The supply chain is the backbone of how commodities are created and distributed to consumers. For the past decade, the supply chain has been facing severe bottlenecks, which have severely affected the global economy and the livelihoods of many consumers worldwide.
An Overview of the Supply Chain and its Stability
Supply chains are defined as the network of individuals and companies involved in creating a product and distributing it to a consumer. They typically include producers, vendors, warehouses, transportation companies, distributors, and retailers. A supply chain covers a wide variety of fields, such as product development, marketing, operations, finance, and customer service. Typically, the steps of a supply chain start with planning inventory, using supply and demand as a reference. Then, materials are sourced and manufactured to create the final product, which is then assembled, tested, and packaged to be distributed to retailers or consumers (or the product could be held in inventory for further use).
It is important to implement good measures in supply chain management, as a bottleneck in the supply chain could end up heavily impacting a whole company and their consumers. Some examples of good measures include seeking continuous improvement and velocity, engaging with other businesses involved in the supply chain, seeking new technology, implementing metrics that allow employees to track their successes and failures, and finding reliable suppliers. Executives must prioritize sustainability in supply chains in order to run effective businesses, because optimizing a supply chain will ensure more efficient production and distribution, lower costs, and therefore higher profit margins.
KPMG, in partnership with the Association for Supply Chain Management (ASCM), created a supply chain stability index, which measures the amount of stress the supply chain is facing using four criteria: the volume of goods shipped, the speed at which goods are transported, the cost of transportation, and the variability of these factors.
While there are always fluctuations in the stability of the supply chain, the index shows that the year 2020 initiated a drastic increase in supply chain stress. The first spike in stress occurred shortly after the start of the pandemic and continued to rise before hitting its peak in 2022. Present-day, the supply chain is still under higher stress than at the start of the pandemic.
The UN Global Compact suggests that now the supply chain is the top issue in terms of sustainability. International events in recent years have caused drastic changes to the global supply chain. If these are not resolved, this could lead to disastrous effects on global trade and the international economy.
The COVID-19 Pandemic
The Covid-19 pandemic, first occurring around December 2020, created a plethora of issues in the global supply chain. The border restrictions that many countries implemented resulted in a disruption in the flow of goods. There were also many port backups and delays. These shortages were paired with skyrocketing demand for specific goods such as toilet paper, masks, and cleaning wipes. Already, supply and demand became unbalanced, and the supply chain failed to accommodate these imbalances.
China, one of the largest exporters of commodities in the world, had a strict lockdown to protect citizens. Production of goods in the country decreased, and many countries such as the US could not receive Chinese commodities. An example of this was the silicon chip shortage, which resulted in the shortage of electronics, cars, toys, and more. Technology monopolies in the US such as Apple tried to compensate, but now in 2024, Apple still sees supply and sale drops in their company. China’s lockdown also resulted in declining automotive and industrial sectors during the pandemic.
Additionally, the pandemic resulted in labor shortages. Quarantining nationwide meant that many Americans could not work. Companies losing money due to lessened demand could not pay all their employees, leading to massive layoffs. The COVID-19 pandemic kickstarted the high stress the global supply chain is facing now, and even now inflation is skyrocketing from commodity shortages, difficult transportation of goods, labor shortages, and border restrictions.
A key takeaway from the pandemic, however, was the increased implementation of technology (from a survey by Ernst & Young of 200 senior-level supply chain executives). Because of the lockdowns, companies worked to increase the visibility of orders using new technology. They also worked to accelerate the digital transformation of supply chains as a whole. This is a good step in the right direction, as the digitization of supply chains can increase their transparency and efficiency.
Global Conflict
Global conflicts in recent years have disrupted many important shipping lanes, further delaying the transportation of commodities between countries.
The South China Sea is one of the most valuable shipping lanes. However, current tensions between China and Taiwan have disrupted these lanes. Many powerful economies such as India, Japan, and China use these lanes to ship commodities. Countries including Thailand, the Philippines, and Vietnam reside near this area and feel the repercussions of the rising tensions. An example of this is the Philippines accusing China of having missile boats following Filipino vessels.
