Global supply chains power the world.
To create value for their business, supply chain professionals act as the conductors of this globally-dispersed orchestra of trucks, planes, trains, ships, and facilities allowing firms to deliver on their promise to customers, combatting changing conditions and demands every step of the way. Managing change is all in a day’s work for supply chain professionals, but success doesn’t happen without thoughtful planning. Understanding the potential risks in your global supply chain requires knowledge of both industry changes as well as macroeconomic, political, and social issues.
Supply Chain Risk Assessment Report
On Thursday, April 23, The Global Supply Chain Institute, The Council of Supply Chain Management Professionals, and IHS Markit held a webinar to celebrate the release of the EPIC Global Supply Chain Risk Assessment Report addressing a variety of complex supply situations and questions.
Where did the EPIC Report come from? And why was it created?
The “EPIC” Report (an acronym for Economy, Politics, Infrastructure and Competency) was initiated by colleagues at the University of Tennessee, Knoxville, and ESSEC School of Management (Paris, France) nearly a decade ago. The reason: supply chain professionals are regularly confronted with questions that relate to the dynamism of the global commerce environment but lack a formal framework to help guide those decisions holistically and shed light on a variety of risks that are likely to be encountered.
The creators of the EPIC Report set out to identify the key macro environmental categories that should be taken into consideration when making global supply chain decisions regarding the geography of supply chain routes and regions. Over time, they narrowed the criteria to four major categories.
E: Economy — economic output of the country, its potential for future growth
P: Politics — political landscape and how well it nurtures supply chain activity
I: Infrastructure — transportation, utility and telecommunications supporting supply chain activities
C: Competence — skill levels of workforce and support industries available to perform supply chain activities
Using data to create and rank EPIC scores
To utilize the data that’s available and provide a means through which countries and regions can be compared, the creators of the EPIC Report populated their framework with a number of different variables from World Bank databases.
Based on that data, scores and rankings were produced, by region and by country. The idea: if a supply chain manager needs to make a decision for sourcing in a particular part of the world, these scores can assist him or her in determining what country or region is best suited for that particular operation.
The EPIC Report scaled each of the individual variables for all four EPIC dimensions into a one to five scale, five being the highest ranking and one being the lowest. Then, an average score was calculated for every region and country on each dimension. An overall epic index score was also calculated.
What are some current trends in global supply chain by region?
Asian Rebalancing
Experts note that there is currently a global supply chain rebalancing occurring in Asia. This reorganization had begun prior to COVID-19, pre-empted by fluctuating tariffs and Trade Wars. Now, with the advent of COVID-19, the conflation of factors will likely speed change to the point that supply chains across Asia have the opportunity to do some reconfiguration. Experts expect to see the pendulum start swinging in the direction of diversification and away from the default “all-China” strategy that many companies have embraced. As a result, Southeast Asia may once again become more popular. Countries like Malaysia, Vietnam, and even some industries in Cambodia, Laos and Singapore may see an influx or demand and action.
European Turbulence
Well before the current pandemic, Brexit dominated the news. Today, Brexit is still progressing forward with an increased amount of uncertainty around a variety of potential delays and distractions. On top of that, COVID-19 has created an imbalance in labor markets. There’s a rising sense of Populism and Authoritarianism taking hold in Central Europe, particularly in countries like Hungary and Poland. This is cause for some concern, or at least awareness for supply chains that have leaned quite heavily into configuring their routes to these countries and regions.
Retrenchment of Unbridled Global Strategies
Supply chain has gone through an evolution that’s resulted in businesses moving away from an environment where cost, alone, drove global decisions to lengthen routes and increase risk. Now, as industries are better able to quantify risks and organize around it, companies are seeing a bit of retrenchment. Recently, companies have been observed seeking demand and supply pods on a narrower, more regional basis. Also reflecting this idea of retrenchment is a trend in companies looking to explore “near-shore” markets as opposed to ones that are more distant and require more tenuous and lengthy supply chain routes and considerations.
How should a supply chain professional think about risk?
According to Shay Scott, Executive Director of the Global Supply Chain Institute at Haslam College of Business, best practices around risk consideration for supply chain leaders include:
- Treat risk as a core design and operations principle.
