Global shocks, from the COVID-19 pandemic to the Russia-Ukraine war, have exposed multinational groups to increasingly costly disruptions in their supply chains. This has prompted a rethink of legacy strategies. Many companies are exploring ways to pull back from their global supply chains, in a move that could reshape the world economy and further push up prices.
Geopolitical risks are driving companies’ efforts to find more robust sourcing and production locations, and nearshore or reshore more of their operations, but there are no quick solutions. And business leaders are also dealing with longer-term systemic risks. Indeed, they are trying to account for the greenhouse gases emitted through their supply chains, as companies work towards net-zero targets.
At the same time, the complexity of supply chains and connected machinery have only added to the cyber risks facing manufacturing companies, as breaches can ripple through the value chain.
To help companies address these big risks in the supply chain, we have spoken to ESCP Supply Chain and Operations Management Professor Christian Durach, who provided some of the most common and effective workarounds for businesses.
There is no way around training more IT experts in our society to help firms protect their supply chains from digital threats.
Prof. Christian Durach
Navigating a deglobalizing world
Looking back over the past 30 years, the globalisation of supply chains has been driven by many factors but primarily the reduction of trade barriers. Now the reverse is happening, as Durach tells us: “The US-China trade war that began under US President Donald Trump, as well as COVID-related restrictions and western sanctions on Russia, have made it increasingly risky for companies to work with international partners. Energy prices are another factor currently driving up transportation costs.”
Such crises have made managers aware of the true costs of global sourcing, which appeared cheap in “normal” times, but have now risen on the back of higher wages, long lead times and quality issues, prompting a slowdown in globalisation that has only been hastened by Russia’s invasion of Ukraine, as Durach continues:
“New manufacturing technologies, such as robotics and 3D printing, will allow for lower-cost manufacturing in the future and enable companies to produce closer to their customers. As a result, companies will likely off-shore less, being able to achieve efficient production that relies more on partners from the immediate vicinity with fewer delivery risks.”
However, as companies open multiple production sites in different locations to better absorb supply-chain shocks stemming from trade barriers such as Brexit, that large-scale revamping of supply chains will inevitably drive-up costs, fanning price pressures:
“For the moment, it will become more expensive for companies to produce and ship products. The cost of this is likely to be borne by customers, society and the environment, as inefficient production and shipping regularly leads to more waste and pollution,” explains Durach.
New manufacturing technologies, such as robotics and 3D printing, will allow for lower-cost manufacturing in the future and enable companies to produce closer to their customers.
Prof. Christian Durach
Scope 3 emissions, a climate and strategic challenge
Meanwhile, addressing the carbon footprints and biodiversity impacts of supply chains will become increasingly important, because of the climate crisis. But most organisations are not even aware of the carbon emitted through their supply chains, known as “Scope 3” emissions, as Durach tells us:
“In our world of division of labour, a large part of a company’s greenhouse gas emissions is outside its own operations. I know from managers in various industries that they still struggle to measure Scope 2 emissions correctly. As a result, there is no reliable data on Scope 3, nor is there much information on how companies are reducing Scope 3.”
However, he adds that companies may be focused too much on carbon emissions, whereas there are other problems to also contend with — including biodiversity loss, freshwater use, and use of fertilizers. “I personally think that we are not doing enough to stabilize the earth system when we focus only on one of these dimensions,” he says.
Shoring up weak links in the supply chain
Another fairly novel topic for companies is cyber-risk. Manufacturing companies are now being targeted even more than banks, exposing the vulnerability of the long, complex supply chains that have traditionally been favoured by multinational enterprises.
Durach underscores the increase in the “attack surface” that cyber-criminals are targeting: “Global supply chains and their efficient way of producing products and services have been significantly driven by computers. I also worry that many, and not just smaller companies, don’t have IT skills needed to protect their data against cyberattacks. In the medium to long term, there is no way around training more IT experts in our society to help firms protect their supply chains from digital threats.”
But he says the real threat is the Earth System crisis, and companies are underinvesting in this area, which could come back to haunt us all. As Durach concludes:
“Everybody seems to be focused on getting supply back on track. It looks like most management efforts these days are focused on that, ignoring the central challenge of the climate and biodiversity crisis that will affect us all in the near future and change the world we live in. It should be clear to everyone that the real purpose of a company is not to maximise profits, but to provide society with what it needs, while respecting the limits of nature.”