Supply chain reform “can save economy from depression”

The boss of a supply chain specialist has warned of further economic turmoil but says supply chain reform can turn the economy around.

“The supply chain crisis isn’t going away any time soon,” says Oliver Chapman, CEO and founder of supply chain specialist and the UK’s No.1 fastest-growing company, OCI, “but it isn’t all doom and gloom.”

Chapman says: “Supply chain issues are already causing major problems across the global economy, and they will get worse before they get better. The causes are multiple, including the Ukrainian crisis, lockdowns in China, climate change affecting food output in India, and the after-effects of the global lockdowns during the height of the pandemic.

“But many of the negative consequences could have been mitigated if companies had previously reformed their supply chains. The need for these reforms is now more important than ever, and there are steps organisations can take to alleviate supply chain bottlenecks, boosting their profits while simultaneously easing the global cost of living crisis.

“The first step is supply chain auditing. The supply chain is complex, with multiple inter-weaving parts. Few companies have a comprehensive understanding of all the parts, and this is something they need to change.

“Once they have this greater understanding, there are further steps they can take, including:

“Country and region hedging – reducing reliance on supply from particular regions. Companies can also examine the supply chain, ascertaining distances between suppliers and whether there is an advantage in instigating local supply even though unit costs before transport might be higher. For example, a US corporation might buy more cargoes from Latin America instead of relying on Asian supplies. The media costs for products may be a little higher than from Asia, but transit time is a lower and control of the supply chain is very much in hand. Likewise a corporation from Western Europe might find there are similar advantages in sourcing supply from an Eastern European country.

“Recycling –  ensure the companies and other organisations that make up their supply chain are geared towards recycling commodities and components in their production process that could become in short supply. For example, in the motor industry, electric vehicle companies are looking at ways to recycle lithium and other components in batteries.

“Look for alternative products  –  for example, if there is a region in the world that is dominant in the supply of a certain commodity, such as sunflower oil, look for alternatives.

“Ensure suppliers use sustainable practices – the supply chain audit needs to highlight suppliers that are too reliant on components for which future supply is either unreliable or subject to price volatility. But suppliers who themselves have more reliable and sustainable sources of supply are likely to be more dependable. An example of this might be to favour suppliers who use energy primarily generated from local renewables or recycle the plastics they use in manufacturing or packaging.

“One very practical step that companies need to consider is the size of ships used to transport goods. Until recently, the trend was towards ever-larger ships because scale saves money. But this trend had the unforeseen consequence of favouriting the concentration of supply of certain commodities in specific regions. The trend toward bigger ships may have saved money in the short term but created fragility in the supply chain. The consequences are much higher costs today.

“Reform of the supply chain can’t save the economy from its current slump overnight. As a result, a recession in many countries and perhaps even a global recession is possible. But supply chain reform can stop the current economic crisis from deteriorating into something even more serious. Without such reforms, an economic depression is a real danger.”