The pandemic has put severe strain on supply chains and the way various sectors are operating across the globe. It is becoming clear that a global model perfected over the past 25 years needs updating for a post-pandemic world, as Gavin Hinks finds out.
Six months ago the UK population began to prepare for the possibility of a lockdown. Shops sold out of toilet roll within days. Next to clear were dried goods such as pasta. Then tinned veg, hand sanitiser and paracetamol disappeared. Basic commodities that should have been in abundance were becoming scarce. News outlets were suddenly filled with images of empty supermarket aisles.
The event illustrated the population’s anxiety over what was on the horizon. But even as ministers and supermarket managers insisted there were goods in the system – if only people would avoid panic-buying – it brought home concerns about the sensitivity of global supply chains and sparked public debate about whether they were still fit for purpose.
The public were not alone in their concerns. According to Professor Tim Benton, Research Director in emerging risks at thinktank Chatham House, more global interconnected supply chains have made for cheaper products, but they’re also more susceptible to a cascading impact if a single link in the chain fails.
“There’s plenty of scope for things to go wrong,” says Benton. “We have become much more interconnected, much more codependent, and much more fragile because we’ve removed all redundancy and diversity. At the same time, we are hitting this more fragile system with bigger shocks.”
The World Trade Organization (WTO) has explicitly emphasised that supply chain disruption was a key feature of the pandemic as factories and transport links quickly shut down. Back in April the WTO said it expected global merchandise trade – a useful proxy for looking at supply chain health – to fall by between 13% and 32% over 2020 as a whole as the pandemic showed no signs of slowing down. More importantly it warned that those sectors reliant on highly elaborate supply chains, for example electronic and automotive, have suffered most.
Imports were undermined by social distancing or factory closures in locations such as the US, Mexico, China, Korea, Malaysia and Vietnam, though gradually some locations began tentatively to reopen.
But that has prompted the all-important question: are current models of supply chains the right fit for the post-pandemic world? Are we on the cusp of deglobalisation? Speak to many of those embedded in the world of procurement and supply chain management and they share a common observation: change was already under way.
Pandemic accelerating change
Geopolitical stresses, global warming and changes in consumer expectations have already been making their mark. According to Andrew Lahy, a Director at the PARC Institute for Manufacturing, Logistics and Inventory, University of Cardiff, these pressures were already beginning to drive change in supply chain thinking. The pandemic, he says, only served to accelerate many plans.
Lahy, who is also Global Head of Strategy and Innovation at DSV (a global transport and logistics company), expects change in three phases: short-term measures to boost inventory and continue supply during the pandemic; a second phase that may see many companies move their supply chains from a global to regional setting; and a third phase in which some could nationalise their supply chains. The cost of holding increased volumes of inventory alone may well force many companies to move from phase one to phase two.
That change – which could see each large corporate unravelling arrangements with tens, hundreds or even thousands of suppliers – will likely take place on a three-year horizon. The work is immense, not least because of the prevalence of outsourcing.
Consumer habits are another big factor affecting supply chain management. Next-day delivery means retailers have to hold inventory and that has stressed the global just-in-time model.
“There was already a general trend to change the supply chain,” says Lahy. “But the pandemic has forced the issue and made companies realise how susceptible and vulnerable global supply chains are when you rely on products that need to move thousands of miles before they get to your customers.”
Others see customers at the root of a bigger, more long-term problem: climate change. Benton believes that what he calls a global reset is required to recalibrate the economic system, because it has built reliance on consumption that is cheap, easy and damaging. Supply chains have manoeuvred to deliver low-cost, next-day consumer goods and food. And that’s a problem.
“They typically externalise production costs onto the environment in ways that are not well incorporated into the price, and they are therefore incredibly fragile against any long-term issues,” he says.
Climate change challenges
Confronting climate change, says Benton, means overhauling the classic supply chain system to promote a healthier planet and healthier people. Such supply chains, he says, will inevitably be more expensive and require new methods, and that includes those that affect our food system.
“People are seeing this as a brief interlude of crisis and thinking that we will bounce back to business as usual. But I don’t think we will,” he says.
That said, many believe weaning the big corporates off the benefits of global supply chains will be hard. Tim Burt, Customer Insights Manager at consultancy Procurement Leaders, says many procurement chiefs were impressed by the way Chinese suppliers bounced back from their crisis. Many will therefore stick with China, at least in the short term.
The big benefit, of course, is cost. According to John Bancroft, a supply chain expert teaching at Oxford Brookes Business School, the pandemic is a unique event and while there has been vast disruption, global supply chains will remain inviting. The cost of localising to regional systems, he says, will far outweigh the benefits.
“The global supply chains we have work very well in most cases, and it’s because of the bottom line. There might be a small change in mindset, but most companies will still be chasing the savings we associate with global sourcing.”
Technology and automation
What Bancroft does see happening is more investment in technology and automation to offer corporates more visibility of what’s happening in their supply chains. This will include warehouse automation and attaching radio frequency ID tags to more goods so they can be monitored at any point along a supply route. The next step is to ensure the data is shared throughout the supply chain so that players at every stage can make better decisions and collaborate more easily.
