Supply chains in the age of scarcity

In recent months, several respected (or at least large) media outlets have started calling the […]

In recent months, several respected (or at least large) media outlets have started calling the post-pandemic, Ukraine conflict era the Age of Scarcity. Indeed, from the perspective of supply chain managers the disruption to sources of supply will characterize supply chain re-alignments for the next several years. The current era demonstrates how quickly trade relationships can unravel.

For supply chain managers, this translates to supply disruptions driven by factors that are both difficult to predict and difficult to manage. A brief perusal of news headlines reveals a wide-ranging list of culprits: the pandemic, international relations, politics, technological disruptions, war, climate change, labor relations and raw material hoarding. There’s also the time lag for building up new infrastructure to meet the exploding demand of a global middle class.

All these factors drive an era of inflation accompanied by reduced choices for global consumers. Coming from an era when Westerners have had a huge variety of goods competing for their attention to an era of both reduced quantity and variety will be a shock as much for supply chain managers as for consumers.

Few things erode value and profits like inflation. Inflationary periods are particularly dangerous for companies because so many managers and leaders want to attack the price increases directly. They try to draw a line in the sand on cost increases with their suppliers, which is understandable on the one hand yet can drive suppliers to cut corners or reduce service levels.

When investments become more expensive and riskier, paradoxically those who perform better often spend more (and not just because of inflation). Their secret is that they are more strategic about how they spend, and they do extra due diligence regarding the value proposition, Value = Revenue Generated – Expense. As the old saying goes, buy well, pay once—buy poorly, pay often.

Navigating an era of inflationary pressures will drive more companies to re-look at their sourcing strategies.

Take a look at this quote: “Threats of resource depletion and raw materials scarcity, political turbulence and government intervention in supply markets, intensified competition, and accelerating technological change have ended the days of no surprises.”

Peter Kraljic wrote those words in his eponymous Harvard Business Review article in 1983. His advice for how to deal with supply disruptions coming out of the turbulent and inflationary 1970’s still applies today:

  • Structure your supply chain so as bolster effective relations.
  • Invest in effective decision support systems—especially important in an era defined by technology.
  • Improve the staff and skill requirements.

We are living through the biggest re-alignment of supply chains and trade in world history. The combination of increasing interest rates and tightening monetary policies at a time of peaking global middle class demand and insufficient sources of supply assure inflation will continue for the next several years.

Achieving flexibility, stable sources of supply, and controlling costs of inputs will require a more entrepreneurial mindset among supply chain managers. Most importantly, paying attention to relationships will determine the fates of many companies—relationships are far harder to imitate than decision support systems or staff while returning the greatest pay-offs.

 


The original article can be found at: Supply Chain Management Review