How to reinvent supply chains in a new global economic order
The key is investing in leading-edge technology that enables resilient, relevant, and responsible supply chains Image: Unsplash/Mika Baumeister
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- The COVID-19 pandemic and the war in Ukraine have caused significant disruption to supply chains as well as economic losses.
- Supply chains are critical to European growth so solving any issues that impact them is vital to rebuilding economies post-pandemic.
- A supply chain reinvention is required to make them more resilient and future ready as a new economic order takes shape.
The combination of COVID-19 and the war in Ukraine has the potential to significantly impact Europe’s economy. Despite expert consensus being that Europe will avoid recession this year, the war is expected to cause a material deceleration in growth.
During the pandemic, we had already faced significant supply chain disruption and, before the Ukraine–Russia crisis, expected some kind of normalisation in 2022 and partly 2023 for specific products.
The pandemic was slowing growth before Russia’s invasion, with disruptions costing major economies €112.75 billion in lost gross domestic product (GDP) in 2021 and inflation climbing. A protracted war could lead to an additional GDP loss of up to €318 billion in 2022 and up to €602 billion in 2023, according to Oxford Economics.
This shows how critical supply chains are to European growth. For instance, the automotive industry represents over 8% of the EU’s GDP, and with 80% of its growth expected outside the EU, solving supply chain issues is crucial to the sector and our economies.
Rising post-COVID demand and labour shortages
Resurging demand and precautionary hoarding overwhelmed supply chains, with bottlenecks undermining the rebound in industry. In Germany, car production in the first months of 2022 was down 32% compared to 2019 due to chip shortages.
Also, transportation bottlenecks have aggravated input shortages and sent costs skyrocketing. For example, container shipping rates remain 10 times above June 2020 levels.
Added to the lack of materials and breakdown in logistics, labour shortages, which prevail across manufacturing, construction and logistics, pose longer-term challenges. Europe’s HGV driver shortfall, which has reached 425,000, gives a sense of the problems organizations face.
The war is exacerbating these three main challenges and hitting economies by pushing up energy prices, impacting energy-intensive industries such as utilities, transportation and freight, and chemicals.
Industries also face interruptions to non-energy Russian imports, including metals used in electric vehicles and airplanes, as well chemicals and fertilizers. Ukraine supplies Europe with cereals, animal and vegetable products, and oil seeds; exports iron ore; and produces the neon needed to make chips.
The stakes of continued disruption are high, but resolving problems will take time and industries are being hit unevenly.
How Ukraine war may impact supply chains
The characteristic feature of the crisis is uncertainty, with unpredictable impacts on businesses.
To help them prepare, we modelled three potential scenarios reflecting varying GDP and consumer price index (CPI) rates to compare conditions before the Ukraine war against potential cases.
The best case scenario is a controlled impact in which sanctions against Russia do not escalate and could even be scaled back, alleviating disruptions. Unfortunately, this controlled impact scenario has elapsed.
Commodity prices would return to pre-war levels, confidence currently at rock bottom will increase, and investment plans and spending will resume.
A second scenario, which is the current baseline, foresees an ongoing impact of disruptors in which the supply chain of key commodities remains volatile throughout 2022. Jobs would continue to be created, with employment increasing by 1% in the UK and Germany, and 0.5% in France by 2023.
Under this scenario, select countries would impose an oil and gas embargo on Russia and commodity supply shocks would sustain a rise in prices. Consumers would cut back on non-essentials and businesses would prioritize efficiency.
Impact of Ukraine war continuing into 2023
The worst-case scenario would be the war extending into 2023. This would have a protracted impact, with 2.8% of European GDP growth shaved off pre-war expectations this year to bottom out at 1.1%, and further stagnation next year. Inflation could increase to 7.8% before retreating in 2023.
This situation envisages a wider oil and gas embargo leading to structural supply disruption, with commodity prices staying high and volatile into 2023. Sustained price rises would hit consumer spending, depressing confidence and growth.
The time it takes to mitigate supply chain challenges and the associated costs will vary. In the worst case, it will take 24 months to ease disruptions in the supply chain and could cost up to €920 billion.
Improve supply chain resilience
Supply chains drive European growth, yet operating models are not equipped for uncertainty.
This Ukraine–Russia crisis will have a significant impact as we are looking at more disruptions for longer; the severity will need to be assessed for each scenario but all of them will require a more fundamental supply chain reinvention around security of supply, energy transition and the labour market, and a different level of agility, to address the emerging economic landscape.
Resilience requires real-time end-to-end visibility, aided by control towers, across the extended supply chain, including tier 2 and tier 3 suppliers. Data and analytics can accelerate decision-making, boosting competitiveness, with frontrunners creating digital twins of supply chains to test responses.
And to prepare for unknown risks, companies must move from a just-in-time to a just-in-case approach, diversifying supply bases, planning alternative freight routes, making distribution centres flexible and building inventory. It comes at a price, but in testing times, this ‘insurance policy’ makes sense.
Supply chain reinvention needed
A reinvention of supply chains is required to address a paradigm shift — supply chains were designed mainly to optimize costs, while in today’s world, they must be more resilient and agile to respond to increasing supply uncertainties, while also becoming a key competitive advantage to enable future growth.
To capture growth opportunities, “future-ready” supply chains must be relevant, enabling customer-centric and tailored experiences. Moving from centralized, linear models of supply to decentralized networks that use on-demand production, and in some instances, bringing production closer to the point of sale, can help organizations better meet customer expectations for order fulfilment.
They must also be sustainable, which means demonstrating a commitment to address environmental and social issues, including by reinforcing partners’ efforts to enhance sustainability across the entire product lifetime. Transparency will be critical to create trust with all stakeholders.
How is the Forum helping to navigate global value chain disruption?
The key is investing in leading-edge technology that enables resilient, relevant, and sustainable supply chains – from digital twins and analytics to control tower algorithms. The cloud will also be critical, providing vast computing power in a cost-effective, flexible and sustainable way.
Nothing short of reinvention is required, as a new economic order takes shape amid an inflationary environment, increased regionalization, the energy transition and a tight talent market.
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