Rolling thunder of disruption

THE UK was shocked by fresh food shortages in February, the latest in a long series of instances where our modern, seamless, first world supply chains somehow fall short.

Speaking at Supply Chain Resilience 2023, a conference in March organised by Logistics UK, Professor Alan McKinnon tackled the issue, saying it was simplistic to only blame Brexit.

“I’m based in Hamburg and the shelves were full,” says Alan. “But it isn’t just down to Brexit. It’s a very complex picture, and severe weather in Spain and North Africa, as well as high energy prices in the UK, causing farmers to delay or scale down productions, both had an impact. That said, Brexit plays a part, with other markets given preferential access to resources at times.”

The key takeaway from Alan at the conference was to be mindful of the complexity of supply chains and the variety of risks. Alan attempted to highlight some of the risks, some obvious, some less so, many of which are somewhat under the radar.

One such risk is the cyber attack.

A Business Continuity Institute survey from this year, queried concerns about supply chain resilience over the next five years. Cyber attack and data breach was ranked highest at 55.6%. Indeed, there have been devastating cyber attacks in recent years. 

Maersk lost an estimated $300 million due to business interruption after its systems were infected by the NotPetya ransomware. Developed initially by the Russian military as a disk-wiping cyber weapon, it is believed Maersk was collateral damage after the malware was used to target Ukrainian businesses.

In the wake of the crisis, Maersk’s chief executive Soren Skou, told the Financial Times: “We have done a lot to harden our defences and we will do more. We will increase our ability to isolate hacker incidents and rebuild [systems] faster.”

Alan McKinnon explains: “We are digitalising our supply chains and this is increasing their exposure. This is the dark side. It’s not just criminal attacks, it can be accidental, or malicious damage form disgruntled employees, and it can be geo-political. There is a lack of awareness, and a lot of complacency in this area. Just consider that 475 undersea cables carry a vast amount of internet data, including financial transactions. A few cable cuts could take out large swathes of the Internet.”

Iain Forbes, director of logistics and borders at the Department for Transport, also spoke at the Supply Chain Resilience 2023 conference.

“We’ve seen the hidden wiring become visible,” he says. “Supply chains are receiving a lot more attention in government than they used to. As a consequence, the Government published the Future of Freight Plan last year.”

Climate change

Alan also sees climate change, biodiversity loss and ecosystem collapse as having the potential to further disrupt supply chains. 

The Intergovernmental Panel on Climate Change (IPCC) stresses the urgent nature of the moment. Beyond certain global temperature increases some climate adaptation measures will no longer work. In addition, it is estimated that it is 20 times cheaper to mitigate than suffer the consequences of climate change.

Alan explains: “When we look at the climate disaster scenarios from scientists, it’s like a peer-reviewed disaster movie. In terms of the relationship between supply chain resilience and decarbonisation, the good news is that there is good practice common to both, such as improving supply chain visibility, which is as useful for measuring carbon emission levels as it is for assessing risk profiles. Promoting supply chain collaboration can also lead to initiatives that both mitigate risk and carbon emissions.”

Logistics UK’s Michelle Gardner expressed concern that Government could do more for alternative fuels, and to support companies in their supply chain decarbonisation journeys. Tax breaks on clean fuels are minimal. The relief available for using biomethane is relatively low and due to be reviewed in 2025, while HVO (hydrotreated vegetable oil) comes with no incentives.

“Companies fear going down a blind alley, and investing in fuel and its infrastructure, only to see the Government withdraw support down the road,” explains Michelle.

XPO finance director Simon Evans, adds: “The approaching phase out dates for diesel are key for fleet renewal plans. Electric infrastructure for charging HGVs is non-existent at the moment. It’s a major challenge to charge a very large battery in a short space of time, to facilitate double shifts.

“Collaboration could be key, we might see shared hubs. A big investment is needed and we are not expecting too much from Government.”

Globalisation in reverse?

Alan McKinnon is cautious over talk on de-globalisation, noting there is little evidence of it in trade data. He places those who perceive and predict this trend into two camps. The structural camp sees a longer term reconfiguring of supply chains that had over-reached themselves and become too vulnerable and unsustainable. The poly-crisis camp sees de-globalisation as a short-term reaction to a series of shocks that have happened to coincide, suggesting that the deglobalisation trend may be temporary.

Alan says: “The debate tends to be over-simplified and there are many divergent views. Some think it is not happening, others think it will.”

Much of the de-globalisation trend can be summarised as fear and suspicion of China, leading both to re-shoring and friend-sourcing.

James Hookham of the Global Shippers Forum said he had observed decoupling from China and friend-sourcing, certainly from North American firms. However, he sounded a note of caution on the trend.

“It’s not as easy as it sounds, a manufacturer, for example, could be in the middle of a contract. Also, when manufacturing was outsourcing, intellectual property went with the contract. The IP has since typically gone through many iterations, and manufacturers would have to secure licenses to patents to resume production.”

Alan adds that a problem with friend-sourcing is that it can be difficult to define who friends are, friendships can shift over time, and according to circumstances. 

He also explains that a China-centric approach fails to recognise the complexity of reality. 

“People sometimes imagine the supply chain as essentially made in China, and shipped straight to the US and Europe, but there are many value added links.”

There are some strategic vulnerabilities that need to be addressed, however. For example, the Taiwan Semi-conductor Manufacturing Company (TSMC)’s main facility in Taiwan makes some 80-90% of the world’s advanced chipsets. In response, the company is building plants in the USA, Germany and Japan.

The renewable energy supply chain, with its reliance on batteries, also highlights supply chain vulnerabilities. The majority of the world’s batteries are made in China, 56% of battery-grade cobalt is mined in the Democratic Republic of Congo, and 80% of cobalt processing in China. This is a series of potential bottlenecks that arguably create a greater sense of dependence than in the oil supply chain.

Alan says: “Gartner is pushing multiple sourcing, rather than single sourcing, but it can come with its downsides, in the sense that it can potentially spread rather than eliminate risk.

“There is also an issue in terms of understanding who your suppliers are beyond the second tier of the supply chain. A McKinsey survey highlighted that only 2% of businesses have this knowledge.”

Conclusion

This lack of knowledge perhaps suggest that our long established just-in-time supply chains were not so much robust, as merely untested. This article hopefully gives a flavour of the breadth of risks at play, and can help in building resilience. 

“When we look at the climate disaster scenarios from scientists, it’s like a peer-reviewed disaster movie. In terms of the relationship between supply chain resilience and decarbonisation, the good news is that there is good practice common to both, such as improving supply chain visibility.”