November 29, 2022

Donalds Hobby

World Finance Reviews

Navigating the supply chain crisis

Aptus Utilities, a UK energy and lighting infrastructure and installer company, sits towards the end of its own supply chain. For Ian Winn, group financial director, it’s an uncomfortable place to be currently. “We’re seeing prices increase as lead times lengthen and demand increases, making it very difficult for manufacturers and suppliers to build up stock levels. This is leading to shortages and impacts across the board.” Winn continues, “We’re not direct importers but two of our most important materials are electric cable and meters, which come in from the continent. Because of Brexit some lead times have now doubled.”

Aptus uses a lot of polyurethane pipe. “But production capacity was taken out of the market last year,” Winn goes on. “That’s reduced capacity to the manufacturers and pushed up prices and introduced scarcities exacerbated by the take-off in construction activity at the back end of last year and this year.” Add in COVID-19 issues for this street light installer. “Effectively they’re [street lights] fabricated steel. But with COVID-19 people are less able to work closely together.” Aptus is getting around some of the issues by talking to suppliers more, holding more stock. But they also have 20 three tonne long wheel-base on order since March from Peugeot. They’re eking more life out of their existing vans, which is pushing up maintenance costs.

Inexplicable planning failure?
Michael Boguslavsky, head of artificial intelligence at Tradeteq, told World Finance that while the supply chain crisis continues, there’s no lack of supply and demand data to plan around it. “What’s clear is we can’t put this down to a lack of resource,” Boguslavsky said. “Global companies have some of the best operational and risk management systems around but, in the case of microchips, they failed to detect how a shortage would impact operations.”

Consumer spending remains high, and inventory levels across the globe remain very low

The technology to detect and anticipate shortages exists – communicating with customers in real-time deploying lightning-fast payment systems right down the supply chain – and is in use in other areas. Banks and the financial trading community use fintech tools that can be repurposed, given care and planning, to other sectors.

Are industries picking up? The evidence looks uneven. Richard Parkinson, port director at Southampton’s UK Solent Gateway, says that while there’s no end of data, understanding it in a holistic way is massively challenging. There are two data issues – context and access – that are needed for an effective pan-global supply chain analysis, he says. “It may be that each logistic service provider, airline or shipping line holds its own data but perhaps it needs to be collated centrally for a single analysis of end-to-end global supply chains. That may be where the weakness in data lies: each element of the global supply chain holding its own stove-piped data.”

Licence to drive
In the UK the food supply chain is being weakened by an acute driver shortage. According to the Road Haulage Association there’s a shortfall of 100,000 missing jobs. Part of the problem is drivers quitting the UK during the COVID-19 pandemic who can’t – or don’t want – to return via the post-Brexit immigration system, which doesn’t recognise the haulage role as highly skilled. Also, the age of the average UK lorry driver is 55 – just two percent of HGV drivers are under 25 in the UK – so the pool of available UK driver labour is getting smaller.

“The public,” says Hugh Mahoney, CEO of UK food wholesaler Brakes, “are starting to notice the resulting gaps on retailers’ shelves; in failed waste disposal collections; and through the items missing from the menus at their local pubs and restaurants.” The disconnect at government level is a failure to see driving, says Mahoney, “as a part of the critical infrastructure that supports feeding the nation, and that this will disproportionately impact smaller farmers, producers and suppliers who will be hardest hit by surging distribution costs.”

In the run-up to Christmas the Conservative government has introduced temporary visas for 5,000 fuel tanker and food lorry drivers to work in the UK. But there still remains a serious shortfall of driving labour. “The EU workers we speak to will not go to the UK for a short-term visa to help the UK out of the shit they created themselves,” Edwin Atema from Dutch-based lorry drivers union FNV said in an interview with BBC’s Radio 4. “In the short term, I think that will be a dead end.”

Demand overwhelms supply
The disruption across so many points is a vicious circle. Freight forwarding specialist Unsworth warned at the beginning of October 2021 that Black Friday, Cyber Monday and Christmas were approaching fast. “Consumer spending remains high, and inventory levels across the globe remain very low,” it said.

Exports out of Asia, it added, have been one of the biggest chokepoints as European demand for goods has overwhelmed the capacity of space and workforce. Worse, several Chinese tech suppliers – including those supplying consumer tech giant Apple – have cut operations in Jiangsu province, a major hub for China’s industrial tech industry due to electricity rationing as the Beijing administration attempts to hit carbon-cutting goals. HP, Microsoft and Dell are also affected.

 

Business and political risk – watch those chokepoints

While the Suez and Panama Canals are global chokepoints there’s increasing worry over less well-known, but critical, shipping highways. For NATO, the Greenland-Iceland-UK Gap is a concern. This is a 200-mile stretch of ocean between Greenland and Iceland and a 500-mile gap between Iceland and Scotland. It’s where Russian warships push through to reach the Atlantic Ocean.

Both the Chinese and the Russians, in different ways, are looking at creating new chokepoints that can accommodate military operations.In other words, some countries are pivoting seemingly neutral economic infrastructure for political and strategic advantage. The US has always made use of its geographical and military reach, weaponised by 9/11.

