That was then, and this is now

2022 turned out like few expected. What can we sensibly say about 2023? Try this…

Well, that was quite a year. Hot on the heels of 2020 and 2021, we can all only agree that 2022 turned out to be a third year of exceptional turbulence. Geopolitical turbulence, turbulence within global supply chains, and turbulence in the global economy.

And no one, it’s fair to say, quite expected it to turn out that way. 2020 had been a bolt from the blue, to be sure. An obscure flu bug outbreak in China had created a few ripples in the outside world by mid December 2019. But even then, it was chiefly among those with long memories—memories of SARS, for instance. In the event, the global flu pandemic of 1918 would have been a better mental model.

Certainly, too, 2021 got off to a better start. Vaccines had emerged, for instance. But just as national economic recoveries were continually beset by repeated lockdowns, global supply chains suffered too. And those lockdowns helped from neither the perspective of supply, or demand. Supply, because factories and ports that aren’t working, are factories and ports that aren’t shipping. And from a demand point of view, because throughout 2021, both consumer and industrial demand patterns were being upset by the lockdowns, by restrictions on social mixing, and by supply shortages. Consumers—who knew?—can’t consume something that isn’t on the shelves.

Brave New Year?

So hopes were high for 2022. With the benefit of hindsight—knowing what actually turned out to derail 2002, in the event—one sees few signs of it in the media as 2021 turned into 2022. Ukraine was being discussed, to be sure. Look at The Economist or the Financial Times  or The Washington Post, for instance—as I have—and the possibility of a Kremlin military adventure was certainly being mentioned. And tanks, after all, were starting to mass across the border. But chiefly, the discussion was around quite what combination of geopolitical pressures would buy Putin off.

None, as we now know. And so the tanks rumbled in on February 24th, and the war continues. Thanks not least to supply chains of a different kind—the West’s military-industrial supply chains—Ukraine has performed far better than many outside observers expected.

Yet for us as supply chain experts, the first thought to come to mind from Ukraine must be how few lessons appeared to have been learned—still!—from events such as the 2011 Fukushima earthquake and tsunami, or the multi-month flooding of many of Thailand’s industrial zones. The impossible does happen. And the vanishingly unlikely does happen.

For as global automotive supply chains ground to a halt in places, from a shortage of automotive components sourced from Ukraine—which specialises, among other things, in automotive wiring harnesses—where was the dual sourcing? What had been the contingency plans? Why was yet another generation of managers scrambling for sticking plasters and supply chain playbooks? If you find out, let me know.

And vital foodstuffs, we now discover, turn out to feature strongly among Ukraine’s exports. Wheat. Maize. Barley. Sunflower oil. Rapeseed oil. Did policymakers know this? Especially when most of those exports went to secondary markets, rather than prime western economies? I’ve no idea.

But now, we all know it. Because prices for such commodities—and the foodstuffs made from them—have rocketed around the world.

Energy as a weapon of war

But that’s not all. Next came something that even fewer policymakers expected—especially in industrial behemoth Germany, where so many supply chains originate: the weaponisation of energy.

Industrial energy, for one thing. Why was Germany so reliant on Russian gas? In retrospect, was it every sensible to sole source such a national and economic dependency from Russia? Without which, its factories would grind to a halt, and its consumers shiver? Questions are still being asked.

Not forgetting—crucially for those of us working in the world of supply chains—the energy used in transport. Gasoline and diesel prices soared, and have remained high since. Even bunker fuel, used in shipping, has not proved immune. Prices stood at just over $600 per metric tonne for the clean VLSFO grade prior to the invasion, but had almost doubled by June 2022. (Thankfully for global trade, the price has now fallen back almost to 2021 price levels.)

‘Make or buy’ decisions, ‘source from here or there?’ decisions, and distributed production decisions: all require roughly stable assumptions regarding shipping costs and lead times. Covid had already thrown container shipping rates out of kilter. Rocketing bunker fuel prices—not forgetting the associated slow steaming to reduce fuel consumption—added yet another unwelcome dollop of volatility.

Where next?

And what of 2023? It won’t surprise you to know that I’m making no detailed projections. Or even broad guesses. After the last three years, that would be a real hostage to fortune.

But that isn’t to say that nothing can be said. And I think that certain things do stand out as valid observations.

One is that supply chains are—occasional trip-ups apart—gaining a welcome resilience. It was always going to be naïve to expect global supply chains to be no less resilient to supply chain disruption than purely national ones. That lesson has now been learned, although the period of adjustment will take some time.

The second is that—so far at least—global supply chains have coped with a 1970s-style oil price shock far better than they did in the 1970s. Partly, it’s because transport today is far more energy efficient than back then (or even 20 years ago), especially when measured in terms of tonnes moved. The zero-carbon agenda hasn’t done any harm, either.

The third and final such observation is less of a cause for self-congratulation. In the 1960s and 1970s, many large businesses maintained internal teams tasked with internal consulting, preparedness, and forecasting. Oil giant Shell, for instance, was widely admired for its rigorous approach to scenario-based forecasting: whatever happened, Shell would have a playbook pre-prepared, was the idea.

In the 1980s, many such internal capabilities were swept away. ‘Lean and mean’ became the mantra. But as recent events have shown, ‘lean and less poorly prepared’ might be a more accurate description. Are such internal capabilities and teams making a comeback? It’s difficult to say: signals are mixed. But if maintaining such teams is costly, then the past three years have shown us that not maintaining them might be even pricier.

Wishing you all—as ever—a safe and prosperous 2023.