We recently sat down with several supply chain experts to identify the trends impacting global supply chains and what to expect going forward.
KPMG Partner Peter Liddell weighed in on everything from the continuous disruption caused by materials shortages and geopolitical conflict to best practices for adapting to these challenges.
[To hear more from Peter as well as Appian’s own Supply Chain expert, Gary Cassel, listen to the webinar: KPMG & Appian: Revolutionizing Supply Chain Orchestration with AI and Automation.]
Obviously, the biggest disruption was the pandemic. When combined with other factors like macroeconomic challenges and geopolitical issues, such as the Russia-Ukraine conflict, they contributed to a near-total reduction in airline freight and significant reductions in ocean freight, too.
The freight supply and demand equation was a common issue throughout the pandemic and during the recovery period. Plus, the growing geopolitical concerns like the USA and China, plus Russia-Ukraine conflict also reshaped global supply chain flows, often adding significant lead time for most products shipped via ocean freight.
Post-pandemic, we’ve seen the US and EU invest heavily in infrastructure projects to help rebuild their respective economies. This led to a run on manufacturing goods from China, which caused shipping prices to rise at astronomical rates and lead to containers getting backed up in major global ports.
Finally, in-country domestic supply chains were also disrupted [for nations across the globe]. Ongoing COVID-19 outbreaks often reduced the availability of local workforces needed to
move goods within countries. Ultimately we’ve experienced a period of unbelievable growth in the demand for goods, yet limited supply of logistics, both globally and locally. This was a perfect storm that I hadn’t seen in more than 30 years.
Unfortunately, no, it hasn’t stopped yet, although we have thankfully seen shipping costs return to pre-pandemic levels. One trend that we will definitely continue to see is continuous disruption. And I also think that we’ll see a second wave of supply chain risk.
Continuous disruption will be evident in a number of ways. Organizations will continue to experience some short delays with transport logistics, yet we are starting to see more shipping availability as many of the global ocean freight providers start to catch up to demand. Even if we can get all the container ships we need into the ocean, the crews won’t always be available, so we will continue to experience an imbalance of supply and demand.
We also don’t know how long the Russia-Ukraine conflict will last or what simmering geopolitical issues could erupt in ways that cause more disruptions. You just need one more issue to flare up and another major shipping lane might close down. We’re definitely in for a bumpy 12 – 18 months at least.
The good news is that the global supply chain pressure index, which measures supply chain stressors, indicates that the problem has already peaked. How fast supply chain pressures come down is an open question—new or current geopolitical conflicts not being resolved could make for a lengthier return to normal.
There are a number of global challenges contributing to the second wave of disruptions—for example, everyone is trying to get their hands on construction materials and equipment, which may slow down repairs and maintenance of critical assets or stall new capital projects (retail stores, distribution centers, manufacturing sites, etc.).
Additionally, many industries producing critical components such as semiconductors, packaging,raw materials, etc., haven’t fully caught up. And with consumption so high, we could face shortages or run out of critical production inputs. This could lead to more supply imbalances for critical industries.
If you peel the onion down a layer, you see that those companies that did well likely had a lot of safety stock or inventory stockpiles. Many also turned to premium freight to expedite deliveries, however these strategies are not sustainable over the longer term. There was a lot of luck involved for many of them who made it through the pandemic, to be frank.
Today, companies have started to adapt by right-sizing their supply chains. One example that we see occurring quite a lot at present, is that many companies are looking at alternative sourcing strategies and revisiting where they manufacture. For example, some are looking at suppliers where they are exposed to really long, in-transit lead times that they’ve always done business with and try to find a closer supplier in order to reduce lead time. In addition to other strategies, this type of approach should support them to become much more agile and resilient. As an example, they now only wait three to four weeks instead of 12+ weeks for delivery of critical materials and supplies.
Well, pre-pandemic, a number of boards and executive teams spoke about ESG and the need for new supply chain strategies to reduce impacts on the environment, but at best, it was more about setting targets and then signing off on end-of-year ESG statements and reports.
Today, ESG has become a larger focus due to consumer behavior. You can see it in the latest research reports and industry studies: customers expect those companies they buy from to source responsibility. We also see how the global investment community is starting to take action by calling companies out who greenwash, and starting to limit or refusing to allocate funds to those not proactively addressing the ESG agenda. We expect that the investment community will also start to walk away from those companies that lack good ESG governance.
Companies were initially urged by regulators, consumers, and financial institutions to focus on scope 1 and scope 2 emissions, but now, scope 3 is emerging and will become a key focus in 2023 and beyond. We are already seeing significant progress in Europe with new industry standards, regulations and acts emerging. Companies will need to identify where carbon, waste, and high energy occurs throughout their extended supply chain and quickly devise strategies to measure, report and most importantly, mitigate their exposures.
One area where companies are investing is full supply chain transparency. Achieving end-to-end supply chain visibility provides real-time transparency into how products really flow through the global supply chain, giving companies real data on carbon emissions, energy usage, and waste. A lot of companies think they know how their products are flowing, but until they get the real data, they don’t actually know. Digitally enabling the wider supply chain, allowing for the better use of internal and external data sources and generating real time supply chain analytics will certainly help.
Two come to mind. First, manufacturing footprint considerations deserve some attention. With the combination of inflationary pressures, high shipping costs, and geopolitics putting pressure on energy and labor expenditures, we’re starting to see more investments into southeast Asian countries like Vietnam, Indonesia, Taiwan and Thailand. This signals a shift toward China plus one manufacturing location strategy for many global corporations, including Chinese companies who are also investing in new manufacturing locations within SEA.
Second, we need to talk seriously about the future of workforce. Two years ago, we started seeing significant growth in enterprise-wide digital transformation. As companies continue this—by shifting their enterprise resource planning (ERP) or other functional specific technologies to the cloud or putting more automation and digital power behind procurement, supply chain planning, operations activities, and other enterprise activities—they will need to focus on how they actively train the workforce or find people with the technical know-how to handle these changes.
Read the full 2023 supply chain outlook here.