Escalating Problems in Supply Chains Amid Rising Inflation - What's the Next Step?
In the wake of the COVID-19 pandemic, the global supply chain landscape has undergone significant transformations. Companies in the life science sector have experienced a 71% increase in customer demand, while 97% of industrial and automotive products have been negatively impacted [1].
The future of supply chains lies in autonomy and digitalization, with key adaptations including regionalization and localization, enhanced risk management, digitalization and analytics, agility and flexible redundancy, and addressing disruptions [2].
Many industries are shifting parts of their supply chains closer to end markets to reduce dependence on far-flung global suppliers and improve resilience against disruptions. For example, 60% of healthcare players have regionalized their supply chains, with nearly 90% of surveyed companies expecting to pursue regionalization in the next three years, especially in healthcare and engineering sectors [2].
Formal risk management processes are now widespread, with 95% of organizations implementing such strategies and focusing on proactive monitoring of supplier risks beyond tier-one suppliers, although visibility beyond that remains limited [2].
Advanced analytics use correlates strongly with better supply chain planning, with companies investing heavily in digital technologies for real-time visibility and predictive capabilities. However, the digital skills gap is a major barrier, with only 1% of companies reporting sufficient in-house digital talent [2][3].
Firms are prioritizing the ability to pivot quickly among suppliers or manufacturing locations, emphasizing flexibility in supplier relationships and rapid reconfiguration of supply chains through technology-enabled manufacturing, supported by Industry 4.0 and emerging Industry 5.0 technologies [4].
Despite improvements, supply chains still face challenges from labor shortages, geopolitical instability, material scarcity, and transportation bottlenecks, all driving continued transformation efforts [3][5].
Expected future trends include increased automation, greater digital integration, a focus on resilience over efficiency, and supply chain talent development to address the digital skills gap [2].
The global chip shortage, exacerbated by the pandemic, has affected Taiwan, the hub of the chip industry, the worst [1]. The shortage could lead to a rise in inflation, with Goldman Sachs predicting prices for affected goods rising by 3% and inflation increasing by 0.4 percentage points through the rest of 2021 [1].
The Brexit decision could lead to higher manufacturing costs and additional tariffs on trade between the EU and UK, potentially affecting global supply chains. Successful shipments and timely deliveries are crucial for unlocking international payments from one business to another [6].
Digitalization is a key aspect in cross-border trade, but the flow of funds through international payments is often overlooked. Economic uncertainty and exchange rate are two important areas to focus on when understanding the impact on global supply chains. A weak currency for countries dependent on imports can result in a decline in their purchasing power, with a drop of 20% in domestic currency increasing import costs by 25% [7].
The latest incident highlighted the importance of the agility of the supply chain, as shown by the blockage of the Suez Canal in March 2021, which caused global supply chains to come to a halt [8]. Cash flow forms an inherent part of the supply chain and was accelerated by the pandemic. Enterprises in the US have reported an increase in investment in supply chain technologies to make them more resilient [9].
The World Economic Forum reported that disruptions led to major economies losing 112.75 billion Euros in GDP in 2021 and caused inflation to skyrocket [10]. Companies are hoping that the Covid-19 is a once-in-a-century event, but ways to weather future disruptions should be planned now [11]. The survey by Ernst & Young LLP (EY US) conducted at the end of 2020 revealed that supply chains are being prioritized for digital transformation, with a focus on visibility, automation, and digital enablement by 2025 [12].
References:
- Supply Chain Digital
- McKinsey & Company
- The Economist
- Deloitte
- Gartner
- World Trade Organization
- International Monetary Fund
- BBC News
- Forbes
- World Economic Forum
- Supply Chain Dive
- EY US
- To ensure resilience in the face of future disruptions and adapt to the evolving global trade landscape, many companies are adopting a supply chain strategy that prioritizes digitalization, automation, and regionalization.
- The digitalization of supply chains, including the use of analytics and technology-enabled manufacturing, is crucial for improving visibility, predictive capabilities, and agility, as well as addressing the digital skills gap.
- In order to overcome challenges such as labor shortages, geopolitical instability, material scarcity, and transportation bottlenecks, companies are focusing on supply chain management and finance, aiming to optimize cash flow and minimize risks associated with cross-border trade and international payments.
