need for a general change in paradigm.

What COVID-19 has changed

Handling disruption is part and parcel of planners’ daily work in the supply chain sector. Of course there have been situations in which supply chain managers were caught off guard – but these mainly occurred at operational level and seldom led to the need for strategic investments nor did they compel companies to change their procurement policies. Of course we are generalizing here a little,  but we believe we can let this go unchallenged.

COVID-19 has upended traditional principles and insights. Instead of coping with just a temporary phenomenon, planners are now having to cope with one which is permanent. Lockdowns can hit suppliers or a company’s own production, transportation times are longer due to the re-imposition of border controls, the required materials are no longer available in sufficient quantities – all of these are immediate implications of the crisis which has been ongoing for a year and a half now. A further aspect is that governments have realized that being dependent on certain manufacturing countries can have a serious impact. How will any politician be able to forget what it was like when one-cent articles such as medical masks were unavailable in the global market? His/her country couldn’t just ramp up its own production overnight and consequently politicians were unable to protect their own population. A possible result of this could be to prescribe a completely domestic supply chain for certain goods– for example, medicine – in order to be prepared in an emergency.

In view of both of these developments, we can assume that there will not be a return to a pre-COVID procurement. The change has come – and it’s here to stay.

Sources of potential disruption to supply chains

A survey conducted by Gartner on supply chain resilience in times of massive disruption is highly conclusive. Supply chain managers were asked to name, among others, what they considered to be sources of further disruption in their supply chain networks. Let’s take a closer look at the top 5 sources mentioned:

No. 1: Epidemics and pandemics

It is hardly surprising that this is the top source quoted by far. No other event has transformed the world as much as the COVID-19 pandemic. And although progress has been made with vaccinations in the industrialized countries, thus giving cause for optimism that a breakthrough is in sight, the world is still a long way from putting the pandemic behind it.

No. 2: Shortage of relevant raw materials and components

The shortage of semi-conductors and computer chips which arose in the middle of this year has hit the automotive industry in particular. Entire assembly lines were forced to a standstill, workers were furloughed. However, it is not just highly specific materials which are becoming scarce. Thanks to the building boom of the past few years, we are now running out of sand.

No. 3: Shortage of supplier production capacity

Our previous example of the medical masks has shown just what a scarcity of production resources can trigger. It makes no difference whether the shortage is artificial (by reserving capacity for one’s own purposes) or whether it is due to external circumstances (e.g. the explosion at the chemical industrial park in Leverkusen).

No. 4: Tariffs and trade wars

For a long time we believed that the era of protectionism was over and that world trade could function without any barriers. However, in the last few years we have seen that more and more countries are drifting towards nationalism which can also have an impact on foreign trade.  The tariffs imposed by the USA on Europe and China quite recently are still fresh in our minds.

No. 5: Cyber security breaches

Cyber attacks have become a serious threat, even to companies with highly sophisticated technology. Clear evidence of this is the recent hacking of T-Mobile US. Here, highly sensitive data such as social security numbers or driving license details were stolen from millions of people . Espionage, blackmail, sabotage or data theft are ever-present risks. It would be feasible to assume that if it hadn’t been for the Corona pandemic, this aspect would have been among the top three sources for disruption since its dangers are immense.

These were the top 5 sources listed in the survey. For more information about this, go to: https://www.gartner.com/en/supply-chain/trends/weathering-the-storm-supply-chain-resilience-in-an-age-of-disruption.

Why resilient supply chains can still be cost-optimal

How can supply chains become more resilient? As a rule of thumb this all sounds quite easy: Transport routes must be shorter, redundancies at suppliers must be created and storage capacity for raw materials and intermediate products need to be increased – to name just three possible starting points. Resilience is gained by higher direct procurement costs ( a different wage structure), worse supplier conditions (as only part-quantities are ordered) and higher storage costs (renting or purchasing storage space).

As resilience is only available at a high price, the question of differentiability arises. Does the entire supply chain need to be secured in equal measure or is it sufficient to simply focus on individual products? If so, which ones and how high should the safety reserves be? Do we also need a redundant network of suppliers for this? Or is it better to achieve cost advantages with single sourcing?

As soon as a further planning objective needs to be achieved in addition to cost-optimality, then Excel-based spreadsheets have reached their limits. The choice of possible combinations and possibilities is simply too great. With the help of mathematical optimization, however, the optimal constellation can be calculated. Using prescriptive analytics, the system calculates the most cost-effective maximally resilient supply chain and provides sound recommendations for action on how this can be attained. In addition, what-if scenarios can be simulated at strategic level in order to make the right decisions based on real data. What is more cost-effective? Renting storage space or creating one’s own? What will happen if orders are distributed among several suppliers? How high is the gain in safety compared with higher costs? The system can answer all of these questions verifiably and reproducively. This is an invaluable competitive edge in times of uncertainty.

Summary

According to McKinsey, we will have to expect serious supply chain disruptions every 3.7 years on average. These are expected to last one month or more. The events which have occurred in 2021 so far clearly demonstrate that something has been set in motion irrevocably. If we look back, we can see that the number of “events of the century” have increased dramatically over the past 10 years. It is now time to acknowledge the new realities and react accordingly. Right now, it is easier for supply chain managers to be heard by C-level executives while events are still fresh in everybody’s minds. The old proverb “there is no glory in prevention” has had its day. There is simply too much going on.

Positive influential factors for supply chain resilience

We have listed six success factors for supply chain resilience in a factsheet which you can download here.

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