Sadly, supply chain uncertainty grows by the day. Ukraine lies in ruins, and the destruction continues. Shanghai, a dynamic business center in China, remains under lockdown. Time magazine reports, “As of April 19, more than half of China’s biggest cities were under some form of lock down. Industrial cities and trading ports—including vital hubs like Changchun, Jilin, Shenyang, Tianjin, Shenzhen, and Guangzhou—have shuttered business, imposed travel restrictions, or told residents to stay home.”
Meanwhile 32 U.S. states have reported the re-emergence of avian flu since the beginning of the year, according to the U.S. Department of Agriculture (USDA). The USDA reports that over 30 million turkeys and chickens have been infected, driving poultry prices through the roof. For example, wholesale egg prices in the Midwest rose 85% in May.
These rapidly evolving situations mean that it is time to reassess our supply chains. We need to review our networks and take stock of risk yet again. Legacy practices in supply chain management can miss emerging issues just over the horizon—wherever that horizon might be.
In the legacy world, understanding and managing inbound supply could often happen working within the company or with Tier 1 suppliers. There is a tendency to look to the Tier 1 suppliers and leave additional tiers of the wedding cake out of scope. This made sense 30 years ago, when industry was more vertically integrated—think General Motors or General Electric. But since then, more complex, multi-tier, global networks have emerged.
The demand side has also become more complex. As international markets opened and trade barriers became less restrictive, exports grew. According to the data analytics resource statistica.com, the annual volume of U.S. exports of trade goods from 1987 to 2021 grew from approximately $250 billion dollars a year to $1.75 trillion dollars a year. That means international issues are more important in the supply chain, requiring more sophisticated oversight and understanding.
We are in a more interwoven, complex, and unpredictable world, and supply chain professionals must assess and perhaps rethink their networks.
Moving forward
It isn’t enough to understand the risk profile of a Tier 1 supplier or customer. We need to understand risk in both directions through the layers of the tiered supply chain. To do this, we need to pull together our portfolio on both the demand side and the supply side. We need to itemize, categorize, and quantify the individual risks. Then we need to align and summarize these risks by segment, risk category, currency, or another salient characteristic. Once we have done that, we can start to peel back the onion to the underlying, tiered risks.
The risk inherent in our complex and unpredictable global supply chains can be seen even in something as simple as wheat. Nearly 30% of the global wheat trade originates in Russia and Ukraine, according to the World Population Review. “As a result, Russia’s 2022 military invasion of the Ukraine sent global wheat prices soaring,” according to the website, “with Ukraine’s production ability compromised and many countries restricting or shutting down trade with Russia.”
Under the global configuration of our supply chains, faraway conflicts can have very tangible local effects. In Charlotte, North Carolina, Spectrum News, reported that inflation caused by the war in the Ukraine is having a big impact at a local bakery, Boulted Bread. The news site quotes co-owner Joshua Bellamy as saying, “There's been a lot of uncertainty, a lot of anxiety about whether or not we can keep baking, whether or not we can pay the awesome crew that works here, whether or not we are going to have to shut our doors.”
Multiply this across all consumers of flour and then look around your grocery store. Maybe you’ll want to rethink how you set up your supply networks, not just for your home, but for your business. The world’s interlocking and international supply chains may not be as stable as we thought.
On February 21, 2021, President Biden issued an executive order asserting that “The United States needs resilient, diverse, and secure supply chains to ensure our economic prosperity and national security.” Unfortunately, the political process moves slowly. Despite the clarion call a year before, the United States was ill-prepared for the shocks resulting from the invasion of Ukraine.
For insight into supply chain agility, I like to look at what the smart money is doing. On the website PE Hub (Private Equity Hub), representatives from several equity firms explore what it means to think local when it comes to the supply chain. According to CORE Industrial Partners founder and managing partner John May, “People are beginning to realize that supply chains can really be whipsawed quickly.” He continues, “We are seeing the benefits of reshoring or onshoring across out portfolio.”
As the President said over a year ago, we need resilient, diverse, and secure supply chains. That comes from reshoring and onshoring. Best value is not the same as lowest cost. Best value considers risk. Do that, and it may become apparent that it’s time to reverse course and become reacquainted with local and regional partners.