One of the most detrimental global conflicts for the supply chain is the Russian-Ukraine war. Russia is a key exporter of fuel, metal, and soft commodities. When Russia invaded Ukraine, gas and diesel prices immediately skyrocketed. Industries such as the automotive industry are also affected as they cannot get metals from Russia. About 60% of aluminum exports from Russia have closed off or been disrupted. Shipping lanes near Russia are also disrupted, as well as airfreight traffic.
Besides global conflict, congestion in ports has also been a factor in decreasing supply chain stability. An example of this is the 2021 Suez Canal obstruction.
What Businesses Need To Do
McKinsey & Company conducted a survey of global supply chain leaders. The survey supported the issue that companies and executives need to understand and spread awareness of supply chain risks. Only about a quarter of executives have an in-depth understanding of supply chain risk. Additionally, the visibility and transparency of suppliers are still low, with executives only aware of first-tier suppliers. It is important to have a comprehensive understanding of all suppliers to make sure that no human labor rights are violated and environmental standards are met. Also, executives report that there is a lack of talent in their companies, especially digital talent as 90% of executives report they lack talent in that department. Companies need to hire new talent or work to provide internal training and revamp talent development programs. Finally, there is a need to educate company board members on supply chain risk. This can be done by implementing regular board updates with supply chain risk analysis.
While the supply chain is still vulnerable, there is progress being made. 60% of companies report that they have comprehensive visibility of tier-one suppliers, up 10 points from last year. Also, businesses are implementing advanced planning and scheduling systems (APS) for their supply chains. This helps them predict disruptions, plan more accurately, and improve supply chain resilience by responding to multiple supply chain scenarios. 73% of executives are reporting success in dual-sourcing strategies, and 60% are acting to regionalize supply chains. Finally, the digitalization kickstarted during the pandemic is growing more powerful than ever, with the capabilities of AI being able to assist in strengthening APS. AI could generate multiple supply chain scenarios, predict risk and disruptions, and analyze supply chain data.
Supply chain stability is still a pressing issue according to the UN Global Compact. While global disruptions, conflicts, and issues are bound to happen, countries and companies can work to increase capacity to meet the needs of an ever-changing global supply chain. Through this, they can ensure the satisfaction of many companies and consumers worldwide.
Works Cited
Butts, Dylan. “Global Trade at Risk as Tensions Escalate in South China Sea.” CNBC, CNBC LLC, 11 Oct. 2024, http://www.cnbc.com/2024/10/11/global-trade-at-risk-as-tensions-escalate-in-south-china-sea-.html. Accessed 16 Nov. 2024.
Hayes, Adam. “The Supply Chain: From Raw Materials to Order Fulfillment.” Investopedia, Dotdash Meredith, 13 June 2024, http://www.investopedia.com/terms/s/supplychain.asp. Accessed 16 Nov. 2024.
J.P. Morgan. “What’s behind the Global Supply Chain Crisis?” Www.jpmorgan.com, JPMorgan Chase & Co., 25 May 2022, http://www.jpmorgan.com/insights/global-research/supply-chain/global-supply-chain-issues. Accessed 17 Nov. 2024.
Knut Alicke, and Tacy Foster. “Supply Chains: Still Vulnerable.” McKinsey & Company, 14 Oct. 2024, http://www.mckinsey.com/capabilities/operations/our-insights/supply-chain-risk-survey. Accessed 16 Nov. 2024.
KPMG, and ASCM. “Supply Chain Stability Index | KPMG + ASCM.” Www.ascm.org, ASCM, http://www.ascm.org/making-an-impact/research/supply-chain-stability-index/. Accessed 16 Nov. 2024.
Social Sustainability Team UN Global Compact. “Supply Chain Sustainability | UN Global Compact.” Unglobalcompact.org, United Nations, unglobalcompact.org/what-is-gc/our-work/supply-chain. Accessed 16 Nov. 2024.
“The Ukraine War’s Effects on US Commodity Prices | FRED Blog.” Https://Fredblog.stlouisfed.org, Federal Reserve Bank of St. Louis, 26 Oct. 2023, fredblog.stlouisfed.org/2023/10/the-ukraine-wars-effects-on-us-commodity-prices/. Accessed 16 Nov. 2024.
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