Chocolate ice cream, in my opinion, is the food of angels. It’s a good thing angels like chocolate ice cream, because they are the only ones who can afford it. In July, before National Ice Cream Day, the news website Axios reported that the “latest Consumer Price Index found June ice cream prices were up 12.5% over last year and increased 3.1% from the prior month.” Ouch.
The Federal Reserve Bank of St. Louis backs this data up. The Fed reports that prices for chocolate and confectionary manufacturing from cacao are up 18% since the beginning of 2022 and a whopping 30% since the beginning of 2020.
It isn’t just chocolate that’s a challenge. Again, according to the July Axios article, eggs were up 33.1% over last year, margarine was up 34.5%, butter up 21.4%, and milk was up 16.4%.
Pick almost any global commodity and costs in the supply chain are up. The Russia–Ukraine conflict is an often-cited root cause, though there are others. Uncertainty in Southeast Asia—China, Taiwan, North and South Korea—has disrupted traditional trade patterns. Brexit is still causing ripples throughout global economy. Semiconductor shortages remain a problem in the automotive industry.
We live in a truly global world. Consider the degree of integration your company has with China or with Russia. What are the risk implications? Can the impact of these risks be quantified? If you manage a supply chain, you need to figure that out.
A global shift
A thoughtful piece from McKinsey Global Institute explores how world trade may be in a step-change transition from the 20th century. One factor cited is the emergence of a “New World Order.” According to McKinsey, our collective economies around the world have evolved toward a globally integrated network built on a foundation of cooperative economic rules. We may now be shifting away from this “unipolar” world to a more “multipolar” one with multiple blocs of nations, which—while still interconnected—are each pursuing divergent goals. This construct overlays well on three super sets of countries: NATO, the Russian alliance, and China.
McKinsey admits that the end state for this multipolar world remains unresolved. But in the meantime, supply chain leaders still have decisions to make. What moves should companies be making in their supply chain now?
McKinsey operates at the strategic level, but most supply chain professionals spend more time at the operational level. We have a business to run and employees to pay. We cannot start with a blank sheet of paper. Enterprise trading partners already exist. Infrastructure investments exist. Any organization’s global network—albeit now in flux—exists. In a fractious time, we still have businesses to protect. How do you figure out what this global shift means in terms of where you should source from and how?
Mapping risk
The first step is to examine the profile of your network. Stratify your supply chain. Identify the top 20% of your suppliers that account for 80% of your procurement spend. Then, collaborate with these suppliers to identify where their supply comes from. Keep peeling, aiming to go down three, four, or even five levels.
Then use that data to map out the tiers of your supply chain. Literally. Hang that network map on a wall and stare at it. Consider the ripples emanating from Eastern Europe. Consider the ripples emanating from China. Consider the pandemic. Consider port congestion. Consider commodity shortages. Look for where you can get the best value for your spend.
The definition of best value is more complex than what the accountants see. We must start with the accounting definition of cost, while keeping in mind that cost isn’t the same as value. Think about those risks overlaid on our network map. Think about resilience up and down the chain. Think about adaptability. Think about flexibility. And then choose suppliers that provide the best value at the right level of risk.
Also think about how your supplies travel from point A to point B. The top five container ports in the world are in Southeast Asia: Shanghai, Singapore, Ningbo-Zhoushan, Shenzhen, and Guangzhou. Four of those are in China. Given the continuing trade tensions between China and the United States, North American organizations that import from China face a shifting and decidedly riskier profile.
Another widely shared challenge faced by North American companies is the convergence of risk at the Ports of Long Beach and Los Angeles. According to the Legislative Analyst’s Office, the California Legislature’s nonpartisan arm for fiscal and policy analysis, about a quarter of U.S. inbound containerized freight flows through these two ports. That is also a risk.
As you build out your network map, review the nodes and flows across the tiers of your supply chain. Overlay your volume through the tiers on the map. Categorize and color code your modes of transportation through the tiers. Look for choke points.
Then the hard work begins. Ask your partners to provide risk mitigation strategies. Consider dual sourcing. Explore nearshoring. Explore onshoring. Calculate the trade-offs of these strategy shifts.
On its website, the Indian branch of the consulting company KPMG offers even more tools that executives can use to “limit and manage disruption, mitigate risk, and build resilience and agility.” The suggested approaches include finding new supply sources in alternative jurisdictions, trimming the supply base to reduce complexity, broadening the supply base in alternative jurisdictions to mitigate risk, implementing risk mitigation strategies to reduce the potential for disruption, and building a supplier development roadmap.
And when you finish, get some chocolate ice cream, because you have just done angel’s work.
