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Wholesale Banking

How to ease the pressure on supply chains

The Covid-19 pandemic, a series of extreme weather events in recent years, and now the war in Ukraine have revealed the weaknesses of global supply chains. But this in turn is creating an opportunity for companies to build resilience to future shocks.

factory production line

It’s no exaggeration to say that global supply chains were upended by the Covid-19 pandemic and subsequent lockdowns around the world. This has been amplified by subsequent events such as the war in Ukraine, causing further supply chain disruption and global shortages of crucial commodities such as oil, natural gas, wheat and sunflower oil.

At the same time, extreme weather events – from floods, wildfires, hurricanes and earthquakes, to record-breaking rainfall and temperatures – are also affecting supply chains, for example by destroying crops or damaging vital infrastructure such as roads and rail links. One recent example is the severe flooding in South Africa in April 2022, which shut down one of Africa’s busiest shipping terminals for several days, leading to a substantial backlog of containers.

Such environmental catastrophes are likely to increase as the world warms, with the latest report from the Intergovernmental Panel on Climate Change (IPCC), published in April 2022, bringing home the realities of climate change and its impact on people and businesses around the world.

So where do these dire circumstances leave supply chains, and how should businesses seek to build resilience into their supply chains moving forward?

Important risks revealed  

Looking back on the past two ‘pandemic years’, supply chains worked relatively well at the height of Covid-19. Joanna Konings, senior economist, international trade at ING, points out that crucial medical supplies, such as PPE (personal protective equipment) and vaccines, quickly got to where they needed to be.

Still, it revealed important risks that many companies were not prepared for. Problems often arose in the last stage of the supply chain, when home-delivery drivers were unavailable because of illness or because they were obliged to isolate.

Konings says: “The pandemic showed companies where their supply chain dependencies are, which parts of the chain can be affected, and which costs are really volatile. It forced companies to review their supply chains, and that is valuable.”

The grounding of a container ship in the Suez Canal just over a year ago highlighted the vulnerability of global supply chains. “The disruption it caused lasted much longer than the Suez Canal was shut,” says Konings. “In a system working at maximum capacity, it’s very difficult for supply chains to recover. Because the system is at full stretch, there’s no ability to respond flexibly.”

Only experience prepares you

In part, this is because it’s only by experiencing a pandemic that you can prepare for it. For years, political and business leaders had warned about the dangers of a pandemic, “but putting a risk down on paper is one thing: no one had thought through how it differs from other risks,” she adds.

Sectors that rely on just-in-time inventories, such as automotive, were particularly vulnerable. “Car- makers were subject to early shocks as Asian countries locked down quickly, preventing their inputs from reaching factories. Then factories shut as demand collapsed. And they had to cope with different countries reopening their economies at different rates,” Konings says.

Car-makers, already grappling with the switch to electric vehicles, were also hit hard by the ongoing global shortage of semiconductors. While Covid-19 disruptions played a significant part in shortages, it is also partly a climate-change issue, she adds. “The major producers in Taiwan faced significant water shortages and heat issues that affected production.”

Technological fixes

One area where there is real potential to improve supply chains is in applying technology, particularly digital technologies, to a sector that is “still unbelievably paper-based”, says Konings. “There are big gains to be made by bringing more transparency to the process and getting everything online. Sharing documents digitally means you no longer need to have everything on paper, in triplicate. Digitalising trade facilitation could offset a lot of the price rises we’ve seen, as well as reinforcing the case for global supply chains.”

It is also possible to apply technologies such as robotisation and 3D printing to bring production closer to home, but Konings says the impact will be limited. “Robotisation is happening much quicker in China than anywhere else, while 3D printing is still a way off being able to cope with mass production,” she says.

“Firms are not really looking at reshoring – the process of returning the production and manufacturing of goods back to a company’s original country – they’re thinking about how to survive disruptions and finding alternative suppliers.

“Reshoring doesn’t necessarily make production more resilient. The supply shocks from the pandemic would have been worse if no one had been able to trade, or if we’d been unable to transport vaccines around the world. If you only produce domestically, you are more vulnerable to domestic shocks. Having a complete value chain increases the ability to weather volatility by distributing risk.”

Preparing for future risks

While companies are currently focused on the physical risks of climate change, there is a need for a broader attitude to risk. Companies often focus on the risks they have just experienced, while ignoring important potential risks, such as cybercrime and terrorism.

Banks have a key role to play in sharing risks, Konings explains. “Companies look at measures they can take to mitigate emissions because that is needed to address the impacts of climate change. But once those impacts arise, companies also need enough capital to get them through the upheaval. Otherwise, entire products become unviable because they can’t get through a short period of disruption. It’s crucial for companies and banks to assess and address these unforeseen risks, as we’ve all seen in recent years that the unexpected can happen at any time.”

This article has been updated and adapted from ING-WSJ custom content