However, some businesses, hauling considerable supply chain risk behind them, may underestimate the geopolitical nuances.They may even, unwittingly, make themselves a target. “Network connections are so complex that policy makers often don’t understand how interventions could produce unexpected consequences,” wrote Henry Farrell and Abraham Newman in the Harvard Business Review. “When the US announced sanctions against the Russian metals giant Rusal, it did not anticipate that they might bring the European auto industry to a halt, and it had to modify them swiftly. The more businesses’ government-relations offices can do to educate policy makers, the better.”

 

Turbulent waters
Simultaneously the cost of sending containers from China to Europe and the US has been hit by severe inflation. For some global trade routes the price of standard 40-foot containers saw a 400 percent rise in 2021. In mid-September the Economist estimated that the spot price of sending such a box from Shanghai to New York cost $2,500 in 2019 but this price was now close to $15,000.

The Ever Given container ship that ran aground in the Suez Canal, March 2021
The Ever Given container ship that ran aground in the Suez Canal, March 2021

Admittedly a monumentally-sized container ship blocking a vital maritime passageway – the 120-mile Suez Canal – in March 2021 didn’t help. The 220,000-ton Ever Given, en route to Rotterdam, diagonally blocked the canal having been blown off course by high winds. Most vessels passing through the Suez are obliged to use Egyptian pilots to help them navigate this stretch. However, the Ever Given belongs to a new super-class of carriers that are simply too vast for some waterways – including the Panama Canal. Somewhat predictably, the incident was a billion-dollar disruption to global trade as well as garnering a huge amount of press.

 

Forever change?
John Manners-Bell, CEO of Transport Intelligence, a supplier of market solutions to the global logistics industry and Visiting Professor at the London Guildhall Faculty of Business and Law, says global supply chains, post-COVID-19, will irrevocably change. “Globalisation has really been about sourcing things from China,” he says. “Now, companies are very much thinking about diversifying their supplier base. A lot more are thinking about sourcing more from either their own countries or from countries that are much closer.”

“Transportation risk,” he goes on, “has been growing for many companies for some years but has come into focus because of COVID-19. Geo-political issues such as the trade war between the US and China but also security concerns as well. You can easily see in the future that the world will start to break into supply chain regions.” Some will be China focused while other routes will be close to Europe and the US. In other words, there will be increasing bifurcation, one being Sino-centric and the other more Western-based.

Cooling on China
This will bring huge changes as regional trade flows rather than global flows predominate, says Manners-Bell. “There will be some major global companies that will lose out but more regional and national players will benefit.” Manufacturing is likely to gain considerably from the switch, he says. He cites electric car marker Tesla, which has sourced a great deal of components from inside the US, snipping transportation risk. While Tesla has operated out of its California Fremont factory, originally built by GM in 1962, its new factory in Austin, Texas is attracting many more local suppliers. That is where it’s building its SUV Model Y and Cybertruck models.

Tesla Gigafactory in Austin, Texas, US
Tesla Gigafactory in Austin, Texas, US

The ‘keep local’ rationale is gaining traction in the UK. A recent EEF survey claimed that the average UK manufacturer has close to 200 suppliers in total with almost 100 percent of manufacturers relying on some materials being sourced from overseas. Many, many companies must be reconsidering their relationship with China, however difficult it is to untangle a supply chain. Multiple supply chains may be one answer. Rising concern over data and privacy is another issue.

In October 2021 the British international freight association (BIFA) said 12.5 percent of global capacity was unavailable in August due to delays. “This means that in August 2021, a full 3.1 million TEU [shipping container with internal dimensions measuring 20 feet long] of nominal vessel capacity was absorbed due to delays. To put this into perspective, the insolvency of Hanjin in 2016 [the world’s eighth largest carrier at that time] removed only 3.5 percent of the global capacity – until the vessels came fully back into circulation with new owners. The current situation is akin to a scenario of three and a half Hanjins all going bankrupt at the same time, with no immediate outlook for the vessels getting back at sea.”

Solutions please
Neil Ballinger, head of EMEA at automation parts supplier EU Automation, says the supply chain manufacturing model itself, for some, would benefit from switching from a linear model to a circular one, slashing production scrap and making better use of existing resources. “Taking care of industrial equipment and implementing a strategic preventive maintenance programme can,” he says, “help manufacturers keep track of their machines’ lifecycles so that they can manage component obsolescence.”

Many companies must be reconsidering their relationship with China, however difficult it is to untangle a supply chain

Over time this limits the amount of new equipment needed to buy, he says. The circular route is built upon the three R’s approach: resume, reduce and recycle. It’s attracting more attention as sustainability and climate pressures mount. This approach contrasts against the linear economy model where the focus is more about eco-efficiency per se, rather than overall eco-effectiveness of the system itself. “It’s also crucial to diversify supply chains,” Ballinger goes on. “Over-relying on one supplier or a cluster of suppliers based in the same area can be a great risk at times of socio-political instability.” While logical enough, many materials companies, according to Professor Thomas Johnsen from Audencia Business School, have little choice “but to source from distant and high-risk locations, for example, in case of rare and precious materials and metals.” He told World Finance that “cobalt and lithium are essential for a range of electronic devices, including electric cars – and are notoriously difficult to source.”

