The past few years have brought unprecedented supply chain tensions. The COVID-19 pandemic led to weeks of delays in the deliveries of many final goods and components, often produced and shipped from the other side of the globe.
Additionally, the costs of importing these goods increased significantly. The crisis during the pandemic highlighted the problems of outsourcing production and sourcing supplies from the Far East.
The cost advantages of such steps during quiet times became a nightmare for importers and producers in Europe who suddenly faced increased costs, delays, or even the unavailability of many goods.
We all remember from our transport yards how in 2021-22, there were several quarters-long waits for new trucks due to a lack of chips, which halted production in many European truck factories.
Even though the pandemic is behind us, this does not mean that supply chain tensions have disappeared. The outbreak of the war in Ukraine completely changed the supply of energy resources to Europe—gas and oil from Russia were replaced by equivalents from the United States or the Middle East.
The recent crisis in the Red Sea, in turn, caused the costs of obtaining goods from Asia to rise again, not to mention the extension of their delivery times.
As Carlos Mena, Professor of Supply Chain Management at Portland State University, emphasises, geopolitical uncertainty or global supply chains are not inventions of recent decades. These problems were known several hundred years ago.
“What is different is the fact that today these global supply chains involve a much larger number of goods—often interdependent and interconnected, as in the case of parts of a complex machine,” says Carlos Mena.
Procurement and import teams, therefore, face a specific challenge—building supply chains that are more resistant to geopolitical tensions and potential ruptures.
As highlighted by HSBC’s latest study, they must do the following:
- Build simpler and shorter supply chains.
- Acquire goods from markets located closer to home/destination markets.
- Pay attention to the origin of the main suppliers and where they source their supplies.
- Avoid deliveries from countries with which trade conflicts or disruptions may occur.
- Move away from relying on a single source of supply.
“These strategies will help build resilient supply chains in today’s complex geopolitical climate,” say the report’s authors.
In theory, everything seems simple. However, organisations looking to redesign their supply chains will quickly encounter many challenges. The number of countries with the necessary production resources, infrastructure, adequate staff, and levels of innovation and technology required to play an important role in the supply chain is not that large.
A new, more politically and geographically secure supplier may turn out to be less efficient, less technologically advanced, and have lower production potential than its predecessor.
Moreover, searching for suppliers located closer to sales markets (so-called nearshoring) is one thing. The second issue is the diversification of suppliers and no longer relying on only one source of supply.
As a result, it may turn out that not only do new suppliers not necessarily meet the requirements to the same extent as the existing ones, but there will also be more of them.
“This is the difficulty of implementing new delivery strategies. Companies need to build relationships across multiple markets to find the same mix of possibilities that they previously had in one market,” says Ajit Menon, Head of Sales for the United States market at Global Trade Solutions HSBC.
Marissa Adams, Head of Global Trade Solutions for the Americas, suggests that companies implement a multi-stage process of assessing threats and responding to problems in supply chains.
- Risk-based analysis of supply sources – Instead of focusing on specific risks regarding product categories or stocks, you should focus on areas where supplies are most endangered. Often this is a derivative of geography—consider threats related to the location of your supply sources.
- Analyse the consequences of supply disruptions – Estimating the probability of supply disruptions is difficult, but analysing the potential consequences is crucial. Which products or product groups would be affected? For how long? Do we have alternative delivery options? What could be the consequences of interrupted supplies? Importers should know the answers to these questions.
- Evaluate available options in the event of supply chain disruptions – What other providers exist? Where are they located? Are their products identical? How do they compare in terms of quality, scale of production, and availability compared to our main suppliers? Is one alternative supplier enough, or do we need more?
This process should be repeated regularly to avoid unexpected events and risks.
Photo by Manson Yim on Unsplash