Supply chains are undergoing massive upheaval and more and more information points to a continuing downward spiral in global trade. Here are current insights on the change in the supply chain.
After two consecutive quarters of declining trading activity, companies around the world had expected good news. They didn’t get it.
Tradeshift’s latest Index of Global Trade Health found that trade activity fell sharply for the third consecutive quarter in the retail, manufacturing, and transportation and logistics sectors. Although the latest index was bolstered by a relatively strong showing in the U.S., supply chain activity declined another 5 points from baseline in the third quarter. The decline was caused by a slowdown in new orders as inflation-related costs and global uncertainties increase.
It’s hard to find a bright spot amid the ongoing downward spiral – but perhaps that’s not the point. Global trade is in a state of upheaval. Like other historic revolutions, this one takes no account of reputations. Even the biggest brands are vulnerable if they can’t respond quickly to new challenges such as changing trading conditions and new regulations. But this upheaval also presents an opportunity for companies – provided they understand what’s coming and are able to respond effectively.
A new kind of pressure
The good news is that supply chain bottlenecks are easing and shipping costs are falling. The bad news is that this is largely a result of dwindling demand. And that trend appears to be accelerating.
Global order volume fell another 7 points below expected levels in the third quarter, following a 6-point decline in the previous quarter. This is the sharpest decline in six months since the height of the pandemic. Manufacturing and retail trade were the hardest hit, while activity in the transportation and logistics sector slowed significantly for the second quarter in a row.
The lack of new orders is hitting smaller suppliers hardest, who until recently have struggled to ramp up production in the face of spikes in demand. When demand collapses, they face a combination of high inventories, high costs and low liquidity. If suppliers run into financial difficulties and give up, the problems that supply chains faced during the pandemic could be repeated.
Maintaining agility: Danone shows how supply chain digitization pays off
The global context of falling demand and rising prices is important, but so are companies’ responses to this period of uncertainty. This month’s Index features an interview with Niels Boersema, Supply Chain Integration Director at global food giant Danone. Niels Boersema highlights how the company’s investments in risk mitigation and forecasting technologies are starting to pay off.
“We don’t want any surprises, and that means setting up systems that give us a wide range of alerts, not just on the big issues, but also on smaller and emerging issues,” Niels says. “We know that some issues are not so easy to mitigate. For example, it takes time to find a replacement supplier, so we look much further into the future and look at a 12- to 18-month period, rather than just 3 to 6 months.”
When companies are dealing with complex, multi-tiered supply chains, they need to be able to manage relationships and risks all the way to the source. This is not possible without some level of automation to offload low-value manual tasks and enable talented employees to use their skills to analyze and mitigate risks with first, second and third-tier suppliers.
“It comes down to agility,” Niels continued. “We need to focus on building agility into the system so we can take the right actions when deviations emerge. The key is to be able to imagine different scenarios so we’re better prepared when something completely unexpected happens.”
Visibility and flexibility go hand-in-hand and are key components of the resilience that supply chain operators must build to cope with the regular shocks that characterize today’s hectic macroeconomic environment. And as the moral, ethical and sustainable credibility of companies comes under increased scrutiny, the demand for transparency across the supply chain ecosystem becomes more urgent. Ignorance does not help when standards misconduct goes public.
A recent news story shows how new risks can emerge without warning and pose an immediate threat to the reputation of companies that do not have top-notch communications and complete transparency in their supply chain.
From the headline-grabbing conflict in Ukraine to the U.S.’s (undeclared) war against Iran, the use of drones is changing warfare. And it’s a recent development in the latter theater of war that should make global companies sit up and take notice. In September of this year, it was revealed that Iranian-made Shahed-131 kamikaze drones were equipped with semiconductors made by American manufacturers.
The key lesson here is how governments will respond to continued opacity and lack of accountability within supply chains. It is likely that scrutiny and regulation will increase significantly, making procurement even more complex and most likely leading to further whipsaw effects in the global economy. Indeed, this is already the case.
As a result, there will likely be a stockpiling of unregulated products as buyers around the world try to anticipate the Chinese response or further U.S. regulations. Each new regulation or export barrier is another hurdle to overcome, increasing inefficiencies, making forecasting more difficult, and driving up prices across the board.
Finally realign supply chains
The only way to combat these new threats is to tackle legacy IT systems and strategies that were based on the relative stability that prevailed in the decades leading up to the pandemic. Digitize the networks that connect businesses and create a global “cloud OS” for B2B commerce. In the long run, finance, FX, and payments will have to follow the same path or suffer from the same problems.
Those waiting for these global storms to pass are looking in the wrong place for a remedy. There is hope, and it lies in businesses embracing the revolution in the way they connect with each other. The world may never be as stable and secure as it was for decades – but companies now have the means to build transparency, flexibility and, perhaps most importantly, accountability into all their trading relationships.
Author: Christian Lanng, CEO of Tradeshift