Dealing with a perfect supply chain storm

The fragility of global supply chains was highlighted in March of last year when the Suez Canal was blocked by the giant Ever Given container ship. The event sent shockwaves around the world with factories in Europe contemplating production cuts or even temporary closure.

The key issue is the complexity of these globalised supply chains which tend to be designed for maximum efficiency and lowest cost but with very limited flexibility. The more links in the chain the more potential points of failure.

That vulnerability and inflexibility was brought into sharp relief early this year following the outbreak of war in Ukraine. Many leading car manufacturers are dependent on Ukrainian suppliers for wiring components and one auto company has informed its electric vehicle customers that they won’t be getting their new cars until next year.

“When you pull it all together it’s a perfect storm,” says PwC supply chain practice leader Mark McKeever. “Almost every adverse event you could think of happened. Some were already happening pre-Covid and the war in Ukraine has amplified the situation.”

McKeever’s clients have reported difficulties at various points in the chain including warehousing and shipping. “Containers are being held up in ports and companies are having to deal with longer throughput cycle times. There are difficulties in obtaining manufacturing slots in China. And I’ve heard stories of summer stock deliveries being put back until October and Christmas stock being delivered in February. In the European context, we also have Brexit and inflation. Everything that could conceivably go wrong has gone wrong.”

While supply chain diversification is a natural response to a black swan event such as this, McKeever says that process had already begun before Covid. “This isn’t the first supply chain shock we’ve experienced. We’ve had weather-related shocks in Asia in the past and companies have been diversifying as a result. There is also the issue of geopolitical risk and companies were taking some manufacturing out of China before Covid.”

Other issues come into play as well. “Companies are starting to invest in stock for customer service reasons. We have nine of the world’s top 10 pharma companies in Ireland. They enjoy high margins, and their number one metric is customer service levels. Customers need drugs now and can’t wait for them. If a supermarket shelf is empty late on Saturday, they can get away with it. That’s not acceptable for a pharma company. They invest in inventory and typically have 90-day stock levels.”

More inventory

Changes are also being seen in other sectors like automotive, technology and communications, and consumer goods which are investing more in inventory. “Unilever had pulled out of Ireland 10 or 12 years ago but are now putting more inventory back in partly for Brexit reasons and partly for security of supply reasons,” McKeever notes. “There are other factors driving nearshoring. Wage rates have increased in Asia, so labour arbitrage is not what it was. This allows companies to locate manufacturing closer to demand markets. New technologies mean manufacturing is becoming more capital and less labour intensive and companies are more likely to invest closer to demand markets.”

He describes sustainability as “a massive issue”. “It is coming more and more to the forefront now and will definitely drive nearshoring. I know of a major US multinational which is trying to move its shipping from air to sea. It will cut costs and be more environmentally friendly.”

Those changes will all require people to manage them and Skillnet Ireland is helping companies with their talent needs in the supply chain and logistics areas. “We know the challenges endemic within supply chains such as the demands of JIT manufacturing, labour market shortages, disruptions around supply, shipping delays, borders, tax, the rising cost of materials, and so on,” says Skillnet Ireland chief strategy officer Mark Jordan. “We are helping organisations understand how to identify these risks and challenges and manage them and we do that through direct consultation with businesses.”

One of the key issues faced by organisations is acquiring the talent and skillsets they need to adapt to the changed lifecycle of products in the supply chain. “They are dealing with challenges around rising costs and supply availability, logistics in crossing borders, and need to be more creative in shipping schedules. In many cases they have been reliant on sub-contractors and third-party organisations to handle these issues.”

That reliance on external partners makes the challenge all the greater now that companies have to deal with the issues themselves. “We look at trying to help organisations have the capability to understand the workings of supply chains and logistics and alleviate some of the pain. The different border processes, regulations and governance countries have in place can be a minefield in itself. Companies need access to knowledge in that area.”

While Skillnet Ireland provides a wide range of training programmes its efforts in this area go further than that. “By consulting with companies, we gain an understanding of where the business issues are and identify the challenges they face. We develop talent programmes around that. We put together plans for organisations to address these challenges and to avail of upskilling opportunities in the procurement of materials and products. That can result in a lot of different learning and talent initiatives being put together to meet the needs of the business.”