Supply Chains – When Did it All Become so Complex?

Disruption

Global supply chains have faced a decade of disruption. Natural disasters, geopolitical conflicts, and even unforeseen events like the COVID-19 pandemic have introduced volatility and uncertainty into supply chain operations.

The recent Francis Scott Key Bridge crash illustrates how one unforeseen accident can blindside local supply chain activities. The Dali and debris blocked access in and out of the Port of Baltimore, the US’s 17^th largest and furthest inland port, leaving vessels stranded in the water and ships outside the blockage rerouting to other East Coast ports².

The waterway in Baltimore will not be used until investigations are concluded, the wreckage is dismantled and removed, and the infrastructure is restored to operational safety. This action could take months, with trade in autos, coal and machinery likely to be most affected.

Closer to home, food industry bodies in Europe and the UK are warning of impending supply chain disruption as Britain introduces new border bureaucracy on EU food and drink and imports for the first time since Brexit.

The introduction of complex paperwork to certify all EU products of plant and animal origin entering the UK from the end of January has placed additional pressure on the supply of several products, including pork and sugared liquid eggs used in cakes and sauces.

The introduction of the new border controls, with physical inspection that commenced at the end of April, will see European companies grappling with border bureaucracy for the first time since the EU-UK post-Brexit trade deal came into force in January 2021. The British government has delayed the introduction of the checks five times since 2021, but now says the border is essential to both deliver biosecurity and level the playing field for British business in its interactions with Europe³.

Geopolitical unrest

Over four billion people, nearly half of the global population, are set to go to the polls in more than 60 countries around the world in the next couple of years. As Gallagher’s recent Spotlight on the relationship between elections and civil unrest, Caught in the Crossfire (LINK) notes, it is a tinderbox for political uprisings.

This year’s Allianz Risk Barometer places political risk and violence in eighth place, (up from #10 a year ago). Political violence, it notes, is “an increasingly relevant source of risk for supply chains and international trade”⁴.

Political unrest and shifts in supplier countries are challenging supply chains, forcing businesses to reconsider their supplier relationships and routes. Trade tensions between the US and China have been ongoing since 2018 and could become exacerbated further with a Trump victory in November. As is often the case, this pressure has reverberated along the trade routes. On 22 March, the UK Foreign Affairs Committee criticised the UK Government’s refusal to publish an unclassified China Strategy, arguing that it leaves businesses in a state of uncertainty.

Chair of the Foreign Affairs Committee, Alicia Kearns MP, said: “Successive UK governments have been naïve about the consequences of deepening our ties with China, particularly when it comes to cooperation on technologies and critical national infrastructure. It is now evident that business with China comes with strings attached, even if they are not immediately apparent⁵.”

Some G7 countries have already taken action—Japan set aside USD2 billion to support companies that move production out of China, while Germany has called for an international response to protect the rules-based world trade through building supply chain resilience⁶.

The UK has also taken steps to enhance engagement and bolster resilience with developing countries by diversifying the sources of supply for their critical imports. The UK government has signed some of the simplest and most generous trading arrangements, including duty-free or nearly duty-free trade in goods, with over 90 developing countries through their Economic Partnership Agreements and the Developing Countries Trading Scheme⁷.

Capacity

In the current economic climate, the logistics sector is experiencing significant volume decreases, raising concerns about potential insolvencies and their impact on supply chains. Freight rates have fluctuated significantly in recent years, impacting supply chain decisions related to volumes, routes, sourcing, and storage.

While global supply chains experienced some upward pressure in 2023-24, the NY Fed’s global supply-chain pressure index is still below its historical mean⁸. This somewhat surprising finding indicates that some shipping capacity is still available despite the security challenges in the Red Sea and the issues relating to the drought in the Panama Canal.

Supply chain strategy

In response to the growing potential for disruption, businesses are constantly reevaluating different supply chain strategies, such as just-in-time manufacturing, dual sourcing, and stockpiling, weighing the pros and cons of each approach.

British manufacturers are bringing back production to the UK in a “reshoring” push to try to address the supply-chain chaos caused by the coronavirus pandemic and Brexit. Over two-fifths (43%% of companies increased the number of their British suppliers between 2020 and 2022, according to a survey by Make UK⁹.

