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Supply Chain Resilience in troubled times

March 15, 2022
Insight
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The terrible events unfolding in Ukraine have been claimed by some commentators to disprove the post-war orthodoxy that economic integration prevents armed conflict. It’s too early to say but we can only hope that, in fact, a corollary of that orthodoxy will soon prevail. If integration cannot always prevent war in the first place, the rapid disengagement of outside investment will soon bring it to an early end.

It’s a bewildering, uncertain and terrifying time. With the White House announcing it has already “basically crushed” the Russian economy, and nations around the world continuing to increase their sanctions on the Putin regime, retail investors in China are buying up any stock with the slightest link to Russia, betting heavily that medium and long-term trade between China and Russia will increase significantly. If both propositions are broadly correct, a potential outcome will be the acceleration of China’s economic ascendency with its already deep links with Africa, South America and the Global North making it the perfect hub for trade, indirect and perhaps reduced, with an isolated Russian sphere of influence.

All future forecasts are usually wrong, of course, but we can be confident of significant and long-lasting upheavals in energy and commodity supply as well as consumer confidence and supply chain logistics. We can also be confident that the political commitment to Net Zero and the move to greener energy solutions and away from fossil fuels has only been strengthened by the invasion of Ukraine. The howls in parts of the media that Net Zero is dead in the water cannot change the message from COP26 that we have to act on greenhouse gases, and we have to act now.

The Chancellor’s Spring Statement, due on 23rd March, was widely expected to report strong prospects for the UK economy, with January’s 0.8% growth in GDP and the Covid pandemic receding as a constant pressure. With business and consumers now braced for huge increases in domestic fuel costs, and Alpesh Paleja, Lead Economist for the Confederation of British Industry, warning that prolonged conflict in Ukraine will push overall inflation even higher than currently expected, Rishi Sunak will need to raise funds: to shore up the economy, rebuild our armed forces, properly fund the NHS and progress the Prime Minister’s flagship Levelling Up agenda.

Sunak has been giving strong hints over the past few months that, while he’s a firm believer in lower taxes, he also believes there’s a time for tax rises in preference to borrowing. He has also shown himself to be a Chancellor who tries to see the big picture so he may take the opportunity to announce a significant overhaul to fiscal policy. One thing he won’t do is downplay Net Zero or discourage green investment.

So where does all this leave businesses struggling to manage their own supply chains? Many have already been looking closely at their Scope 1, 2 and 3 emissions and figuring out how to reduce all three. That’s already making the business more resilient and there’s a 4-stage approach which businesses can take to develop their supply chain resilience further.

Assess

Sanctions have always been in play to some extent for the past few decades. But with the scale and scope of the sanctions we are seeing now against Russia, any company with international business should assess its counterparties to check they are not subject to sanctions. It’s a rapidly developing situation and the Export Support Team at the UK Foreign Office (https://www.gov.uk/ask-export-support-team) can provide support. It may also be a good idea for smaller businesses to register with the UK Export Academy, set up by the Department for International Trade (https://www.events.great.gov.uk/website/6264/), for additional expert advice.  

Divest

We often think of divesting from high risk investments when things look too rocky. It’s also worth looking at high risk contracts – particularly with customers – which may not provide adequate mechanisms to protect the business, or at least mitigate damage to the business, from supply cost increases and delivery delays. If high risk contracts are nearing the end of a fixed term, or contain early termination rights, it may be the right time to halt renewal or break early. Similarly, and perhaps more challenging, if particular suppliers are highly vulnerable to disruption, careful thought should be given to what levels of orders should be placed with them.

Diversify

It’s been a trend over years now for specialist suppliers and component manufacturers to consolidate, providing buyers with faster turnaround times and lower prices. The risk now is that those mega-suppliers may themselves be overexposed and unable to adapt quickly enough to the changing situation. It is therefore prudent to being developing additional and alternative lines to the supply chain and developing systems to enable as rapid a switch as possible between those lines.

Buffer

The extraordinary growth in the past ten years of fast delivery solutions meant, for many businesses, a move away from holding any supply reserves at all to a reliance on Just In Time supply, from almost anywhere in the world. The benefits of this approach will not disappear over night but, just as critical manufacturing components are usually held onsite in a consignment stock, it may be time to invest in holding less critical material onshore, Just In Case.

Flex

During the pandemic, companies which adapted quickly to home and hybrid working generally managed to maintain their productivity. The evidence now is that very many people prefer that way of working such that companies which have continued to develop their operations along those lines are retaining their best talent and attracting new recruits. Companies which insist on physical presence where there’s no compelling reason are looking increasingly outdated and at a disadvantage.

The moral, as it always is, is that when business leaders flex their approach during challenging times, new and better ways of operating can emerge. The well-established benefits of diversity and inclusion in the workforce and in management can really shine if the leadership opens the discussion on how to adapt to all their stakeholders, and responds positively to the imaginative and surprising solutions that those stakeholders will put forward.

Mark works with manufacturers, distributors and software suppliers to build and maintain resilient operations and supply chains and facilitate their transition to Net Zero. If you are facing immediate or longer term challenges, Mark will be able to assist. Please contact him at mark.ohalloran@ilaw.co.uk

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