When the world watched in horror as Russia invaded Ukraine, many supply chain leaders felt their pulses racing for multiple reasons. In addition to the awful humanitarian consequences of the conflict, the invasion seemed like yet another insurmountable obstacle piled on top of ongoing macroeconomic challenges.
Since the start of 2022, the International Monetary Fund (IMF) cut its forecast for global growth from 6.1% to 3.6%. Prices have kept rising while demand doesn’t seem to be slowing. And leaders who once believed their supply chains were relatively immune to the impacts of the war in Ukraine are seeing surprising ripple effects.
For example, the Trans-Siberian Railway is a vital artery for transporting goods from China to the rest of the world. But with sanctions affecting rail transportation, and the closing of airspace over Ukraine creating longer flight routes, even companies that don’t source from conflict-affected regions and don’t rely on Ukrainian and Russian markets are facing delays in getting certain products to market.
In this context, what can supply chain leaders do to not only slow their heart rates, but gain more solid footing while navigating shifting sands?
While there’s no magic solution, getting the right data and acting on it at the right time is a crucial component. When used in the right way, today’s digital tools can help mitigate the worst impacts of the challenges that inflation, geopolitics, and unprecedented global shifts in consumer demand pose.
Here are a few approaches supply chain leaders in our community are taking in the face of these challenges:
Improve capital efficiency to reduce the impacts of inflation
According to the IMF, “shipping costs are an important driver of inflation around the world: when freight rates double, inflation picks up by about 0.7 percentage point.” The implications for businesses extend to every aspect of their supply chain while budgets are already stretched thin. Many have felt the need to choose between paying a price that makes them squirm or not being able to deliver to their customers. Often, bidding on services and procuring goods feels like an opaque process, with limited visibility into the true market rate.
Improving capital efficiency can help lessen some of these impacts in your supply chain. For example, data that provides better visibility into potential savings when bidding on goods and services, such as ocean freight, can help you make more informed decisions in real time.
onsemi, an American semiconductor supplier company, like many others, has faced its fair share of supply chain challenges. But onsemi has introduced sales and operations planning efficiencies that have reduced decision-making timeframes from 2-3 weeks to just 1-3 days. This means engineers spend less time doing sales and operations planning process analysis and more time improving factory productivity. This translates to a bottom-line benefit of 10-15% improvement in capital efficiency, and optimal allocations in terms of profit and revenue for each of onsemi’s 25 different sites.
Another constraining factor in supply chains is the amount of working capital buyers require upfront. One option for improving capital efficiency would be for suppliers and buyers to adopt more flexible payment terms. For example, prioritizing supplier adoption of early-payment discount programs can improve return on treasury cash, or moving to anytime payments (as opposed to bi-monthly or monthly) also creates flexibility while improving efficiency.
Challenge assumptions about geopolitical impacts on supply chains
From oil and gas to fertilizer, supply chain leaders are worried about how shortages will contribute to everything from food scarcity to further transportation delays. As millions of refugees flee Ukraine and other countries where there are ongoing humanitarian crises, like Eritrea and Myanmar, the centers of gravity of demand are also shifting. Air, land, sea, and rail routes that were once wide open have been closed or rerouted. And all of this is taking place in the midst of enormous human suffering that cannot be ignored.
We all hope these crises will be resolved, but we also know that geopolitical issues — whether they’re trade wars or land wars — tend to recur, are often slow to resolve, and have lingering global effects. So how can you adapt your existing supply chain strategies now to reduce current negative impacts and create resilient supply chains before the next crisis?
One of the first steps is to challenge your assumptions about your supply chain. Are the guiding principles and rules up to date? Have you included enough lead time in all aspects? Are you taking certain raw materials for granted? Do you know which suppliers, sites, and lanes are most critical to meet your delivery plan? Do you know which suppliers could be at risk? Do you have viable alternatives should heavily loaded revenue flows be interrupted? What other constraints aren’t you considering? Which constraints should you be relaxing? And do you have the data to support these assumptions?
Employ rapid, data-driven solutions to get ahead of unpredictable demand
Related to the points established above, making decisions based on real-time data rather than on past models is more important than ever. By now, we all know the impacts of misjudging demand: delays, lost revenue, angry customers, brand reputation risk, and more.
One part of the solution? Design, design, and design again.
Long gone are the days of only using supply chain design for annual transport planning, opening warehouses, or merging supply chains for acquisitions. Supply chain design must be an ongoing process. While this may sound daunting, today’s digital tools are better than ever, and can help improve supply chain efficiency and identify pain points before they become full-on breakdowns. Artificial intelligence (AI) can factor in hundreds of macro-economic considerations to help with demand forecasting. AI can also parse these elements to score supplier risks. When these indicators shift, the AI should trigger organizations to re-optimize the supply chain’s network structure, flows, and policies accordingly. Continuous design that leverages AI gives organizations the agility they need to respond, rather than react, to market shifts.
For example, Microsoft has spoken about how digitizing their supply chain and embracing continuous design gave them the data they needed to know exactly where their trains were when the war in Ukraine began, how the trains were moving, and what changes they needed to make in real-time.
Disruptions and macroeconomic challenges aren’t new. And technology can’t solve every challenge on its own. However, today’s digital tools and analytics can help us be better prepared for and adapt to whatever comes next.