Building Resilient and Sustainable Supply Chains in a New Macroeconomic Context

When the COVID-19 pandemic hit the global economy, sudden shifts in consumer demand, closed borders and lockdowns put global supply chains to the test. The result were empty shelves, delivery delays and severe price fluctuations. Towards the end of 2021, many hoped that things would turn back to normal but Russia’s invasion of Ukraine teaches us differently. Economic ties to Russia are severed, the Ukraine is forced to curb production, and many wonder about the trustworthiness of business partners in other parts of the former Soviet Union.

The consequences of the war are far-reaching and should not be underestimated. Consider the recent export ban on palm oil announced by the Indonesian government. The ban is a direct reaction to soaring food prices which risk to destabilize the country. Indonesia is the world’s largest producer of palm oil which is a key ingredient to products which – so far – had not been considered to be affected by the war in Ukraine: chocolate, ice cream, body lotion or shampoos. Further supply chain problems are very probable – no matter when and how the war ends.

Business leaders of all industries and operating global supply chains are well advised to understand that changes in the global macroeconomic context will be persistent and that they need to fundamentally change their supply chains in order to be able to compete in the long run. Below are a set of recommendations about to set supply chains up for this new area of competition.

1. Diversify your Supply Base

The past: Concentrating large volumes on one or a handful of suppliers had been the golden rule of achieving the highest cost reductions. Suppliers agreed to lower prices as they could sell large quantities and bundle shipments. The downside of this strategy is a high dependence on suppliers which are usually co-located in the same country or region. Thus, a local disruption immediately breaks up entire supply chain connections. A company which relies on, say two independent suppliers for electronic components – one located in Jiangsu province, the other Zhejiang province in China – may face supply disruption if both suppliers need to ship through the harbor of Shanghai when it is locked down.

The future: The risk of large scale, global events will increase rather than decrease. Consider climate change and its consequences such as floodings, heat waves or draughts will increase rather than decrease. Thus, it will be essential to spread supply volumes across several suppliers located in different regions to ensure continuous supply in case a disruptive event strikes. Here, it will not make a big difference if the product in question is a commodity or a strategic component as absence of any of the two can cause production standstill. However, buying companies will probably need to invest more time and resources in building alternative sources for strategic supplies.

2 Regain Profound Knowledge about Products and their Whereabouts

The past: Starting with the 1990ies, companies concentrated on their so-called core competences and outsourced other, ‘non-core’ activities to external partners across the globe. This process enabled many countries to benefit and develop economically. It also led to the forming of highly sophisticated suppliers who have become world leaders in the production of certain parts and components. The downside of these developments is, however, that many companies lost the know-how about how the components they source are manufactured, where the raw materials come from and so on and forth. This makes global supply chains inflexible and contributes to the aforementioned dependencies on select suppliers and sub-suppliers.

The future: Competition for resources will become more and more severe resulting in both higher prices and fights for securing access. The reason for increased resource competition is twofold. First, demand continues to reach ever higher levels as the world population grows. Second, non-renewable resources are bailed out and renewable resources are overly exhausted resulting in their decline. As we will enter a new area marked by shortages in raw materials and components, companies will need to regain at least part of the knowledge about the whereabouts of the products they buy in order to be able to understand how their negative environmental impact can be overcome and which non-renewable materials can be substituted with renewable ones to ensure long-term viability of their business models. Through life-cycle analysis, companies can re-learn product compositions and they understand which materials can be substituted such that their negative environmental impact decreases.

3 Use Carrots, not Sticks

The past: In the ceasing area of ‘resource abundancy’, many companies fell prey to treating suppliers like a commodity, specifically those suppliers which delivered rather simple products. Relationships were considered transactional and in case a supplier did not meet cost or quality expectations, they were replaced without further ado. In the pandemic, things have changed rather abruptly. Buying companies had difficulties in securing supplies and suppliers, in turn, could barely produce enough to satisfy demand. This has changed the balance of power in quite some buyer-supplier relationships. For the first time in decades, suppliers could choose whom to supply.

The future: There is strong evidence that firms who treated their suppliers well before the pandemic kicked in fared better during the crisis: Their performance plunge was less severe and less long. Suppliers first assisted those buyers who entertained long-term, trust-based and stable relationships with them. Thus, these buyers were less often victim to supply disruptions. In general, rewarding suppliers for meeting goals by offering long-term contracts and increasing business leads to better results than threatening with penalties or relationship termination. Suppliers will show their gratitude in times of crises. The benefits of such relational capital should not be underestimated in an area where resources are increasingly scarce.

4 Build the Supply Chain from the Beginning to the End

The past: Buying companies usually know their immediate suppliers, i.e. the ones whom they have a contract with. However, they usually have little to no knowledge about their suppliers’ suppliers. Transparency over the supply chain decreases as the number of tiers in the value chain increases. This is a high risk when the raw materials that products are made of are scarce as it can threaten resource access. It is not without cause that China has started to secure access to key strategic raw materials in Asia-Pacific, Africa and elsewhere years ago. The goal is to ensure servitude.

The future: A handful of companies have started to get a fuller picture of all the products and components they buy and, most notably, the raw materials these are made of. They no longer have supply contracts with component manufacturers only, but rather with the raw materials suppliers directly. This enables them to control for relevant issues such as quality and cost but also for worker health and safety and environmental standards. These buying companies ensure that the raw materials they have bought enter the next stages in the value creation process until, ultimately, they receive the final product for further assembly. Aside from transparency and control, these buying companies benefit from higher supply security: As they entertain binding relationships with raw material and sometimes even component suppliers, they have higher security about the flows of products through the supply chain and they can redirect materials flows in case one partner in the chain faces a disruption.

5 Digitalize the Supply Chain

The past: Enterprise resource planning systems have the problem that their functionality is limited to the border of the organization. Sometimes, support systems are implemented to smoothen communication with direct suppliers by interconnecting a buyer’s IT system with that of the supplier. Only few firms make use of cloud-based services in order to connect a larger proportion of the value chain partners. But this where the story ends. There is no full transparency over entire supply chains spanning multiple players across the globe.

The future: Technology has so much more to offer! Cloud-based services, blockchain technology, digital twins and the like assist companies to generate full transparency over entire supply chains. Blockchain, for example, is a system which enables the digital storage of every single transaction in a supply chain. Each transaction is recorded, chronologically updated, distributed and cryptographically sealed. Each partner in the supply chain can store, exchange, view and add new data, but no one can change something to the blockchain such that falsification is impossible. This was, blockchain can be a key enabler of fully transparent supply chains – upon condition that buyer assist suppliers in developing the necessary technological infrastructure and skills. Digital solutions support each of the previous four recommendations and leading firms started to seize the opportunity.

Best of luck in making your supply chain resilient to future challenges!

References

Eggert, J. and J. Hartmann. 2021. Purchasing's contribution to supply chain emission reduction. Journal of Purchasing and Supply Management 27 (2): 100685.

Eggert, J. and J. Hartmann. 2022. Sustainable supply chain management – a key to resilience in the global pandemic. Supply Chain Management: An International Journal (ahead-of-print)