Untangling complex global supply chains

The fragility of complex global supply chains was exposed during the Covid pandemic, brought into sharp relief by the Ever Given container ship blocking the Suez Canal for six days in March 2021 and has been exacerbated by the war in Ukraine and other geopolitical tensions. The world is facing widespread food insecurity as grain held in Ukraine ports is blocked by Russian ships and the return to farming hampered by the continued war.

Then the dearth of semiconductor chips is hampering car production as limited supplies mean only the better paying industries such as IT get first dibs on these tiny chips, with full automotive production not expected until the end of this year.

Closer to home Brexit has taken items off the food shelves and airports struggle to manage the influx of travellers post-pandemic. It would be hard to have predicted the changes back in 2019, except in one area – the hyper local movement where climate change is making people rethink the way they use, consume and produce goods.

This in turn has given rise to a trend in near-shoring and reshoring, with companies relocating manufacturing facilities closer to home and destination markets. The initial urge may have been done with greener footprints in mind, but the international breakdown of supply chains suggests greener is also more secure.

There may now be an opportunity for Ireland to benefit from a new wave of manufacturing investments as offshoring loses its shine. Rising costs are an issue across the world, and security of production increasingly trumps broken supply chains.

Studies conducted by Ibec into Ireland’s manufacturing sector back up this movement. Its 2021 report on manufacturing shows Ireland is resilient in adapting to new processes and markets. When every other country in Europe saw its manufacturing exports fall, Ireland’s grew.

Alan Dickson, partner with supply chain and operations with EY, believes that Ireland’s strong manufacturing base will only grow over the coming years.

“There are issues, but we can offer high quality manufacturing. Our skilled labour force will give us a unique advantage. In addition, when our clients are evaluating their supply chains, risk is an important factor. In fact in some cases it can be more important than cost calculations. We often help our clients build resilience, and part of that is having more control over the manufacturing and supply chain operations,” says Dickson.

He is joined in this opinion by Keith Watt, head of retail and manufacturing at KPMG. Watt says that for a while the world got used to the idea of smooth running “just in time” global supply chains humming away in the background.

“In reality often things just don’t go as expected – we’ve seen the impact of volcanic ash clouds on aviation, for example, or a blockage in the Suez Canal. Business has become more wary of the unexpected and mitigation costs money – inevitably this has an impact on costs and inflation,” Watt says.

Risk is a key issue nowadays. Now awareness that one typhoon can wipe out your supply chain is more disruptive and costly than predictable cost.

Overall, Dickson breaks down the potential issues facing supply chains for his Irish clients into a number of factors – with geopolitical being one of the main impediments. He reckons there are always wars impacting supply chains but the war in Ukraine is especially significant coming as it does after the pandemic.

“Then there are technology disruptions moving from linear supply chains to ecosystems. This is having a really major impact in a less obvious way.”

Dickson describes technology changes as the real time data exchanges. He cites as an example a customer going into a store and buying a product. As soon as the product is scanned, the sale is automatically reported to the warehouse and replacements are ordered. “It’s called connected ecosystems and it will make supply chains much more responsive, with manufacturers, transportation and procurement all connected. It also makes them more local.”

Other big issues facing supply chains are the price and availability of raw materials. “Once you’ve secured them, the next task is to contain the costs which is not easy and can increase costs right the way along the chain to the end consumer,” says Dickson.

Energy costs are also spiralling out of control, shipping costs are skyrocketing and HGV drivers are at a premium.

“The total cost of purchase, production and movement has gone up in double-digit amounts, but funnily enough Brexit has actually had less impact than first imaged but notably because extra ferries were very quickly laid on from Rosslare to France. We may be an island, but we have good transportation links,” says Dickson.

It’s not without addition costs, however. Watt argues: “Anything that inhibits trade complicates supply chains and this inevitably adds to costs. Brexit is a particularly relevant example where supply chain disruption or risk has triggered an increase in shipping frequencies between Ireland and continental Europe.”

Mark McKeever, director of advisory practice in supply chains with PWC, counts similar factors impacting supply chains and driving near-shore trends. Like Dickson he points to the sharp rise in shipping costs, where the price has doubled in the past few months.

The supply chain crisis has been responded to in different ways. A week ago Lidl, the discount grocery multiple, announced it had purchased its own container cargo ship and started a shipping line in a bid to offset the effects of rising prices. While an innovative approach, McKeever does not see many other companies following suit. “Buying a cargo ship ties up a lot of capital which is not suitable to everyone.”

Watt agrees but points to even less disruptive changes costing Irish manufacturing. “Many Irish companies have had to change their behaviours to manage supply chain issues, and this comes at a cost – both a ‘real’ cost in time and effort and also an opportunity cost, where focus has been diverted from other activities. Real costs include higher warehousing costs to hold additional stocks resulting in increased working capital which also has a cost. Other issues include higher freight, shipping and transportation costs, longer lead times and managing the inflationary impact of raw materials. This all puts pressure on manufacturing margins and inevitably increases the cost to the end customer.”

A recent global study shows that two-thirds of global manufacturing takes place close to final markets. “Although globalisation has had a huge impact on trade, proximity still matters. A greater amount of trade is still within the world’s geographic regions rather than between them” says Watt.,

Another factor is labour arbitrage where labour costs in traditionally cheaper markets such as the Far East are now rising, making it not as cost effective to locate in Asia. Additionally, manufacturing is becoming more tech-enabled, tending to include more automating and AI tech.

“In short the actual manufacturing itself is becoming more capital intensive rather than labour intensive which again drives near-shoring,” says McKeever.

It’s not all reactive, and sometimes there are proactive approaches to helping manufacturing and supply chains within Ireland. McKeever points to the IDA investing in an advanced manufacturing facility in Limerick, which is following similar examples hosted in Singapore and Scotland.

McKeever reckons it’s a real calling card. “Imagine you are an US multinational company and you are looking at potential manufacturing locations. You can come to Ireland and use this new facility to conduct research, simulate sophisticated manufacturing facilities or look at the impact of using digital twins. It’s like a giant test bed where different scenarios can be investigated in Ireland. I believe it will be a strong enabler to bring in more fintech and medtech manufacturing.”

The advanced manufacturing facility is due to open in quarter four of this year, and will help Ireland demonstrate its capability in capital intensive, eco-connected manufacturing.

The Irish manufacturing sector has a very large footprint – with just 1 per cent of the EU’s population Ireland accounts for 5 per cent of its manufactured goods exports to the rest of the world.

Despite challenging supply chain issues and rising costs, Ireland looks set to maintain this outsized share, helped in part by the availability of a skilled and flexible workforce; coupled with a stable, transparent and competitive tax regime; membership of the EU Single Market with a regulatory regime conducive to doing business globally; a stable industrial relations regime; and a strong and reliable business culture.