- Don’t give up because of the unknowns.
- It is better to be generally right than precisely wrong.” Even though we can’t take an engineer’s mindset to exactly quantify something doesn’t mean that we can’t figure out what we know, prioritize it and use it.
Holistic Mindset to Supply Chain
Shay Scott noted that “supply chain professionals often also focus on their own processes, on getting that year-over-year incremental improvement in cost or in service level.” “However,” Scott advises, “we must also be students of politics, of science, of trends and really see where those opportunities or challenges are going to occur.” Scott continues:
“We should take advantage of this limelight currently being shined on supply chain to remind the broader business community of what we already know: that supply chain is a critical value creator for the business.
We’ve been shouting about risk for quite a while. We just need to be able to clearly articulate it and lay it out in a time when it seems more likely that we’re going to be able to be heard.”
What should you consider for a holistic view of supply chain risk?
“People are looking for a complete and holistic view of risk.” explains Patrick Thomson, Executive Director of Macroeconomics at London-based global information provider, IHS Markit. “It’s not simply finding the lowest cost location or finding the location with the lowest levels of physical violence on the roads between the manufacturing facility and the port or finding the country with the government that is sort of most conducive to working with business. It’s really all those things at the same time.”
Supply chain risk indicators by region, in relationship to COVID-19
According to Aleksandra Maguire, Associate Director of Consulting at IHS Markit, the following regional activities are likely to impact supply chain trends in the coming months:
Asia
Recently, sourcing has been observed shifting away from China to the other Southeast Asian countries, a trend that is expected to continue.
At the present moment, China is ahead of the other Asian countries in terms of the recovery, especially in terms of the factory production due to COVID-19. And this is mostly in the manufacturing sector.
One example is the apparel industry that has already begun shifting away from China, moving to other Southeast Asian countries.
South America
In the past three months, many emerging markets, such as Brazil, have been facing a currency crash. Other South American countries will likely be under the increased threat of political disruptions that often accompany a declining economy, like increased unemployment and reduced work for others.
Some of the resource-exploiting economies in South America, such as Brazil, Chile and Argentina, have had crashes already in commodity prices due to the recession, and supply chain disruptions are likely to impact this state.
In this region, impacts will especially be seen in the basic goods and state services.
Europe
The European Union is still facing Brexit repercussions. But in the short term, this has been muted due to COVID-19 and the associated recession that has followed. Governments in the European Union have provided the stimulus and relief packages, but increasing unemployment will make it hard for European countries to sustain an investment climate attractive to businesses.
North America / U.S.A.
The U.S. economy is driven by consumption. In general, about 70% of the GDP is consumption by households and businesses. China, in comparison to the U.S., has a much lower proportion of consumption of GDP.
Graphic Analysis: Household consumption – amount vs share of GDP
This treemap reflects how important the U.S. is to the global supply chain. It is by far dominant in terms of how much is consumed.
Supply chain impacts are more severe in countries
Reading:
Size of rectangle: total amount of country’s domestic household consumption (real USD)
Color of rectangle: share of household consumption in country’s GDP (100% = 1)
How should supply chain management respond COVID-19 disruptions?
- Accelerate decisions to secure shipment space where capacity is reduced
- Map supplier geography and their supplier networks
- Improve supplier communications and transparency
- Identify alternative transport service options and their characteristics
- Identify suppliers in alternative locations and associated freight transport options
- Monitor governments’ trade / freight-operating restrictions
- Assess continued e-commerce transportation costs, including costs of returns
- Start or advance assessment of potential supply chain automation
- Investigate potential for collaborative shipping to lower costs and disruption risk
Is your supply chain as diversified as you think?
To determine how diversified a company’s supply chain really is, the EPIC Report and IHS Markit highlighted a few complex and critical themes and questions to consider:
- How stable and reliable are your current strategic sourcing partner countries? a. What are the odds of disruption? b. What are the greatest areas of risk? * c. How are risks evolving over time?
- What new strategic sourcing partner countries should you consider? a. Where do economic, demographic, and risk conditions align? b. What origin markets already support a product or segment? * c. What origin markets produce adjacent products or segments?
