What supply chain managers can learn from the Covid crisis
Dr Shereen Nassar outlines the complex drivers of global supply chain challenges and how companies can adapt for the future
Before Covid-19, most of us paid little attention to supply chains. Consumers in developed economies took well-stocked shelves for granted. Those in the developing world endured poor availability for many products, but that was due to many factors beyond supply chain issues.
That all changed with the pandemic. When government-mandated movement restrictions were put in place to curb the spread of the virus, supply chains made headlines. Consumers soon noticed shortages with bricks-and-mortar and ecommerce retailers, while manufacturers reported supply chain disruptions for components and distribution to customers.
Supply chains have not fully recovered from the “global ripple effect” caused by the pandemic, according to Dr Shereen Nassar, global director of logistics studies at Heriot-Watt University Dubai. Coupled with other worldwide disruptions, supply chains remain under pressure, she says.
“In the short term, experts predict that continued disruptions with pressing operations include supply and demand mismatch, labour shortages, cargo ships and ocean freight bottlenecks,” Nassar explains.
Nassar describes the conflict between Russia and Ukraine as a “manmade crisis” that has created serious problems for supply chains, especially across Europe. She says the war forced production to shut down in the affected regions, created energy price rises that challenge many industries – especially in areas that rely on Russian gas – and diverted ships and aircraft that transport goods in and out of Ukraine.
Planning for emergencies
Against a backdrop of geopolitical and trade tensions, including headwinds in China-US relations and rising inflation on a global level, many businesses are struggling to keep up with rising consumer demand while controlling their operating costs, says Nassar.
She points to the 2021 Retail Supply Chain & Logistics Planning Report from Delmia and Reuters Events, which shows that reducing logistics costs is the top business goal for most retailers.
“The pandemic has highlighted the need to have a logistics plan in case of global emergencies,” Nassar says. “While retailers are prioritising this, most have mentioned service requirements, automated warehouses, and infrastructure problems as the main concerns for logistics planning.”
For individual countries, supply chain pressures are exacerbated by domestic factors, along with the impact of extreme weather events, such as the heatwaves in western parts of the US and Canada and flooding in Western Europe. “These events added more pressure on logistics networks and ports that are already stressed by high demand.”
It is challenging to separate ongoing and foreseeable challenges “as they are closely interlinked and are an extension of one another,” says Nassar. “However, if we consider this from a long-term and strategic angle, focusing on the known and controllable sources of risks, we can identify a number of potential pressures if risk mitigation plans are not in place.”
Headwinds on the horizon
It is important to ensure supply chain sustainability, which is mandatory in many markets across the world. But making these changes increases pressure on businesses, especially those struggling to rebuild after the pandemic.
With customers, investors and regulators expecting sustainability improvements along entire value chains, Nassar says many businesses are lagging. “Although many businesses have sustainability as part of their mission statement and as one of their business goals, there is a gap in the actual implementation.”
This was confirmed by an Oxford Economics survey, she notes, which showed that 88% of global supply chain decision-makers have either created a clear mission statement around sustainability or are in the process of writing one. However, only 52% of these industry leaders have developed action plans to reduce their environmental impact.
In addition, Nassar cites research by Celonis and IBM that revealed that more than half of chief supply chain officers would be willing to sacrifice up to 5% of profit to become more sustainable.
“If this is put into action, it would mean that freight transportation and supply chain processes will continue to change as more environmentally sustainable practices are adopted,” says Nassar. “Another potential related pressure is about introducing new global laws and regulations to govern logistics and supply chain sustainable practices that incur high non-compliance penalties.”
Digital transformation is more than a buzzword for supply chain managers. Technology is increasingly important for such functions as transparency, tracking goods and monitoring carbon emissions, but this increases the risk of cybercrime, Nassar cautions.
Finally, Nassar says worldwide water instability, an outcome of climate change, is a potential threat to smooth supply chains, with five of 11 global regions deemed by the United Nations to be “water-stressed”, meaning 25% or more of renewable freshwater resources have been withdrawn.
“Water is a main component of most production industries. This threat is growing due to accelerated urban and industrial expansion, population growth and the rise in extreme weather events, including floods and droughts,” Nassar explains. “Major waterways, such as the Rhine in Europe and the Chagres River in the Panama Canal, experienced significant low water levels that affect the transportation of goods and materials, can cause price surges, and threaten production.”
“The first response to a major crisis always comes from governments,” Nassar states. “The rapid change and continued disruptions [to supply chains] require governments to further enhance their preparedness and response, not only during the crisis but in the recovery process.”
Collaboration between governments and all stakeholders, including businesses, is vital for smoothing out the bumps that have affected supply chains globally. The pandemic holds several lessons.
“The pandemic has highlighted the importance of collaboration between business and governments – this is especially evident considering the development and distribution of Covid-19 vaccines in a speedy manner,” says Nassar. “Continuous dialogue between governments, businesses and other stakeholders allows better understanding of the business challenges and the support needed to address them.”
According to Nassar, government priorities should include working with other countries to improve efficiencies in cross-border supply chains, as well as dealing with labour shortages.
“Combined with economic shocks, cost increases and logistical challenges, labour shortages have been a challenge and [labour force numbers] have not recovered to pre-pandemic levels,” she says.
While it is important to manage the cybersecurity risks associated with digital transformation of supply chains, Nassar says that digitising information exchange and “ensuring a seamless flow of information between businesses and governments will make cross-border trade simple and safer for businesses.”
Another advantage of digital transformation is the acceleration of processes along supply chains, which Nassar says is very important in competitive markets. Part of this process is to leverage data to “improve visibility of inventory capacity, supply and finances”, resulting in more organised workflows, greater agility, better supply-and-demand balance for stock levels, and faster responses to avoid crises.
For companies, the “inevitable transition” from just-in-time to just-in-case manufacturing business models requires a foundation of resilience.
“To navigate the current challenges, it’s important for supply chain leaders to focus on what they can control and simulate future scenarios for uncontrollable and unknown elements,” she explains. “With labour shortages being a major challenge, keeping the current workforce healthy and productive and prioritising agile ways of working can greatly counter this challenge.”
It is important for companies to run simulations and scenario planning models to predict excesses and shortages that might occur, leveraging technology “to get actionable insights and optimise performance,” says Nassar.
Nassar thinks there are reasons to be optimistic about the future of supply chains. During the pandemic, the importance of supply chains and logistics gained global attention, serving as a wake-up call for rethinking supply chain management and strengthening vulnerabilities, she says.
Reskilling and upskilling programmes to improve the quality of supply chain workforces should help address talent gaps and labour shortages, while freight capacity for sea and air has reduced delays.
“Overall, with technology improvements, upskilling, back-up plans, and lessons learnt from supply chain disruption, I believe supply chain leaders and companies are more resilient and better prepared to tackle future challenges.”