Risk and resilience key to future supply-chain strategies

Shortages of everything from cars to kitchen appliances during the Covid pandemic served to highlight the world’s dependence on lengthy and highly complex supply chains. More recently, UK shoppers found a range of staples including cucumbers, onions and tomatoes hard to come by on supermarket shelves as a result of adverse weather conditions in North Africa.

These shortages may have abated somewhat but we can look forward to continued disruptions as a result of geopolitical tensions, climate-related weather events and a range of other risks including the prospect of a single ship blocking the Suez Canal. This has led many businesses around the world to rethink their supply-chain strategies.

Pankaj Agarwal, supply-chain vice-president with PepsiCo Ireland, points out that existing supply-chain models weren’t designed to cope with disruptions on the scale experienced in recent years.

“Sudden adjustments to changes like this just aren’t possible,” he says. “Shipping capacity, for example, needs massive capital investment over a multiyear period in containers, vessels, port infrastructure and truck fleets to take effect. The ensuing ocean freight crisis then smashed assumptions inherent in global supply chain design – shipping container availability and ocean transit times are just two examples. Manufacturing facilities without a finished goods warehouse were designed and built assuming plentiful supply of shipping containers. Containers become scarce when they stack up at congested ports or idle on ships at anchor waiting to berth. This shortage drives disruption, delays and additional cost for supply-chain teams.”

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Those delays had knock-on downstream impacts. “Supply-chain designers assume transit time performance and reliability – the freight crisis saw some transatlantic crossings take three and four times longer than established performance in recent decades, severely degrading product freshness on arrival at destination, driving expiry write-offs for short-shelf-life products plus manufacturing costs and freight costs for replacements.”

This has led to a greater focus on risk management. “Across the PepsiCo global supply-chain network, we use proactive risk management to assess vulnerabilities from suppliers all the way through our operations and onwards to our hundreds of customers around the world,” Agarwal explains.

It will also drive new approaches to sourcing strategies. “In the short term, global supply chains will continue to have a high dependency on China and the Asia Pacific region as the factory for the world because local infrastructure sourcing will take investment and time to bear fruit,” he adds. “Multi-location, multi-vendor sourcing is key to de-risking supply.”

Pauline O’Flanagan, director of the Ibec Engineering Industries Ireland trade association, agrees. “The pandemic will likely result in more fragmented and regionalised value chains, combining efficiency with resilience and sustainability,” she says. “Some companies are shortening supply chains to bring them closer to market. They are not necessarily reshoring, but they may be diversifying their supply base and building partnerships with multiple suppliers to be prepared should another crisis arise.”

The extent of those changes should not be exaggerated, however. “The amount of change happening sometimes gets overplayed,” says Ibec chief economist Ger Brady. “We have seen a huge amount of disruption as a result of Covid with backlogs at Chinese ports and so on. Things got gummed up and there were massive problems in container freight.”

Those problems helped to spark the surge in inflation, he adds. “Shipping a 40-foot container from East Asia to Northern Europe increased from $2,000 to $15,000 at its peak. But that has almost come back to the original price now. It’s around $3,000 to $4,000 at the moment.”

That points to a high degree of inherent resilience in supply chains. “As things started to come back to normal supply chains came back reasonably quickly. The feedback from our members is that global supply chains are still pretty resilient.”

Change is coming, nevertheless. “People are more aware of one off risks now,” Brady notes. “We went through 20 or 30 years without any major risks materialising. A lot of people stopped thinking about them. The risks were always there but we got to forget about them for a few decades. Companies are looking at how to structure supply chains in future. There is more focus on resilience now.”

That doesn’t mean that cost and leanness are being ignored. “Lean will remain a priority, but resilience is also a priority,” Brady points out. “Companies will be more likely to hedge their bets across multiple sources. But they are not being silly. Cost still matters. They will optimise supply chains to reduce risk, but they won’t forget about cost.”

Sometimes the options facing companies are limited. “The unique and specialised nature of our ingredients often prevents sourcing changes as many of our ingredients are crop-based, seasonal and native only to certain countries,” Agarwal explains. “PepsiCo’s strategic pep+ sustainability programme and innovation agenda demand supply-chain efficiency, speed and agility. Building the digitally enabled end to end visibility and supply-chain capability to absorb complexity in an economically efficient manner is the critical task facing our talented supply-chain team.”

Resilience and risk management are by no means the only challenges facing supply chain managers. The environmental, social and governance (ESG) agenda is also having an impact on decisions, with everything from food miles to labour practices being called into question.

Environmental factors will come into play in supply-chain design, but not immediately, according to Brady. “Most companies are struggling to cope with their scope-one and -two emissions without trying to manage scope-three emissions,” he points out referring to the different emissions classifications where scope three refers to those produced in the supply chain. “They will begin to think more about them in future. Scope-three emissions will present challenges to how supply chains are put together but at the moment the main focus is on scope one and one. However, we are definitely seeing more and more pressure from consumers, shareholders and other stakeholders for companies to do more about emissions.”

“Social, political and environmental considerations will all influence where companies are sourcing from in the future,” adds Pauline O’Flanagan. “Companies have to consider social issues now and ensure their suppliers have fair labour practices. There is a lot going on. We live in a constantly changing world where nothing can be taken for granted. Lots of different approaches will be required.”