Global Supply Chains: Is the Risk Worth the Reward?

We've seen global trade grow exponentially for decades, but now things are changing as companies start considering their supply chains more deeply than ever before. What does this mean? It means that there will be new choices and challenges in reorienting production footprints; how do you make sure your company is resilient enough against uncertain times (and rulings) when so much depends on unstable regions or nations?!

Supply chains have buckled under the relentless weight from compounding disruptions initially caused by the Covid-19 pandemic, followed closely by climate-related events and geopolitical tensions. As companies look for ways to repurpose their sourcing strategies, they should consider new factors concerning geography, logistics, sustainability, and supplier health.

1. Geography: With the outbreak of Covid-19 originating in China, many Western countries began to reconsider their reliance on Chinese manufacturing. The pandemic has exacerbated existing tensions between the US and China, leading to calls from some quarters for a decoupling of the two economies. The conflict in Ukraine – which has seen Russia annex Crimea and support separatist rebels in the east of the country – is also a reminder of the geopolitical risks associated with global supply chains.

2. Logistics: The Covid-19 pandemic has highlighted the vulnerabilities of just-in-time production systems, which have little room for error or disruption. The closure of factories in China due to the virus led to widespread shortages of car parts and other components, forcing many automakers to idle plants around the world. The hurricanes that hit the US Gulf Coast last year disrupted oil refining and chemical production, while also causing damage to critical infrastructure such as ports and pipelines.

3. Sustainability: The push to decarbonize the global economy is putting pressure on companies to rethink their supply chains. The use of renewables is growing, but the majority of the world’s energy still comes from fossil fuels. The need to transition to a low-carbon economy is driving up costs and creating new risks for companies that are reliant on carbon-intensive supply chains.

4. Supplier Health: The health of suppliers is becoming an increasingly important consideration for companies. The Covid-19 pandemic has highlighted the risks posed by workers in low-wage countries who are often exposed to dangerous working conditions. In China, for example, there have been reports of workers being forced to work in areas where the virus was known to be circulating.

As the world becomes increasingly interconnected, the need for resilient and sustainable supply chains has never been greater. Disruptions to global supply chains can have a cascading effect, causing widespread economic damage and often leading to humanitarian crises. In light of this, the traditional trade-off between cost and risk is no longer enough to guide decision-making. Geopolitical risks, environmental concerns, and social issues all need to be taken into account. But with the right approach, these challenges can be turned into opportunities to build a more resilient and sustainable future for global supply chains.

There are a number of ways to build resilience into a global supply chain. One is to increase the use of locally sourced materials and components. This helps to reduce the reliance on long-distance transport, which can be disrupted by political instability or natural disasters. Another approach is to diversify supplier relationships. This can provide some protection against disruptions at any one supplier. And finally, it is important to invest in digital technologies that can help to identify risks and vulnerabilities in the supply chain.

By taking these steps, companies can position their supply chains for success in an increasingly complex and uncertain world. By anticipating and preparing for disruptions, they can create a more resilient and sustainable future.