- Is your sourcing strategy appropriately diversified?
- a. Is your current strategy resilient to local, regional, and global events?
- b. Are there hidden or underlying risks that exist across your current strategy that weaken your diversification?
What are some complicating factors that can mask the aggregation of risk?
While companies are digesting, measuring, and responding to the critical questions and implications of a constantly changing global marketplace, there are a number of complicating factors that may mask the aggregation of risks.
Evolving Macroeconomics
These dramatically impact total landed costs and uncertainties. They include the cost of labor, raw materials, packaging and shipping — and do so differently in countries around the world, over time.
Commercially Relevant Risks
These include contract enforcement, labor strikes, and corruption. They are increasingly impacting business operations and, sometimes, strategically impact companies through reputational risks.
Policy Environments and Local Conditions
These include regulatory, international trade and tariff regimes. They are changing rapidly and are driven by new and increasingly competitive political, economic and even security dynamics.
The Sourcing Behavior of Competitors
These are constantly changing, presenting clients not only with new strategic challenges, but also, with new opportunities.
What are common mistakes companies make in managing supply chain risks?
One common mistake companies make in relation to their supply chain is applying a focus that’s too narrow. Rather than taking a macro view of risk, companies fall into the trap of taking a perspective that is too internally-facing or focused on process failures or supplier capability. Instead, companies should take a broader view that they then use to build a more global orientation when making decisions pertaining to their supply chain.
Another common mistake is over-simplifying or over-aggregating data.
Supply chain decisions that are heavily influenced by cost considerations are another category where mistakes can be abundant. Whenever possible, supply chain managers should avoid allowing costs or revenue implications to become a “buzzsaw” in considering factors that may not seem, on the surface, cost-effective or in the best immediate interest of revenue. In the long term, some pricier decisions may serve the organization better than the quicker option that stops spending immediately.
The spotlight is on supply chain now more than ever
According to Shay Scott, a combination of factors — the pandemic, trade wars, coupled with the rise of nationalism and populism throughout Europe and an increasing global IQ surrounding risk — are creating a global environment where supply chain heads should be able to articulate our needs to our leaders in the C-suites and be heard more than ever before.
Moderator Rick Blasgen, President and CEO of the Council of Supply Chain Management Professionals, echoed Scott’s point: “I think that a lot of our sourcing decisions have been made outside of the realm of supply chain professionals and for other reasons, generally driven by cost issues, and that potentially what happens as we come out of this [pandemic] is a greater understanding of the cost of risk and disruption that will enable a kind of portfolio sourcing approach.” This, Blasgen hopes, could be beneficial to supply chains and those tasked with managing them.
How can global supply chain combine sustainability with risk reduction?
“I always think of sustainability as an issue that’s tied in implicitly with risk,” noted Ted Stank, Faculty Director at Haslam College of Business Global Supply Chain Institute, “because if you take a long term view on risk, if we don’t have sustainable components that go into our food supply chains and our chemical supply chains, then we’re going to fail at some point in the future.”
Stank linked sustainability to cost and supply, citing AB InBev’s practices with farmers. “The kinds of things they’re doing with farmers around the world to be able to source hops and barley sustainably and teaching farmers sustainable methods so that you can harvest around the world, 365 days a year because you need that for growing seasons. I think those are the kinds of learnings that we can apply across industries and include sustainability into our risk profiling.”
How is consumer demand for socially responsible products, including environmental and human rights issues, affecting the global supply chain trends?
Panelists noted that, lately, there’s a lot of focus at the consumer level on reputational risk factors. Companies globally are growing acutely aware that missteps in these areas can lead to consumer movements that will drastically impact a company’s valuation and performance, including a company’s supply chain practices as well.
The University of Tennessee, Knoxville’s Haslam College of Business Online MS-SCM and EMBA-GSC aim to set students up for success by providing a wealth of support, resources, cutting edge supply chain knowledge and networking opportunities. If you have any questions, feel free to contact an enrollment advisor at 865-322-9978 or msscmonline@utk.edu.
For people interested in exploring the complete EPIC Report, the full version is available here.