Black-swan events are meant to come about rarely. We often talk of once in a generation occurrences that batter and derail the global economy and the way the world works. But, they’re often more common than that.
In the past two years, we’ve been buffeted by a pandemic, several key supply disruptions caused by catastrophes at sea that blocked important trade routes; the impact of the UK leaving the European Union trade body; and, most recently, a war in Europe that scatters supply chains through physical disruption and sanctions.
It’s enough to blow even the best-planned supply chain off course and lo and behold, it has. As China, the world’s factory, struggles with Covid-enforced port closures, supply chains that were already tight have reached a breaking point. The world is redrawing its economic activity to cut out Russia after the country invaded Ukraine – an action which is affecting supplies of grain and cooking oil, as well as the oil we use to power our factories and cars. Catastrophe is being piled on top of catastrophe. “The expanded global nature and contracting diversity of supply chains have exacerbated this effect,” says Tim Morley, director at ISG.
“Most supply chains have some element of protection built-in to combat disruption, whether it’s extra capacity, extra inventory, alternative suppliers or different routes to market,” says Dave Food, head of supply chain at Board International. Doing so is simply being prepared – a sensible precaution in the event of issues. “The problem is, disruptions are occurring in multiple locations, on multiple routes of the supply chain, from source to consumption point –highlighting that the existing protection isn’t enough. It’s not one big event but multiple micro-black swans.”
Those multiple micro-black swans have a meaningful impact on our lives because of their chaotic effect on supply chains. In July 2020, 100% of food and consumer goods companies said they had experienced problems with production and distribution because of the Coronavirus pandemic. And that was just the start of the calamitous two years the world has faced.
“The issue is how organisations produce further capacity when they already have a limited supply,” says Food. “We’re currently stuck in a world struggling to catch up and until we create the capacity to do that, further black-swan levels of supply chain disruption are inevitable.” He predicts that we’re likely to see issues with supply chains in years to come, because of the interconnectedness of the global world and its many moving parts.
Normally, supply chains rebound when demand is relatively stable. That has not been the case recently
But what’s causing the supply-chain bottlenecks that we see in our day-to-day lives? What’s behind the empty shelves, the long lead times for delivery of items, and the reduced range of products in shops? It’s not simply the black-swan events that have stymied the steady flow of containers across the planet. Demand also interacts with supply in a way that can make a meaningful difference.
“Disruption is a regular occurrence in supply chains but the recent challenge has been that demand has increased significantly,” says Mark Johnson, professor of operations management at Warwick Business School. “Normally, supply chains rebound when demand is relatively stable. That has not been the case recently.” Inflationary pressures could change that, but for the past two years at least demand hasn’t slowed. Instead, it has shifted: the same money we would spend in-store is now spent online.
Fixing things is tricky. There is a fundamental imbalance and problems keep piling on top of problems, making them difficult to resolve. “Ships aren’t running all routes, there isn’t enough port capacity and there aren’t enough drivers, trucks, trailers, containers or chassis for this situation to resolve any time soon,” says Johnson. He forecasts that the situation will take time to unwind and won’t happen easily. “Unless countries and firms are serious about building resilience through holding inventory and excess capacity as well as restoring industrial capabilities that have been off-shored, we will continue to see disruptions,” he says. “I don’t see this happening due to the primacy of finance and accountancy in determining investment decisions in firms.”
The big question that consumers, business owners and analysts will all ask is a simple one: are we stuck in this supply-chain disarray for years to come? And if disruption is the norm, how should businesses respond?
There are several schools of thought on how best to respond to the current circumstances. One is to generate the best visibility over your supply chain – not just your own, but from key partners, suppliers and customers. “The further up the supply chain you can see, the better decisions you can make,” says Food. “Enlarging your business’s peripheral vision to be able to make a data and insight-driven decision could save you tens of thousands of pounds. Apply that across the tens and hundreds of decisions taken in organisations every day and suddenly your profit margins have increased.”
Once you have that information, you can act to remedy issues. For larger businesses, with greater capital reserves, that’s easier. You can build capacity that helps you overcome some of the most pressing issues and leaves you available to run your business as smoothly as possible. In the first year of the pandemic, 61% of companies said they had increased their inventory of critical products, while 55% were now dual-sourcing raw materials to create redundancy in the event of supply disruption.
Of course, that’s not possible for every organisation. “Businesses with less capital can move forward by being more collaborative, using intelligent contracting and sharing resources – both internally and externally – with partners,” says Food. Regardless of how you fix things, it’s vital to act quickly to head off issues before they compound and become even greater. Time is of the essence – and with disruption forecast long into the future, simply ignoring the problem isn’t the answer. “The pandemic is still the biggest threat, with some countries worse affected than others by illness and absences, causing a substantial impact to international trade,” says Morley. “Other threats continue to loom, while new and different threats are as yet unseen.”