The nearshoring strategy is also gaining popularity. In a recent survey, 71% of the chief procurement officers plan to increase their nearshoring share by 2025, and 24% are considering nearshoring in the same market where they currently operate¹⁰.

Over the last few years, businesses have adopted new risk management tactics. Many have begun diversifying their supply chains, turning away from single-supplier sourcing and supplier consolidation. This approach tackles regional and global uncertainties head-on, equipping businesses with the flexibility and agility to drive resilient supply chains.

Many businesses have pursued supply chain optimisation in recent years, seeking to improve their pricing and ensure a consistent level of quality by working with a single supplier. However, this approach can conflict with effective risk management. Some clients have recognised the potential risks associated with relying on a single source and have begun shifting away from this model in recent years.

Some companies can diversify to self-sufficiency to mitigate supply chain volatility. The world’s largest electric vehicle manufacturer, BYD, chose to combat the shortage of car carriers by buying its own ro-ro car carrier, EXPLORER NO.1, which took its maiden voyage in January this year. The Chinese company intends to expand its fleet by adding seven vessels over the next two years¹¹.

While this option would not be financially feasible for many companies, another Chinese auto manufacturer, SAIC Motor, has also recently followed suit. Chinese company Chery attempted the same move in 2007, acquiring a ship-building business, but the financial crisis delayed plans for roughly a decade. Now, the state-owned auto manufacturer owns two shipyards.

Supplier relationships

Building stronger relationships with suppliers has become crucial for UK companies. However, some businesses are yet to map the full extent of their supply chain to include goods, components, materials and services relating to tier one and beyond. The silicon chip business is a good example where multiple tier-one supplier options may exist, but then they might all rely upon a single source for one component. Missing the full complexity can lead to the loss of customers before an event even triggers a disruption; many production contracts demand visibility of continuity and priority status when supply is in jeopardy.

Some clients have requested Gallagher create a questionnaire for their suppliers to complete to establish their business continuity arrangements. We encourage all clients to conduct business impact assessments, which involve asking their key suppliers what their continuity arrangements are. If these businesses are key suppliers, then you need to know if they have multiple factories/locations where they can make your product.

In many areas, there will be a host of alternative suppliers that could be utilised. However, that is not always the case with certain components and materials, and businesses may want to consider identifying alternative sources.

Yet, one of the challenges clients face when considering alternate suppliers is whether they need to go through a qualification process. Alternate suppliers may want to prove that they are capable of supplying the product or service and typically require a certain percentage of the actual demand before committing. They are often not content to be there "just in case".

Even with multiple supplier options, product supply may still be restricted by specificity, geography or seasonality. The growth of supply chain optimisation in our global marketplace may have improved pricing and quality, but it can also conflict with effective risk management. Sometimes there just aren't options for an alternative source because the product is so specialist or has been developed with a specific supplier. For example, a scientific instrument manufacturer may own the intellectual property, but the device supplier may utilise specific tooling, meaning it cannot be produced by anybody else.

Conclusion

In conclusion, the globalisation model that has dominated post-1945 seems to be fading. Businesses are making decisions based on far more than profit and loss, and costs are consequently increasing. For instance, some companies are now deciding to diversify their manufacturing away from China after decades of dependence on the country.

Governments are also stepping in to regulate supply chains, and their policies are increasingly focused on national security priorities. This has resulted in both cooperation and competition between nation-states for access to critical supply chain components, ranging from minerals and food to intellectual property and investment.

Businesses must be prepared to navigate disruption, constraint, unrest and catastrophe. With careful planning and adaptability, businesses can mitigate these challenges and ensure the smooth delivery of goods. Proactive risk management is key to this. Mitigation is vital, but risk transfer options are available. Gallagher can support clients in exploring the entire spectrum of tools available to build more resilient supply chains that can withstand the unexpected and continue to deliver value to their customers.

Webinar: Could your supply chain be at risk from criminal activity?

Join our webinar on Tuesday 2 July at 12 p.m. where Simon Davison, Director of Investigations for Another Day, will be examining the threat of criminal activity and organised crime in supply chains across the globe.

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