By Simon Coates and Kieran Heinze

The price of strawberries doubled in a week. Sales of Australian wheat are going nuts. So, too, is the price of the imported fertiliser used to grow that wheat. Meanwhile, Australia’s Reserve Bank, which was saying interest rates might go up in 2024, now says a rate rise this year is likely. Volatility is the new normal – and all supply chains are affected.

The idea of lean supply chains has proven to be a latent failure in the global order.

The pandemic put supply chain risks on the corporate radar. And now with war in Europe, that blip will be on our screens for a long time.

Who knew that a significant proportion of the global supply of several ultra-pure gases used in semiconductor manufacturing come from Ukraine? That’s an instant strain on an already strained supply chain. Who knew Volkswagen would have to shutter two plants in Germany due to the lack of parts originating in Ukraine?

Then there’s wheat and the lost freight capacity on the Trans-Siberian railway that will be put back into already strained sea routes. You may already be feeling shocks, and more are to come.

But war is only the latest in a series of factors that have changed supply chains forever.

The supply chain risks before the Ukraine crisis

The supply risks from a European conflict compound the risks we are already trying to understand and respond to – such as the ongoing destabilisation of production capability in China, where restrictions on US chip technology, energy shortages, a shaky and debt-heavy property sector and the pandemic are not diminishing.

Secondary threats flow from supply volatility as organisations place larger orders to secure supply, creating a bullwhip effect, which in turn places more stress on an already failing international logistics network.

When orders for goods become more variable than normal demand signals, that variability tends to increase the further upstream a company is in a supply chain. Unfortunately, these are typically companies that are poorly equipped to deal with the variation.

Why a move to domestic supply chains isn’t a simple solution

Picture: Kieran Heinze.

So, no wonder there has been a lot of chatter about nations going it alone and improving domestic supply chains. It looks good on paper, but in practice, it is difficult to achieve.

Wealthy nations, with the capacity to develop more certain, often domestic, supply independence, will generate jobs and increase domestic cash flow, while traditional manufacturing centres will lose volume.

The downside of nations seeking more independent supply arrangements is greatest to second-tier manufacturing centres in developing economies that are pushed out on price and forced to reduce production.

“The downside… is greatest to second-tier manufacturing centres in developing economies that are pushed out on price and forced to reduce production.”

The secondary threat then – somewhat ironically – is that these second-tier production centres are also large suppliers to developed economies, with consumer electronics, machinery, textiles, and more, subsequently affected.

This causes economic disparity to grow.

Developing economies with poor health infrastructure will suffer from reduced intergenerational prosperity because of these supply chain issues. Poor infection control and low COVID vaccination rates, driven by poor supply and distribution arrangements, as well as cultural issues, combine to negatively affect workforces at scale.

And, of course, many seafarers are drawn from developing economies. At the same time, border closures have prevented the repatriation of seafarers for lengthy periods, contributing significantly to the sea-freight risks that have affected consumers and businesses in developed economies.

The fallout of global panic buying

Picture: Simon Coates.

On top of all the above, we see a drive to secure the supply of critical commodities, especially those considered vital to developed economies. This will be followed by a reactionary rush, not only to secure supply but to trade on the windfalls of demand – a type of global panic buying.

With smart traders the only beneficiaries, commodity volatility only increases the amplitude of the bullwhip effect. For, while we’re not likely to see increased production when input commodities are trading low, we are likely to see reduced production when input commodities are trading high.

This will result in lumpy production causing uneven supply, prompting buyers to place large orders to secure their own production inputs. Construction materials are one of the more obvious examples, where demand for timber, steel and electrical inputs have been frenzied.

“Construction materials are one of the more obvious examples, where demand for timber, steel and electrical inputs have been frenzied.”

When that bullwhip of demand finally cracks – even after commodity prices stabilise – the impacts will echo around the globe for months.

Benefits and risks with digital supply chain management

Organisations must be digital. The opportunities are too great to ignore. From a supply perspective, who doesn’t want real-time data or better integration? Most do. But along with the opportunities, we need to recognise the accompanying threat.As the number of digital assets and systems increases so does the cyber-attack surface of an organisation.

Awareness of cybersecurity threats is the first step towards becoming resilient.

Let’s make no mistake, we can’t unscramble this situation, and we have to adapt to a new, long-lasting, set of conditions. If you are not already super focused on the threats to your supply chain, then realistically you should add a lack of responsiveness to your list of risk factors.

Our advice? Get serious now about the scenarios your organisation is exposed to, knowing exactly where and how severe the threats are, and start thinking about what you can do to put more resilient arrangements in place.

Simon Coates leads the supply chain management business at Infosys-Portland and consults to a wide range of Australian-based businesses. 

Kieran Heinze leads the supply chain risk practice at Infosys Portland and has a 20-year supply chain risk background servicing a diverse range of industries including manufacturing, FMCG, transport, industry and mining.

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