Preparing for disruption is no longer a trade-off against cost
In the first half of 2022 we’ve already seen natural disasters, continuing uncertainty caused by the Omicron variant, rising inflation, an escalation of the conflicts in Eastern Europe and energy supply issues around the globe. While there certainly seems to be light at the end of the tunnel for the pandemic, it’s increasingly clear that the post-Covid world will never be the same as it was before. There’s a growing consensus that many of the economic and supply chain consequences of the pandemic, from sudden supply chain disruptions to material shortages, were just the rapid acceleration of apparent trends. Supply chains were dried out and optimized to “just in time”, which is now the issue when looking at the challenges with logistics suppliers. Logistics were obviously undervalued in the past, looking at employment conditions of lorry drivers to cost of a container shipment across several 1000 miles.
In a recent poll among Supply Chain Leaders, many agreed that various disruption scenarios are here to stay, as capacity struggles to bounce back to meet demand. Other challenges such as extreme weather or political impacts continue to disrupt supply chains. Disruption in an interconnected economy, is here to stay and we need to accept that and figure out how to handle it. Companies already deployed sophisticated tools such as risk management systems, data analytics and supply action teams which proved to be vital during the pandemic – allowing to anticipate disruptions much earlier than it otherwise would have been, able to and keeping factories running and meeting its customer obligations. It is recognized that while it can’t influence the number of disruption events that occur, it can minimize the number of disruptive events it is affected by. To that end, companies are simplifying and reshaping their supply chains, regionalizing production, reducing the number of steps materials take to reach its plants, and ensuring more suppliers are qualified in case it needs to shift to new vendors quickly. But doesn`t this come at a cost?
Managing risk doesn’t necessarily introduce cost. For instance, by sourcing raw materials in North America rather than China and using this for products in the same market, it can avoid potential disruptions as well as reduce shipping costs and lead times, helping to keep the overall landed cost and supply chain risks low. That’s without even considering the environmental impacts – or how shorter lead times can benefit the company’s cash flow. Measures to monitor and mitigate potential disruptions can no longer be seen as a simple trade-off against cost. With companies facing significant disruption for the foreseeable future, taking action now to enhance supply chain visibility and bolster supply chain resilience has the potential to avert cost pressures in the long term. However, for this holistic approach there needs to be a professional, single point of responsibility in the company, weighing the risk mitigation against cost and environmental objectives.
The supply crisis is becoming an accelerator for more sustainable supply chains
As above examples point to more local buying and thus less negative impact to the environment, the supply crisis is creating the readiness to fundamentally change suppliers or substitute products. When changing formulations or de-specification of products were a painful process pre-crisis, there are ample examples to be seen, where this is transforming. This allows companies to purposely introduce more sustainable solutions looking at the whole supply chain with their direct and indirect suppliers. Combining green objectives or considering new regulations like the EU Green House Gas reduction act has become now a very clear target for the Procurement department. Looking at packaging in consumer companies, companies are looking to review their packaging strategies, all the way from challenging the need for packaging, introducing new materials or entering in extensive re-use or recycle streams. This has a huge impact to the plastics, glass and/or aluminum industry, which have their own struggles and opportunities considering their sustainability, i.e. energy consumption, recyclability and other performance criteria, such as weight, look and feel….and last but not least as well to the chemical industry, depending on what is decided towards and by the consumer.
For the Specialty Chemicals industry this is a huge opportunity, potentially as important as the shift in the electronics industry from light bulbs to LED technology some 20 years ago. This required a whole set of new technologies, disruptive ways of supplies and completely new value chains dominating the market, and eventually new legislation, which accelerated the change in the applications.
Within the next couple of years, the Chemicals Industry must be open to find and accept disruptive technologies, i.e. raw materials from the bio-chemistry space, developing start-ups as suppliers and allowing sometimes a “try and error” mode when introducing new and CO2 reduced raw materials. This applies to raw materials but also to new ways of spending in the Indirect space, i.e. packaging,
(internal-) logistics and energy sourcing. All of this need responsibilities bundled in companies open for this change. There is “Procurement with Purpose*”, as many companies consider procurement in the role of moderating or even directing the combination of supply chain management, total cost optimization and sustainable sourcing. “Procurement with Purpose aims to use the corporate and public sector spend with suppliers to drive wider benefits, environmental, social and economic, rather than simply support the spending organization` short-term goals” such as department cost and savings.
In this perspective, Procurement will play a central role establishing resilient supply chains while optimizing towards less CO2 generation and transparently decide on the comparably least financial effects.
*”Procurement with Purpose” by Peter Smith and Mark Perera
