French consultancy KYU Associé’s third annual Supply Chain Risk Barometer, published this week, shows that the Covid-19 crisis combined with a strong rebound in consumption are amplifying what was already an acute situation facing supply chains.
“The magnitude of the recovery in 2021 was nowhere near anticipated. Since the first trimester of last year, markets saw a disruption in supply due to accelerating consumption rates and companies found it more than challenging to meet demand,” summed up KYU Associés Founder and Associate Laurent Giordani. KYU’s Supply Chain Barometer* ranks the top-10 risks facing the supply chain at the onset of 2022. CSR risks, at number 10, is entering into the ranking for the first time.
Lack of Capacity tops the list as the main worry facing industrial players. Growth in consumer demand coupled with shortages in materials and essential components has made for a “silo effect” in the supply chain. Suppliers should be looking to build stock given that these turbulent times are forecast to continue throughout 2022, unless rising inflation curbs consumption rates.
Logistics is the second biggest risk factor due largely to what KYU aptly defines as a “traffic jam on a global scale”. Lockdowns in China shut down key ports for days if not weeks, while the Canal Suez chokepoint contributed heavily to what was an already congested logistical situation. The impact goes beyond just maritime shipping, but affects the entire supply chain, resulting in lengthened delivery times and escalating shipping prices. “This will remain a major factor given that demand is still strong, although once again, rising inflation may put a dent in demand. Our forecast is that flow will remain highly disorganized in 2022,” notes KYU Associate Thibaud Moulin.
Cyber risks are a growing concern given that supply chains are increasingly digitalized and interconnected both upstream and downstream. The health crisis has only accelerated this state of things, making supply chains more interdependent than ever.
Industries’ dependency on China has made sourcing risks reach a critical stage. As a result, companies are looking for suppliers located closer to their manufacturing locations, and/or opting for dual sourcing to limit their need for Chinese goods. However, KYU warns that developing new sources requires both time and investment. In addition, some products are simply no longer available outside of Asia.
- Forecasting demand is an uncertain practice at best in the current context. Will a new variant of the virus emerge? How much will political tensions or climate events have a knock-on effect on the global economy and therefore supply? “The majority of forecasting models are based on relatively stable historic data, which don’t make a lot of sense given the huge changes undergone in the last two years. Forecasts allowing companies to make production plans is therefore complex and will remain so throughout 2022,” explains KYU.
- The health crisis will continue to be a risk for the supply chain this year. China’s policy of ‘total’ lockdowns in affected regions means that production can be halted at a moment’s notice and ports shut down, having obvious repercussions on industry.
- Economic crises may be less of a concern for 2022 than in 2021, but with the growth in inflation, it remains a risk for numerous companies due to rising costs (materials, energy, transport), and whether they will be able to pass those costs on to their clients. This could see the disappearance of smaller suppliers, which will add to the existing disorder on the global supply chain.
- Climate change is making natural disasters a growing risk throughout the supply chain. Last year alone, damages from climate-related disasters were estimated at $250bn. The outlook here is, unsurprisingly, bleak.
Controlling product quality remains a concern in a context where rising demand has put pressure on suppliers to ramp up production. “Although the number of returns is down due to the pandemic, potential crises are worrying companies for the years ahead, making them look to reinforce their controls throughout the supply chain,” notes KYU.
CSR risks are entering the top-10 for the first time. The Chinese Uyghur forced labor scandal in the textile industry put the issue of vigilance in the limelight. Legislation regarding duty of care - linked with health and security, human rights and environmental protection - is coming to the fore in Europe. KYU sees this as one of the major issues in the years to come.
How can companies better anticipate these risks going forward? KYU polled its respondents who acknowledged their need to secure capacity to absorb the lack of visibility. Anticipation is another key issue: companies should build their business continuity plans with their suppliers to be able to react collectively when a crisis hits.
Identifying where suppliers and components are located and what logistics and transport are needed to obtain the goods is another solution. “Those companies that are the most advanced in this area have developed ‘watchtowers’ that monitor all their sourcing areas and supply flows. This is something that will have to expand in the years to come,” predicts KYU.
More companies aim to put into place double sourcing, and/or are developing local sourcing. Integrating critical savoir-faire through acquisitions or investments, as the luxury industry has been doing for several years now, is another solution. “Luxury players know that they need to support and safeguard certain areas of expertise. Other industries will take the same route in the years to come.”
Getting production closer to consumer markets, or “multi-locality globalization”, is also catching on. “It’s probable that this trend will persist throughout the crisis and even accelerate as a result of the pandemic. While the crisis laid bare industry’s fragility, it has also exposed the fact that entire segments have disappeared and can’t be brought back. Re-localization makes sense only if it is economically viable or if it represents a truly strategic interest supported by public authorities. Let’s be realistic, we won’t go from globalization, that took 30 years to build, to a de-globalization in just a few years,” concludes KYU’s Giordani.
*The study is a partnership with Arts & Métiers, AMRAE and France Supply Chain