Welcome to the new floor for supply chains

Those expecting supply chains to go back to what they once were are sure to be disappointed.

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The current state of supply chain disruptions has created a new floor across all supply chains due to multiple shifts in several key forces. These range from deglobalization to the relationship between labor and productivity as well as climate change and inflation. These shifts have brought on significant changes that are not likely to allow supply chains to return to “normal.” 

The trend toward deglobalization

At the moment, deglobalization (or reglobalization) is hitting supply chains hard. Although China seems to regret promising “unlimited friendship” to Russia, the outcome of current trends will likely be the development of multiple spheres of economic, military, and political clout. It will be a matter of the U.S. and close allies versus authoritarian regimes like China and Russia with the EU trying to strike its own balance. The rest of the world seems likely to remain as neutral as possible in order to trade and maintain relationships with all spheres.

These spheres will not be completely independent, but the aftermath of Covid and political realignments have given a certain animus toward traditional, globally sprawling supply chains. They’ve become too complicated and difficult to manage. They’re also too long and unresponsive to increasingly dynamic (and volatile) markets. And, furthermore, we have reached the point that shifting costs to other countries’ workers and environments to generate profits for Western companies has become an unsustainable strategy. The need to re-look at long logistics pipelines to make them more responsive and with smaller carbon footprints will further energize this animus.

Change in relationship between labor and productivity

The leaps in automation, artificial intelligence and additive manufacturing (3D printing) are leading companies to re-think how things are made. Many current supply chains are embedded in economic clusters that have specialized talent pools. Technological innovations will weaken the dependence on human labor pools and make certain skills available wherever there’s an internet connection. Humans will be used less for manufacturing, assembling, and certain logistics tasks and more for design, responsiveness, R&D, and interfacing with customers and markets—tasks that no machine will do better than humans for some time to come.

Climate change shifting everything

Increasing variability in weather patterns will make prediction of supply chain disruptions increasingly difficult. People are already changing where they live in response to the increasing incidents of storms and wildfires, not to mention rising heat indexes and changing rainfall patterns. Climate control for homes and offices are changing and adapting, and agriculture is dealing with changing patterns of where to plant crops and diseases among crops and livestock. Supply chains will have to adjust to the shifting production locations and needs and demographics.

Inflationary pressures result from global shifts

The harbinger of the current economic crisis could be said to be the Asian financial crisis of 1997. Countries started stockpiling currency as a hedge against economic uncertainties, with U.S. dollars playing the prominent role. Countries perceived the dollar as a safe haven for value, but that isn’t as true as it used to be. The sanctions on Russia have led some countries with significant stockpiles of dollars to re-think their strategy.

This is an existential threat to the wealth of certain Russians, Chinese and other large holders of U.S. dollars. It seems likely that they might convert their savings in dollars to physical assets such as oil that are more likely to gain (or at least not lose) value. What will happen to the cost of a barrel of oil if China decides to spend even a small portion of its $3+ trillion in American dollars on stockpiling oil? Then repeat this scenario for a variety of commodities, goods, and services.

What to do

In this environment, the riskiest risk management move is often the one that looks the most appealing: trying to cover all the bases. Too many companies try to be all things to all people to hedge against uncertainty. Let’s call this what it is: failure to make a decision about what the real risks are. The problem with this approach is: when times are tough is when people most need to concentrate on resources on a few effective strategies, not spread them in a vain attempt at covering all contingencies.

First and foremost, strategies must provide decision-making clarity combined with flexibility. This begins with people. Focus on training the human element on decision-making principles embodied in managerial approaches like lean that provide a framework for making decisions in response to evidence-based principles. This is the first line of defense when dealing with volatility.

Second, invest in digitizing your supply chain. You can’t see evidence without it, and you can’t execute decisions faster than your competition without digitization.

Third, develop cybersecurity to avoid the vulnerabilities that digitalization introduces.

Fourth, foster a culture of accountability in your organization for its leadership and workers. Also, be sure this accountability includes the impact of your company on its suppliers, customers, society, community and other stakeholders.

These steps should be enough to get you at least pointed in the right new direction since the old direction is no longer applicable.

Michael J. Gravier is Professor of Marketing and Global Supply Chain Management at Bryant University. He received his PhD from University of North Texas, MS from the Air Force Institute of Technology, and BA from Washington University in St. Louis. His research focuses on supply chain connections including procurement, industrial marketing, transportation, and the impact of technology on supply chains. He can be contacted at [email protected].

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