‘Normal’ labour mode?
Then there is the concern around supply chain ethics and working conditions. In a crisis, it’s harder for companies to keep labour standards and working conditions tight. Supply chain disruption means higher risk of unauthorised subcontracting as wholesalers, agents and others seek alternatives, upping corporate risk. “The risk of exploitation,” says Jessica McGoverne, director of policy and corporate affairs at ethical trade service provider Sedex, “such as forced labour increases at times of pressure through a combination of factors – supplier pressure, worker shortages and more pressure on workers to work longer hours.”

There’s not just reputational risk but legal and financial. Poor practices and mistreatment of workers – low wages and discrimination – can quickly turn into scandals and negative press coverage, even a drop in share price. McGoverne says the global garment manufacturing sector has been badly hit by the supply chain crisis with close to 90 percent of businesses exposed to slashed orders. It’s not all bad news: some 20 percent of businesses have diversified and deployed new innovations to respond to the pandemic, she adds.

Picking, packing and sorting isn’t cheap
To what extent can artificial intelligence (AI) better support the average supply chain? Nigel Lahiri from software provider Grey Orange says industries exposed to labour shortages should look at robotics and AI to slash labour costs as much a third, “while also reducing order fulfilment time by as much as 50 percent.” He says the supply chain crisis, at least in the UK, is in part due to Brexit and loss of a European workforce. “Which reflects,” he told World Finance, “the often tedious and dangerous nature of those jobs within logistics, retail, food service, and manufacturing, which are the industries most affected by the labour shortages.”

Supply chain fulfillment using robotics
Supply chain fulfillment using robotics

“With a lack of labour,” he adds, “businesses within those industries will experience slow order fulfilment and food shortages by Christmas.” As the holiday season gets under way with the promises of record sales, so too does the risk of record returns. This logistics area is one many retailers dread. But some think this is a good area to deploy AI and robotics towards.

AI doesn’t object to repetitive tasks or require a pension, but it drags its own supply chain risk behind it: AI administers highly sensitive business information and only one incident is needed to jeopardise a supply chain. Not everything in a supply chain can be automated. Sales predictions and HR are areas supply chains will always struggle with. These ‘soft’ skills may never be a fit for robotics – until computers and robots are able to think beyond their own programming. And we’re not there yet, most AI experts say. Social cues, ‘reading’ a human situation – delicate HR circumstances, for example – remain well beyond it.

Each company is looking for the right mix of automation and AI investment to tackle the sheer volume of data

AI though can be an enabler of supply chain verisimilitude, says Chris Huff, chief strategy officer at software business Kofax. This has real value as ESG supply chain pressure rises. AI can track data insights that “previously,” says Huff, “might have been ignored because the human labour cost of assembling, analysing and gleaning insights was simply too onerous and costly.”

Applied with care AI can expose poor business practices and work quality. And when AI is used to create digital workflows the quality and cost of work can be rapidly measured. “Just about every industry,” says Huff, “is struggling to digitally transform as they seek to remain relevant. Each company is looking for the right mix of automation and AI investment to tackle the sheer volume of data.”

Taxing issues
What is harder to plan and anticipate is political risk. In fact, it’s impossible. Christiaan Van Der Valk is a tax and regulatory expert at Sovos, a reporting software business. He acknowledges being crisis resistant is an impossibility – but tax digitisation and the reporting around it can streamline supply chain governance, at least. “All companies could benefit from tax digitisation efforts.

The big question is whether governments can converge on more harmonised approaches. There is a real opportunity with modern technology for all stakeholders to benefit from tax reporting and business process automation, provided the diversity of legislative requirements can be reduced over time.” This is ongoing. Van Der Valk says too many businesses see supply chain tax issues as a tiresome ball and chain. “I’d recommend them to instead approach tax as an opportunity. While it’s true tax administrations, in their quest for digital transformation, may place varying requirements on your systems and processes which in the short term make supply chain automation harder, smart organisations transcend it to see a bigger picture.”

And if the tax data is high quality, your tax and business objectives stand a better chance of converging. “This level of externally-consumable data intelligence will open up new opportunities to improve many critical processes such as cash management, supply chain transparency for environmental protection and labeling purposes, and customer service.” So, get serious about understanding what tax authorities want in digital format, he advises, then look hard at how consistent the reporting flows are.

Turning a corner
While there are plenty of excuses for understanding the current shortage problem the most pressing challenge is how to restore stability and ease the shortages, and quickly. When the immediate supply concerns retract, companies and governments will need to consider what kind of insurance or slack they should build into the production system over the longer term.

Just as banks needed to increase their equity buffers after 2008, we perhaps now need to step back from just-in-time production and redefine productivity in light of the supply-chain risks being witnessed.