Businesses around the world are increasingly becoming more vocal and active around “sustainability” issues and managing the breadth and depth of the “carbon footprint” generated by their operations. While both of these terms are getting lots of airplay, what they really point to is the need to plan for greater “resilience” in supply chain design, management and execution.
How resilient are you in your thinking, and does that reflect itself in your supply chain’s processes and management?
The risk of sudden change is growing, so in addition to optimizing supply chains for current conditions and to cope with traditional disruption scenarios, companies should also give more thought to their macro-vulnerabilities. They can use the same sophisticated network tools they use today for optimizing their supply chains to answer questions like “What should we do to minimize the impact if oil prices were to double?” or “How protected are we against potential consequences from regulation of greenhouse gas emissions or a severe weather event?” And of increasing concern, “How vulnerable is my supply chain to political flashpoints and tensions if they should develop into conflicts that can disrupt trade?”
Having considered worst case scenarios for supply chain disruption, it should then be easier to work towards positions of resilience in case any of the scenarios are realized to any degree.
For example, how do you plan for the effects of climate change? Addressing greenhouse gas emissions is a political, economic and environmental issue. And while the effects of increased carbon emissions are debated, governments are increasingly examining – and implementing – regulatory steps intended to reduce man-made sources. These actions are likely to increase as we experience more instances of extreme weather events, such as intense rainstorms leading to flooding, unseasonal droughts and forest fires, all of which have been reported this year. Hurricanes and typhoons are becoming more frequent and more intense. North China recently suffered an unprecedented assault of three coastal typhoons in one week – forcing the evacuation of well over one million people.
Supply chain planners also should consider more seriously how rising international tensions and competition for global energy and mineral supplies could affect operations, or the sourcing of plants and raw materials. Optimizing existing and projected business flows is a very sophisticated management process, but count for nothing if the underlying assumptions suddenly change. Consider the implications if the Suez Canal – or the Panama Canal – were to close; less likely, perhaps, than other risks, but just as far-reaching in its consequences.
As I write this, two of the world’s top economic nations, China and Japan, are embroiled in a dispute over ownership of a small number of mineral-rich uninhabited islands. To the surprise of many, the incident has touched off domestic protests in China, with citizens threatening to boycott ‘anything Japanese’. Similar actions have taken place in Tokyo.
Macroeconomics around global oil supplies also are becoming more and more volatile. Even with today’s high prices, global energy demand continues to rise, a trend that will not end soon, particularly as developing nations mature. China’s car market, for example, has been growing at an annual rate of 25 percent for a decade, and more cars were sold in China last year than in North America and Europe combined. The Brazilian, Indian and Russian markets are also set for dramatic growth. The increased consumption foreshadowed by this growth is likely to send oil prices even higher.
All of these issues present potential sources of supply chain disruption on a macro scale. While the issues themselves are beyond the control of individual companies, the more businesses explore their vulnerabilities and ask themselves key ‘what if’ questions, the more attention and planning they can devote to avoid or reduce the impact of adverse consequences from these trends.
Part of the unpredictability of these trends is their timing. Some have and will develop at a steady pace, allowing some assessment of their effects and reaction to take place, but others will be swift and allow little response time. This is why business models and supply chains must be flexible; their structure and design must be resilient.
Much is talked about taking cost out of the supply chain. The flight of manufacturing from Europe to lower cost regions in China and Southeast Asia was driven by such economic considerations. Increases in the cost of labor, energy and transport as well as tighter and more demanding consumer markets have encouraged variations in supply bases, which now feature Eastern Europe, Turkey and North Africa. As the incomes of workers in developing nations increase, and their appetites for manufactured goods rises, we may well see the supply/demand map be redrawn once again – with some production capacity returning closer to home.
However, supply chain modeling and engineering in Europe must increasingly take into consideration the ability to consistently supply the businesses it serves with the relevant goods, raw materials and services. These will have to be managed within a future physical, political and economic environment that is more volatile than anytime within the last fifty years. Focusing on resilience may cost a business some profitability in the short term, but will pay dividends in the long term through a sustainable business supported by a supply chain that can flex and adapt to shifting economic, social and environmental developments.
As a senior director at Menlo Worldwide Logistics based in Eersel, Holland, Arthur van Gerven is responsible for business development, solutions design, account management and 4PL/supply chain consulting in Europe. He has more than 20 years of experience managing and directing global logistics for clients in multiple industries across Europe.