Whatever happens in the longer term, many large corporates have focused on helping suppliers weather the storm caused by COVID-19. These may be short-term measures, but they provide much-needed support.
This more considered focus on suppliers was happening before the pandemic started. Steve Pospisil is a chartered accountant with 30 years’ experience of supply chain management, including spells with DHL Supply Chain and Panalpina, as well as founding consultancy Genepy Group. He said many companies have been polishing reputations tarnished by the treatment of suppliers in the past.
“If you look at the power dynamics, you’ve got big retailers with lots of purchasing power, and lots of smaller suppliers,” says Pospisil. “There’s a power mismatch between the purchasing side and the supply side.”
As a result, he believes big corporations have been trying to build fairer relationships with their suppliers. “There’s a big opportunity for larger organisations to reassess their relationships with suppliers and say, ‘Look, we’re in this for the long haul’.”
Supply chain managers are now looking further ahead to the medium and long term. They’re examining which suppliers are preparing to reopen and bringing forward payments for goods and services to boost cash flow at those suppliers.
But Burt makes it clear that companies cannot save every supplier. Those receiving support are those that are critical to the big corporations. Supply chain managers are also preparing for suppliers that simply won’t survive the impact of the pandemic. Procurement teams are being trained to confront that possibility and processes are being put in place to accelerate the onboarding of new suppliers – a crucial and difficult process.
“With potentially thousands of suppliers on their books, providing support to all is near on impossible. The focus for our members has been on getting support to those who are critical and need it the most,” says Burt.
For some, the kind of financial support extended to suppliers can look more like short-term, tactical measures. Some experts call for a more strategic view.
According to Nick Wildgoose, an ICAEW member and former Chair of the Supply Chain Risk Leadership Council, supporting suppliers is also about building close long-term collaborative relationships. CFOs, he says, should know their supply chains in depth; not just their tier-one suppliers but the network of suppliers below those. Only in this way can finance departments gather a full picture of three essentials: supply chain risk, transparency and sustainability.
These factors enable big corporates, or end customers, to build stronger supplier relationships with greater levels of trust and more collaboration.
“One of the key messages is, ‘Do you, as a finance senior professional, really understand how much you depend on third parties and their ability to severely damage your profit line or enhance it?’,” Wildgoose says.
He adds: “This is about changing mindsets. That means people really caring about their supply chain, not just the direct suppliers – thinking about the multi-tier suppliers.”
Achieving this may mean encouraging the most important suppliers to do their own visibility legwork to shed a light on the complexity of their own supply network. Big corporations can help by perhaps giving them tools to do the work.
“Not enough people are using technology, data and artificial intelligence, which is readily available and very cost effective now,” says Wildgoose. “You can map and monitor your supply chain for under $100,000.”
As we emerge from lockdown, he anticipates seeing problems arise as end customers attempt to ramp up production and sales. In part this stems from discovering key suppliers are no longer in business. But troubles will also emerge as clients are confronted by suppliers who felt unloved during the crisis. “You’ll suddenly find it’s August or September and suppliers saying they can’t supply until November,” Wildgoose says.
“It’s about improved financial performance,” he adds. “This means that you need to have a resilient and collaborative supply chain. And in order to achieve that, you need to work with them.”
So while it’s likely in the longer term that supply chains will become less global, in the short term it will pay to stick to some tried and trusted business principles: work out what relationships are most important to you and invest time and money in them.
H&M, Waitrose, Primark and Morrisons in focus
While big corporates reassess their supply chains, there are undoubtedly examples of suppliers being offered a helping hand during the crisis.
Swedish fashion group H&M said at the start of the crisis that it would take delivery of already-produced goods without changing existing payment terms, despite reducing orders.
In mid-April FTSE 100 consumer goods giant Unilever revealed it was providing €500m in cash flow relief to suppliers, with the relief coming in the form of early payments for those deemed vulnerable. It also revealed it would be extending credit to small retail customers whose businesses rely on Unilever.
Elsewhere, Waitrose, one of the UK’s most high-profile supermarket chains, published a wide-ranging set of measures to support suppliers. This included £200,000 to bolster overseas farmers, which would pay for health advice as well as sanitation kits and food parcels for the communities that grow, pick and pack food for Waitrose stores.
The business also revealed quicker payments for vulnerable suppliers, even speedier than the seven-day terms it already uses. Rupert Thomas, Director of Food at Waitrose, said the measures were “just the start”.
Supermarket Morrisons said it would switch to immediate payments for small suppliers and temporarily adjusted its criteria so its policy included businesses with trade volumes with the retailer of up to £1m a year.
Primark said it would help suppliers obtain credit by demonstrating “commitment to orders, initiating conversations with international lenders and liaising with governments”. As well as this, it pledged to pay for £370m in stock that was in production and finished.
And further afield, Europe’s largest retailer, Carrefour, halved its 2019 dividend and held its annual shareholders meeting behind closed doors in May. The Carrefour Foundation also pledged €3m to fund food aid and to help hospitals.
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