Supply Chain Reset

Feature

New Global Realities Heighten the Need for Sustainability, Visibility, Resilience

In retrospect, the just-in-time, single-source, ultra-streamlined supply chain was never built to last.

Wages in developing nations can rise, and labor disputes can bring manufacturing and shipping to a halt. Values of international currencies fluctuate, tax and environmental policies change, and fuel prices are historically volatile. Authoritarian governments are unpredictable, and in an interconnected world, a war in a single country can create a global shortage of essential products. Natural disasters and pandemics are parts of life.

Amid all that uncertainty, toss in growing consumer expectations for corporations to reduce their carbon footprint and to disclose their environmental impact, and C-Suite executives have their work cut out for them. The response has been a global supply chain reset aimed at enhancing sustainability, visibility and resilience.

“I think the importance of sustainability is really clear with all the global issues we see now,” said David Duque Lozano, a sustainability project manager for MHI member Vanderlande. “Sustainability is becoming a license to operate.”

In February, McKinsey & Co. published a report showing that consumers are supporting companies that make positive claims about their environmental, social and governance (ESG) policies, with an emphasis on addressing climate change. Products making ESG-related claims averaged 28% cumulative growth from 2017 to 2022, compared with only 20% for products making no such claims, according to the global consulting firm.

To arrive at those numbers, McKinsey and NielsenIQ analyzed five years of U.S. sales data covering 600,000 individual product SKUs representing $400 billion in annual retail revenue. Those products came from 44,000 brands across 32 food, beverage, personal-care and household categories.

The findings buttress a 2020 McKinsey survey in which 78% of U.S. consumers said a sustainable lifestyle was important to them. Likewise, 60% said they’d pay more for products with sustainable packaging.

This summer, as the world endured the hottest days in recorded history, it was hard to deny the effects of climate change, and calls for greener companies were growing louder.

“Ten years ago, people said climate change was coming,” Duque Lozano said. “I think you can see now that climate change is happening, with the natural disasters and extreme weather around the world. It’s really clear, and companies have a really big impact on that. We have no Planet B.”

Multiple factors driving change

Duque Lozano, based in the Netherlands, said his work involves setting “science-based targets” to make Vanderlande’s operations more sustainable, and then developing a strategy to achieve those goals. Many European companies are taking similar measures to comply with the European Commission’s Green Deal, a set of policy initiatives approved in 2020 to make the European Union climate neutral by 2050.

But climate change isn’t the only driver of the supply chain reset, Duque Lozano said. Pandemic-fueled supply chain shocks, such as the global shortage of computer chips, are leading companies to diversify their supply chain, even if having more than one supplier erodes some of their purchasing power.

Similarly, extended delays at ports during the pandemic and high shipping costs have led companies to begin nearshoring—manufacturing closer to home and choosing nearby suppliers, Duque Lozano said. Those efforts have accelerated due to tensions between the United States and China and rising wages in the communist country.

Geopolitical concerns have given rise to the term “friendshoring”—manufacturing in and sourcing from countries that are geopolitical allies.

In July, China announced that it would restrict exports of gallium and germanium, two metals commonly used in computer chips and solar cells, beginning Aug. 1 in order to “safeguard national security.” In addition, Forbes reported in January that the average U.S. worker made only 3.5 times more money than his Chinese counterpart in 2021, down from 6.5 times a decade earlier and 30 times at the turn of the century.

In Europe, 53% of companies are considering nearshoring to bring operations closer to customers, according to Ernst & Young’s 2022 European Attractiveness Survey. The poll, which measures Europe’s appeal to foreign direct investors, also found that 43% of European companies are considering reshoring, or returning operations to their domestic market, up from 20% in 2021.

In the United States, where the political parties are divided on climate change, consumer sentiment has driven these trends more so than new environmental regulations. But that could change. The Securities and Exchange Commission proposed guidelines in 2022 that would require publicly traded companies to disclose climate-related information in their financial statements.

All over the world, “linear, lowest-cost supply chains are giving way to more multidimensional supply networks that better balance risk, sustainability, speed, agility and cost,” according to Ernst & Young’s report.

“Companies need to rethink where they operate, the materials they source, the suppliers they buy from and their physical supply footprint and operating model,” the report said.

Some products have to go

Companies should reevaluate their product portfolio and determine if any offerings are incompatible with their sustainability goals, according to Ernst & Young. A “radical review” of their product line and bill of materials may point to products that are no longer profitable to sell, regardless of where they’re manufactured, unless inflationary costs are passed on to consumers, the report said.

Other products simply can’t be made sustainably, including single-use plastic goods and fast-fashion products, Ernst & Young said. Some products require vast amounts of water or raw materials, while others damage biodiversity or are produced thousands of miles from end users.

“Manufacturers should question whether such items can survive the pressures of ESG reporting requirements, carbon taxes and consumer demand for ESG,” according to the report, written by Matthew Burton and Joost Vreeswijk.

Rethinking product design is another component of supply chain sustainability, according to Ernst and Young. In some products, scarce materials may be swapped out for recycled or readily available materials. Instead of manufacturing cheaper products that typically can’t be repaired and don’t last long, companies can design moredurable products, reducing the use of raw materials.

Industries also can standardize as many parts and components as possible, allowing a broader pool of suppliers to participate, the report said. That practice contributes to a circular economy, in which products are recycled to reduce consumption. It also minimizes the risk of global supply chain shocks stemming from a natural disaster, war or other isolated event that knocks out a single main supplier.

Reshoring and nearshoring are occurring even though global container shipping prices have fallen sharply from their peak in the third quarter of 2021, according to Keegan Coats, vice president of analytics and customer solutions for MHI member eShipping. The company provides transportation management systems and other logistics solutions.

The decline to 2020 rates “ends an incredibly turbulent time for ocean importers who are understandably jittery when it comes to spot vs. contract rate commitments,” Coats said.

“What hasn’t gone away, or rather has now just returned to the front-of-mind for most shippers, are blank sailings, port congestion, chassis shortages, port strikes and the need to ensure adequate inventory volume is being supplied to the right location in the right timeframe to meet forecasting demands,” he added.

Expensive inventory

The move to diversify supply chains doesn’t necessarily mean that the lean, just-in-time model is dead, however, Coats said. During the pandemic, companies learned that if you can’t ensure a reliable supply chain, you quickly lose market share to those who can. As a result, many businesses, especially distributors, entered 2023 with excess inventory, and those volumes remained high this summer, he said.

Now, rising interest rates may force businesses to reassess that strategy, Coats said. Moreover, the easing of supply chain bottlenecks, allowing companies to import products quicker and cheaper, could lead some to return to just-in-time.

“My assumption is companies will need to attempt to strike a balance between high-interest holding costs and mitigating short/medium-term risk to future supply chain disruption,” Coats said.

Making supply chains more regional instead of national can help companies deal with volatile fuel costs and uncertainty in the trucking industry. A driver shortage and rising insurance costs are well-documented concerns for carriers of all sizes.

“Fuel remains a heavy influencer in the U.S. domestic market” even though gas prices are down substantially from recent highs, “which has really eased the pressure on [full-truckload] spot rates in particular,” Coats added. Less-than-truckload carriers are reporting that their volumes are down 7% to 10% this year, he said.

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