Global supply chains are prevalent in many, if not, most industries. Many benefits accrue from having global supply networks which include: reducing risk of reliance on local supply, getting better prices for the same quality of supply, an ability to ensure demand is met from the global network with the ability to move capacity and production. The downside might be longer lead times or delivery times. Problems may arise when distance delays deliveries through unexpected disruption. In an uncertain world this has become a greater problem. Take the examples of gas supply from Russia to the European Union and you get the picture. In this article I discuss volatile global supply chains and the impacts they have. Global supply chains as a means of mitigating risk and meeting demand have become the dominant paradigm for supply chains, Just-in-Time (JiT) systems that operate in many industries come under pressure when disruption occurs. The system relies on stability and certainty to satisfy demand. It fails when there is uncertainty and disruption.
Volatility suggests instability and unpredictability. Chain reactions occur when chemicals added to existing chemicals cause further reactions that spread throughout the system. A series of events happen each caused by the previous event. Supply chains are said to be volatile when there is uncertainty in a part of the network that causes reactions elsewhere in the system. Supply chains are dynamic systems and a change in one node in the network can impact the whole system. For example, if one supplier represented by a single node in the supply network drops out this will cause changes elsewhere in the system. Jay Forrester’s (Forrester, 1961) work studied system dynamics and described oscillations in a system which supply chain professionals refer to as the ‘Bullwhip’. This is often expressed as demand amplification signals triggering an under or over-response of supply in different parts of the system.
Global Supply Chains – How we changed the paradigm
World views determine how we think about supply chains and for the past thirty years or more this view has adopted the notion that supply chains are global in nature. The editor of the Harvard Business Review Joan Magretta, said that supply chains needed to be ‘fast, global and entrepreneurial’ back in 1998 reflecting the then current thinking about supply chains (Magretta, 1998). Previously Kurt Lewin said that strategies get frozen in time until something changes the way we think about them at which point we unfreeze our thinking develop a new paradigm of how things work and refreeze until the next time something stimulates us to change our view of the world (Lewin, 1947). I think you would agree that the world appears to change faster in the digital age. However, we might consider a caveat from Plato who talked about universal truth existing beyond the realm of appearance – the world that most of us inhabit on a daily basis (Plato, 1941). People are social animals and the need to connect, relate and trade is necessary for survival and growth. There will continue to be interest in trading globally now that patterns of world trade have developed and been established, some over centuries not merely decades. The nature of that trade will remain even if the geography shifts. Global shifts are a continuous phenomenon (Dicken, 1998). Time, money and need will determine the nature of global supply and demand (Hines, 2014). The forces of economics prevail and shape world trade. As long as this universal characteristic is prevalent so too will global supply chains remain. The paradigm may shift as Thomas Kuhn acknowledged(Kuhn, 1962) but the essence remains as Plato noted.
Changing the paradigm is more difficult than you might think. There has been much talk during the past two years since the Covid 19 Pandemic about change. Some of that change has focused on building a better world for people to live in. Recent events in Ukraine have taught us that this aim has been trashed temporarily at least by Russian aggression seeking opportunist territorial advantage. It may appear to be a relic from earlier times but history has many such lessons that teach us that little changes even if much appears to change. It is rather depressing.
Disruption
Disruptions to supply chains have been caused by the Pandemic, Brexit, Global Trade Wars, Suppressed demand, Excessive Demand post lockdown and Limited Supply through factory closures and transport limitations as well as the invasion of Ukraine by Russia. All of these factors add to the already complex nature of world trade with fluctuating prices in commodities, energy and other goods and services traded. Geo-politics is always a force at play. It is what many social scientists would call an invariant factor.
Volatility
Volatility is a disruptor. Global supply chains work on the assumption that each link in the chain is able to meet demand. For example, a retailer procuring agricultural products from Spain will expect the supplier to deliver within predetermined timescales. If the retailer is based in the UK goods may come by ship or by road within days of being harvested. Any delay would increase the risk of the goods deteriorating in transit. So when you have disruptions adding friction (delays) to supply chain processes such as Brexit it means that risk increases. The current situation with port hold ups, shortages of ships and HGV drivers add to the problem.
Greater distances add time to supply chains. If there are any delays to agreed lead times and delivery times it will impact the supply chain. Volatility often occurs when demand is higher than expected or supply is less than expected. If I export oil or liquid natural gas by ship and one significant source of supply is removed from the market (e.g. Russia) prices will rise. It might also encourage suppliers operating in an oligopolistic market to hold up deliveries to earn more profit. Volatility changes the balance in supply chains.
White House Economists this week gave a review of the state of global supply chains in which they acknowledge “Because of outsourcing, offshoring and insufficient investment in resilience, many supply chains have become complex and fragile,” they go on to say “This evolution has also been driven by shortsighted assumptions about cost reduction that have ignored important costs that are hard to turn into financial measures, or that spilled over to affect others.” Interestingly what they do not say is that resilient supply chains cost money. In order to make supply chains resilient you have to invest in inventories. If we move from JiT to Just-in-Case (JiC) supply chains, that would would be a backward step with no guarantees that it solves the problem either. Just how much working capital investment would be needed and how many fixed assets or rental costs to secure warehouse space. Interestingly in the past year the demand for warehousing space has increased significantly.
Conclusions
When a globalizing world moved toward a paradigm changing the business model from local to global supply it reconfigured the value system. Singular acts, an ‘invisible hand’ as Adam Smith might have said repeated and copied many times changed the future. A value system determined by global supply chains redistributes resources, profits, employment incomes and determines future trade patterns that affect our everyday lives. When we look at the problems now appearing in global supply chains they were set in train when the paradigm shift to a business model predicated on a new order value system was enacted. Unravelling a tangled web in an interconnected world will be difficult to change. It may require a shift in our world view away from growth to survival that binds minds to change their priorities. Protecting the planet and a desire for a better future for people may well provide such impetus but it remains to be seen if it is enough to change the paradigm.
References:
Dicken P. (1998) Global Shift, London Paul Chapman Publishing.
Forrester JW. (1961) Industrial Dynamics, Boston MA MIT Press.
Hines T. (2014) Supply Chain Strategies: Demand Driven and Customer Focused, New York: Routledge.
Lewin K. (1947) Frontiers in group dynamics. Human Relations 1: 2-38.
Plato. (1941) The Republic of Plato, Oxford: Oxford University Press.
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