When will supply chains return back to “normal”?
The prevalent wisdom at this time (Q4 2023) is that most of the world, and to a further extent,Supply Chain, has moved on from thepandemic. Therefore, supply chains will return to "normal." Unfortunately, the world has permanently changed, and supply chains will face continuing challenges for decades to come.
Return to “normal”? Still not optimistic
First, let's listen to some supply chain managers' voices from a CNBC survey:
- More than half of logistics managers surveyed by CNBC do not expect the supply chain to return to normal until 2024 or after.
- Bloated inventories have kept warehouses packed, and respondents said they saw a 400% increase in warehouse prices as space decreased.
- Sixty-one percent said their current supply chain is not operating normally, compared with 32% that said it is functioning normally.
- When questioned when they see a return to normalcy, 22% were unsure, 19% said 2023, and 30% said 2024. Another 29% said in or after 2025 or never.
- The Global Supply Chain Pressure Index has experienced a significant increase in recent years, mainly due to the unanticipated disruptions caused by events such as the War in Ukraine and Port congestion.
Challenges contributing to such pessimism
Inflationary & labor pressures
Energy prices and labor are two inflationary pressures respondents said are still driving up logistic costs. Israeli-Palestinian conflict, Russia's war on Ukraine, and tariffs imposed during the Trump administration are among the geopolitical events that impacted the supply chain the most, followed by COVID-19.
On the labor front, respondents said they were worried about the mental health of their workforce as well as the shortage of skilled workers, which is adding to the stress. Survey results cited these as problems:
- Employee burnout (65%).
- Shortage of employees with the right skills (61%).
- Hiring to address the skills gap (75%).
"International logistics is still a business driven by people," said Kenney of CONECT. "The survey highlights all sorts of challenges in the supply chain, but none of those will get solved without the right talent and expertise."
Companies have instituted ESG requirements that require disclosures and monitoring of how and where products have been sourced. This pressure means that goods produced in factories that don't match Western standards for environmental controls and human rights may not be available to Western consumers. The factories that do produce goods that match Western standards will often be more expensive, and therefore, there will be less buffer stock in the system.
The same ESG standards also challenge commodity producers, as the cost of adhering to environmental and social disclosures makes it more expensive and less productive. It also discourages investment in producing environmentally sensitive commodities – most obviously in energy.
Environmental concerns and regulations that have prevented exploration and production and killed pipeline projects are largely why the world currently lacks sufficient energy resources to buffer against the consequences of the Russia-Ukraine war.
Tightening ESG requirements
Companies have instituted ESG requirements that require disclosures and monitoring of how and where products have been sourced. This pressure means that goods that are produced in factories that don’t match Western standards for environmental controls and human rights may not be available to Western consumers. The factories that do produce goods that match Western standards will often be more expensive and therefore there will be less buffer stock in the system.
The same ESG standards also create challenges for commodity producers, as the cost of adhering to environmental and social disclosures makes it more expensive and less productive. It also discourages investment in the production of environmentally sensitive commodities – most obviously in energy.
Environmental concerns and regulations that have prevented exploration and production and killed pipeline projects are largely the reason that the world currently lacks sufficient energy resources to buffer against the consequences of the Russia-Ukraine war.
Facing the new normal
To thrive amidst ever-evolving challenges, it is crucial to reassess established patterns and strategies in supply chain management and explore the potential of innovation. As illustrated in the graph below, traditional supply chain strategies typically prioritize three key factors: service, cost, capital, and quality. However, the next new-normal supply chains are significantly more complex. In the emerging new-normal landscape, businesses must adopt more multifaceted strategies prioritizing resilience, agility, and sustainability. This calls for concerted efforts to integrate these values into operational processes to ensure long-term success and viability in an increasingly complex global economy.
Boosting supply chain resilience
Supply chain risk manifests at the intersection of vulnerability and exposure to unforeseen events. The very initial step to mitigate supply chain risks is to recognize the vulnerabilities of an organization's supply chain, such as single points of failure or critical inputs that may be at risk due to shortages or price instability. Unfortunately, most companies lack practical tools to monitor these vulnerabilities, and they often have limited visibility beyond their direct suppliers.
According to a 2021 survey by McKinsey, just under half of senior supply chain executives knew the location of their tier-one suppliers and their potential risks. Only 2 percent had the same understanding of their third-tier suppliers and beyond, which is crucial since most disruptions occur in these deeper tiers.
To manage the complexity and diversity of supply chain risks, companies are now utilizing intelligent management tools, including digital alerting systems and risk heat maps, to monitor potential disruptions and concentrate their focus on high-risk areas and suppliers.
Increasing supply chain agility
Traditional supply chains were designed to achieve stability and reduce costs. However, the future supply chains need to be much more adaptable and flexible, which can predict, prepare, and respond to constantly changing demand and product mix. In other words, supply chains need to be agile.
To do this, supply chain teams must be much more proactive at the planning stage. They can begin to develop scenarios that are ready to be implemented as soon as new products or market opportunities are identified. Furthermore, advanced techniques such as demand sensing and dynamic forecasting using machine learning technologies will become essential in day-to-day supply chain operations after launch.
New capabilities and tools are required for agile operations in supply chain execution. For example, agile operations extensively use digital technologies in manufacturing and maximize smart automation in production and logistics settings. Unlike the rigid supply chain automation systems of the past, collaborative robots and smart packaging machines are capable of faster changeovers. Additionally, they can handle a broader range of products and shipment types.
Achieving supply chain sustainability
Companies are under increasing pressure to address ESG risks, including reputational, regulatory, and financial risks. Companies like Henkel have demonstrated that strong environmental actions can deliver operational benefits. Henkel's digital twin, which connects and benchmarks 30 factories and prescribes sustainability actions in real-time, has reduced energy consumption by almost 40% and waste by 20% over ten years. The supply chain plays a vital role in an enterprise's sustainability transformation.
According to a 2020 industry survey, most of the nine ESG initiatives highlighted by senior executives involve the supply chain directly or have significant implications for supply chain operations. To begin an ESG-focused transformation, an organization needs to understand its baseline impact. This includes quantifying the resources consumed and emissions generated by the company's direct activities and participants in its more comprehensive supply chain. A clear baseline allows an organization to identify opportunities for improvement and set challenging but achievable goals and timelines.
Achieving these goals requires adopting sustainable technologies in manufacturing or logistics projects, optimizing operating practices, having an ESG focus in procurement decisions, and rigorous sustainability KPIs from the boardroom to the shop floor.
Although it may seem difficult to anticipate a positive future in the field of supply chain management, there are new measures that can be implemented to confront unforeseen risks. The current focus on resilience, agility, and sustainability cannot simply be added to existing supply chain models. Instead, these priorities must be integrated into every aspect of supply chain planning, organization, and operation from the very beginning. Achieving this goal will likely require a change in mindset from company leadership, with risk, agility, and sustainability metrics given the same consideration as more traditional metrics like cost, capital utilization, service, and quality. To succeed in supply chain management, having a skilled workforce and robust digital capabilities will be crucial.