The pandemic-induced period of supply chain disruption has not disappeared. Companies need to invest in resilience to cut risk and improve profitability, such as reshoring and spending on supply chain technology enhancements. Failure to invest now could result in continued or even heightened exposure to future disruptions, warns a new report from S&P Global, Look Forward: Supply Chain.
The report authors argue firms must balance generating short-term cash flow with spending on long-term material resilience. Inventories are being cut back to pre-pandemic levels, which is unsurprising given higher interest rates and financing costs. This will, however, leave firms at risk of short-term inventory shocks.
Supplier diversification has reversed, reflecting a focus on cost-cutting and simplification. This could, they warn, lead to more fragile supply chains, increasing geopolitical and logistics network risks.
Meanwhile, investments in technological improvements and reshoring can provide cost improvements and risk mitigation, but such strategies can be organisationally complex, expensive, take years to deliver and introduce new forms of risk.
Labour crisis
Labour is a critical supply chain input facing mounting pressure from multiple fronts, including climate change, demographics, public health, and corporate responsibility. These factors will have far-reaching impacts on supply chains in the coming years.
There are growing demands on companies to monitor and manage labour risks within their end-to-end supply chains, namely more regulations requiring companies to protect worker rights across the value chain.
The COVID-19 pandemic brought to light growing labour shortages in industrialised countries, revealing challenging demographic trends that cannot be easily reversed, partly due to political restraints on immigration in developed markets.
Climate change is also a major factor in this equation; worker productivity has been shown to decline when temperatures exceed certain levels.
“It is not an overstatement to say that due to increasing labour pressures, supply chains will experience higher costs and be more prone to disruption in the coming years,” says the report.
Decarbonisation not happening
The International Maritime Organisation (IMO) has mandated the shipping industry achieve net-zero global greenhouse gas (GHG) emissions by or around 2050. This will result in higher industry costs and require shipping companies to find efficient ways to spread these costs across the supply chain.
The authors argue companies need to consider decarbonisation, but there is little willingness to spend on reducing emissions. Few companies have backed their public climate commitments with investments in higher-cost, zero-carbon logistics solutions offered by the major ocean carriers and freight forwarders.
This presents a conundrum to container lines that handle 45% of global trade by value accounting for 0.75% of GHG emissions but face the prospect of not having an effective mechanism in place to pass along the higher costs of zero-carbon fuels to customers.
There are concerns the IMO may not approve a meaningful carbon tax, potentially leaving the industry ill-equipped to finance the transition. The next two years will be critical for the UN agency to develop regulations that can create a viable pathway toward the 2050 decarbonisation target.
EVs and national security
Trade wars, geopolitical battles and infrastructure issues have tempered initial excitement surrounding EVs. A global battle is shaping up to secure the critical minerals and raw materials needed to manufacture sophisticated batteries and other EV parts. The report authors write that Asia, and particularly China, holds a dominant manufacturing advantage for EV parts, but national security concerns are quickly changing the narrative.
Governments’ supply chain policies will continue to shift toward national security priorities, while some economic aspects will become less important. Nation-state cooperation and competition for access to critical supply chain inputs are set to heighten as geopolitical conflicts continue. Protectionism and sanctions will remain a key part of nations’ policy tool kits and may find new applications, the report concludes.
