Before the Ukrainian-Russian conflict the country had already a 14.3 percent increase in energy costs, as well as the knock-on impact on gasoline prices (which rose by 20 percent) and food prices (which rose by 4.9 percent), all led to the country’s inflation rate rising to 4.1 percent per end of 2021, the highest level in over 30 years. But since the end of February 2022 these numbers are expected to even rise: A very recent study at ifo Institute at Munich University showed that Germany is about to expect a longer term in raise of its inflation rate. If one follows the inflation expectations of the participating economists, a longer-lasting higher inflation rate for Germany can be expected. The most frequent causes of the current increase in inflation are rising energy and commodity prices – exacerbated by the Russian attack on Ukraine since February 24, 2022. Supply bottlenecks and pandemic-related effects (catch-up effects in consumption coupled with supply shortages) are also frequently cited by economists. They also see the ECB’s monetary policy as a major cause of the current consumer price increases in Germany.
The lights were about to go out in major sectors of China’s economy in autumn 2021. Social media videos showed a family locked in an elevator after the power went out, with several people noting that they felt as if they were living in North Korea as a result of the circumstances. Because of power outages that have caused manufacturers to close and are also causing lengthy queues at ports, investment banks Nomura and Goldman Sachs have revised their growth predictions for the world’s second-largest economy downward at the end of 2021. According to a new poll by the American Chamber of Commerce in South China, a fifth of enterprises in China’s southern industrial area saw a more than 40% loss in production capacity last year during the height of an energy crisis.
Shortly before last holiday season: Hundreds of container ships are anchored off the coast of Los Angeles, ready to discharge their cargo. This was a world record. Several firms throughout the United States are expecting shortages and price increases. Several retailers have warned that necessities such as toilet paper may be in short supply once again. Oil prices spiked to their highest levels since 2008 on Tuesday after the U.S. announced it would ban imports of Russian oil.
What do these scenarios have in common?
This is only a small excerpt of how every single country, and in total, our world economy, is facing a perfect-storm-crisis of pandemic- and conflict-caused supply chain disruptions. So called once-in-a-lifetime disruptions to our global supply chain have been experienced several times – at least four times in the past 12 years. Japan’s tsunami, earthquake, and nuclear calamity in 2011 were followed by a trade war between the United States and China that seemed to reach a climax in 2018, and now the COVID-19 epidemic has broken out in earnest. Peaking with a conflict between Ukraine and Russia, dragging along never seen amounts of sanctions that will have impact on our global economy. The international domino effect of global dependencies on businesses in the Ukraine region as well as in Russia is already being felt.
Setting up a resilient supply chain in 6 steps
A certain resilience to businesses supply chains has become a matter of survival. Why do some businesses have it and others don’t? Let’s break some tactics down:
1. Identify your own weaknesses
It may take a lot of investigating to figure out where the dangers are and how and if your business can protect itself from those threats. Besides mapping your first and second tiers, it also includes mapping your whole supply chain. Since this is a time-consuming and costly process, the majority of big corporations have concentrated their efforts only on key direct suppliers who account for a significant portion of their expenses. However, a sudden interruption that puts your firm to a grinding stop might be far more expensive than a thorough examination of your supply chain. The mapping approach should have as its purpose the classification of suppliers into three categories: low-risk, medium-risk, and high-risk. It is recommended to use metrics such as the impact on revenues if a particular source is lost, the time it would take for a particular supplier’s factory to recover from a disruption, and the availability of alternatives to accomplish the status quo. When an entire industry is affected by a disruption-related shortage, it is critical to determine how long your organization can withstand a supply shock without closing down, as well as how fast an incapacitated division may recover or be replaced by other locations. If your production capabilities are flexible and can be reorganized and reassigned as needs evolve the answers to those questions are more likely to be affirmative than negative. If your manufacturing capacity consists of highly specialized and difficult-to-replicate operations, the answers are more likely to be negative. You may utilize the knowledge you’ve gathered to mitigate risks in your supply chain by diversifying your suppliers or hoarding critical resources and commodities, which we will show in the next steps.
2. Supply chain diversification
While some companies may lean towards having a single supplier to save costs or secure their supply, this strategy can pose many risks. If that supplier shuts down temporarily, it will severely disrupt the entire supply chain. Supplier management could make or break some manufacturers as demand spikes. Even before the pandemic, it was important to diversify your supplier networks, and even more so now. Diversity ensures a steady flow of materials. In the face of pandemic or global conflicts, new methods of engagement need to be explored to diversify supplier networks. If you haven’t yet taken these measures, it is time to qualify new suppliers and drive future flexibility across your supply chain. A roster of local suppliers ensures that your supply chain remains undisrupted in a global crisis that affects cross border trade.
3. Create relationships with your suppliers — and make them count.
To ensure supply chain stability, it is necessary to understand your business partners. Consider the sources of your suppliers and the overall value they bring when selecting them. Cheaper prices may imply lesser standards, which may manifest as process instabilities or a substandard customer experience. Often, cost reduction is not the best option for strengthening supply chains. Once you’ve begun dealing with suppliers, your first objective should be to earn their trust. Being genuine and upfront with them will motivate them to produce high-quality output. What begins as routine communication regarding current demand and forecasts can turn into strong partnerships that improve service quality and customer satisfaction. These are critical for survival during tough situations.
When the market threatens to weaken your supply chain, but you have a solid relationship with your suppliers, these connections will be far more motivated to find solutions and support each other.
4. Control your Logistics
Another area to prep is in logistics and transportation. Once again, business continuity plans must be reviewed and risks analyzed. If transportation lines break down, can alternates be used? What are the effects on costs and lead times? It’s important to review your ports, your logistics capacity pre-booking, and route optimization. Are you optimizing your logistics capacity? Again, have you considered leveraging local suppliers? If not, you should investigate transportation routes and determine if adjustments can be made.
With the current state of the economy, there is much uncertainty. If you don’t already have a plan in place for adapting to the existing global challenges, it is important that you do so now.
5. Develop sound processes for making quick decisions and acting on them immediately.
When the market’s volatile, everyday communication processes don’t cut it. Your supply chain team — which might include production, procurement, logistics, and sales managers — must assess its communication needs and meet as often as necessary, especially when the market is changing rapidly. It helps to have up-to-date purchasing, production, and shipping information handy.
Supply management could also prepare an emergency action plan (EAP) to speed up the decision-making process in times of crisis. A solid EAP will help you keep employees safe, ensure business continuity, and minimize damage to company assets in the event of an emergency. In terms of coronavirus, EAPs might outline: Safety precautions; business compliance with relevant government directives; platforms for daily activities and communication; circumstances that would prompt working from home; and expectations for all employees — whether they were required to work from home or not.
6. Use new technologies to your advantage.
Adoption of state-of-the-art technology will improve the resilience of your supply chain by increasing security, improving procedures, offering data insights, anticipating hurdles, and informing consumers of order statuses. The benefits are endless. With automated technology, you can keep track of where every unit in each node is at all times, avoiding goods from becoming misplaced, improving stock management, and minimizing the likelihood of human error. There are several new technologies that should be investigated. These could be IoT in general, artificial intelligence, radio-frequency identification, or near-field communication, to name just a few. Many of these solutions are affordable, scalable, and easy to use.
The economic turmoil caused by the pandemic and now the conflict in Ukraine has exposed many vulnerabilities in supply chains worldwide. Strengthen the resilience of your business supply chains will not only help you mitigate the negative effects of COVID-19 and other causes but also improve your competitiveness. Your overview and planning should be 360° and include a very detailed look into suppliers, inventory, operations, and logistics – finding your vulnerabilities and improve robustness.