Supply chain management’s trade offs just got even more awkward

It’s too simplistic to say that supply chain management was ever really a straightforward affair. Even in those faraway simpler times of the 1980s, supply chain management could still be fiendishly challenging.

Yet the 1980s was arguably the last such decade for which any claim of ‘straightforward’ could credibly be made. Starting in the 1990s, an era of rapid and sustained globalisation took hold, vastly complicating the business of supply chain management. Suddenly, supply chains that formerly sourced on a solely national basis began instead embracing China, Mexico, Vietnam, India, Brazil and other distant locations.

Talk to those involved in the early days of globalisation—as I have—and there are few mentions of increased supply chain disruption resulting from this. Such were the distances involved, that substantial inventory holdings seemed not only prudent but essential. And such were the cost-savings wrought by sourcing from low-cost economies that the financing cost of those inventory holdings paled into relative insignificance.

Increasing fragility; increasing disruption

But eventually, as more and more companies trod the globalisation path—and as low-cost economies gradually became higher-cost economies—that inventory-holding dynamic changed, and supply chains were forced to become leaner.

Disruption, as we have repeatedly seen in recent years, has consequently become an ever-present danger. Trade tensions, natural disasters, Covid-19, port strikes, rocketing freight costs, a global shortage of semiconductor chips, the ongoing fallout from the war in Ukraine: these and more have become business-as-usual.

We’ve even—remarkably—seen a six-day blockage of the Suez Canal, and a subsequent multi-week disruption to shipping schedules caused by the stranding of the 220,000 tonne Ever Given, a huge container ship capable of carrying up to 24,000 industry-standard 20-foot shipping containers.

For supply chain management functions, the choices have been agonizing: hold more costly inventory—or risk supply chain disruption in this suddenly fragile new world?

The carbon dimension

The sustainability agenda has added another twist to this dynamic. Even a few years back, sustainability in a supply chain management context generally meant ethical sourcing in terms of labour practices, or ethical sourcing in terms of environmental pollution in terms of discharges into water or onto land.

No longer: CO₂ emissions are now the chief concern, with supply chains focused on carbon footprints and low-emission fuels. A year ago, everyone was focused on the upcoming United Nations COP26 summit in Glasgow, where—predictably—various pledges were made to cut emissions, close dirty power stations, and accelerate the transitions to renewables.

What a difference a year makes: as I write, Germany is reactivating mothballed coal-fired power stations, countries are importing all the LNG that they can get their hands on, and the spectre of electricity and gas rationing this winter stalks Europe.

Fuel costs—aviation fuel, bunker fuel for ocean-going shipping, and diesel road fuel—have hit record levels, and once the summer demand lull is over, are widely expected to return to those record levels. Freight rates, accordingly, are elevated—although both sea-freight and airfreight rates are finally softening, as new and more efficient capacity comes on-stream.

The horns of a dilemma

The bottom line is that those awkward choices and trade-offs aren’t going to go away any time soon. Source for cost, or source for resilience? Source for resilience, or source for sustainability? Only rarely will a solution to optimise all three be readily apparent.

Instead, it’s time to throw an additional objective into the mix: flexibility. For if the Covid 19 pandemic and the current energy crisis has taught us anything, it is that being flexible is the key to supply chain resiliency. The days of sourcing purely for cost are long gone—and sourcing purely for sustainability can be just as misguided.

The key point is to build flexibility into supply chains and take improvements in cost and sustainability as they arise, balancing short-term costs against long-term gains. Sourcing closer to home, for instance, can increase costs in the short term, but prove less risky, more resilient, and more sustainable—while also delivering enhanced flexibility.

Taking such a stance isn’t easy, of course. Corporate measurement and accounting systems find it difficult to place a value on flexibility and resilience, but find it all too easy to measure cost. A change in mindset is also called for, involving recognising that the best decisions are often those decisions which keep the most options open. They may not be the lowest cost, but they ensure that the supply chain can withstand the turbulence and volatility we face today.

Neither change will be popular. But as supply chain professionals, we can—and must—help to prepare the ground. More than ever, those of us working in supply chain management need to communicate these awkward new realities to our wider organizations and stakeholders.