Why Managing Supply Risks Is Now The New Normal?

I had an interesting discussion with a client as we were invited to present a proposal on our turnaround approach: as I was arguing that managing a crisis and running day-to-day operations require two completely different sets of skills, operational teams are usually not equipped to recover a major crisis (and this has nothing to do on how competent they are), so the client asked me this interesting question: since we have to face more and more crisis, more frequently, should our way of managing the day to day operations be adjusted to a crisis management modus operandi?

Indeed...

Manufacturers worldwide continue to face new challenges affecting raw material supply. The pandemic, the Ukraine war, the lockdown in China, the semiconductor shortage and the port congestion are the main events impacting? every link in the value chain, from raw material supply to final consumers. The pandemic is testing the business, operational, financial, and organizational sustainability of most companies worldwide.?

Let me give you some figures: the pandemic slowed world economic growth to around -3.2% per year in 2020, rising to between 4.2% and 6% in 2021, before falling slightly in 2022 while world trade fell by 5.3% in 2020, but grew by 10.8% in 2021 and 4.7% in 2022.

A timeline of continuous supply chain disruptions events during the last decade.

Did you know that the overall total cost of supply chain disruptions caused by COVID-19 and geopolitical tensions to Western companies is estimated to be around $4 trillion?

How much have Supply Chain disruptions already cost you? or are going to cost you in the long run?

These global events have negatively impacted shipping delays at nearly double pre-pandemic levels while some global manufacturers have shut down production due to a shortage of parts from Ukraine; e.g Volkswagen.

There is an interesting index (not perfect though) the PMI that I usually consider: the PMI index of suppliers declined sharply in 2020 because of the covid-19 pandemic, but improved slightly in 2021 and 2022. Factory closures in China in early 2020, blockades around the world, labor shortages, high demand, logistics and capacity constraints due to network disruptions, leading to a sharp increase in transport costs and delivery times.

Here is a quick root analysis of top 3 global supply risks:

1 . Raising container price

Since the production of shipping containers was limited and the cost of construction had increased, many ocean ship carriers had to use their existing inventory carefully, which affected the cost of shipping containers due to the scarcity of shipping containers for sale.

For the first time this year in May, the average container prices globally have soared month on month at an average of 5.4%, from $2207 to $2330, for the 20 ft DC and by 15%, from $3800 to $4410, for 40 ft HC.

2 . Raising fuel price

Transport costs are becoming more important than storage, production, and installation costs. So, some trade-offs are emerging: Regional distribution centers are more attractive, and companies have moved large volumes of goods to take advantage of economies of scale.

Based on an analysis of forecast data, the price of natural gas is expected to exceed the $5.86 level. In addition, the price of natural gas could reach a maximum of $6.18. Investors and crypto token holders should take note of GAS's price forecast for 2025.

3 . Raising commodity price

Sharp rise in commodity prices, financial volatility and signs of further deterioration of supply bottlenecks.

Brent : In May 2022, the price of Brent crude rose by 14.5% to over $123, after the EU decided on a partial embargo against Russia.

European gas : The price of petrol is rising in the EU, affecting almost all economies on the continent. This is due to policy changes and fluctuations in supply and demand.?

Wheat : Wheat prices rose by 5.6% in May and were on average 56.2% higher than a year earlier. The war had a significant impact on the rise in wheat prices, as Russia is the world's largest wheat exporter and Ukraine the fourth largest.?

Nickel : The price of nickel fell in May 2022 to 28062.55 from 33132.74 last month and 17577.06 a year ago.

VIX : The VIX index fell by 3% in May, reflecting the growth in financial markets, and is expected to continue to fall.?

Sea Freight: Baltic Dry Index : The Baltic Exchange Dry Bulk Sea Freight index, which tracks the price of dry bulk ships, had reached a high of 3% in 2022 due to losses in the shipping segment.

What should you expect in the future?

Overall, commodity prices are expected to continue to rise in the future, as several factors influence changes in the supply and demand for raw materials. Super-cycles are possible, and prices can rise and fall for decades.

Conclusion

Let's face it: supply chain disruptions are the new norm, whether it's driver shortages, capacity issues for logistics providers, inflation, delivery delays, rising transportation costs, inventory shortages, labor shortages and erratic unpredictable Demand, the business environment you operate into is going to be dominated by frequent, unpredictable disruptions.

Management boards need to know now how to be more resilient, i.e capture early signals of a potential disruption and react quickly to contain the situation before it gets out of hand.

Managers and their operational teams need to build their knowledge from learning on past crisis experience and document formally in a playbook format.

Besides, it will become "mandatory" to monitor all potential disruptions on your current commodties, main suppliers, critical facilities or geopolitics trends.

The entire "System for Management" should be reviewed to match the new reality and install a new mindset along with new tools.

Let me know what you think - post your comments.

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