Don’t Believe the Hype – Global Supply Chains Aren’t Back To Normal
By James Stirk, Tradeshift
Business leaders watching this year’s Oscars ceremony may have afforded themselves a wry smile when the film ‘Everything, Everywhere All at Once’ won the Best Picture award. If ever there was a title for the ages, this was it.
In March this year, analysts at the Federal Reserve Bank of New York called time on a period of disruption that has left supply chains battered and bruised. Their February Supply Pressure Index tipped into negative territory for the first time since August 2019, something the New York Fed says points to a broader normalization of supply chain activity.
On one level, it’s hard to disagree. Our Index of Global Trade Health has shown a broad slowdown in trade activity for the past year. A general economic downturn, combined with the opening of key freight routes out of China, has taken the heat out of overburdened supply lines. That trend continued in Q1, with global transaction volumes across our network tracking below the expected range.
Activity across the transport and logistics sector has also softened. Total transaction volumes across the sector finished 9 points below our baseline, putting activity firmly in contraction territory. Specific sectors, notably food supply, are still suffering from shortages. For most businesses, however, securing the goods they need is becoming easier.
Supply Chains Caught Out by Demand Shift
Normal remains a reasonably broad spectrum, however. Spare a thought for the toy manufacturer who recently had to incinerate $30 million of unsold stock it could no longer justify keeping in warehouses.
A post-pandemic bullwhip cycle left supply chains working through a chronic case of indigestion in the second half of 2022. Quarterly trading updates across the US have been awash with stories of excess inventory hitting bottom-line performance.
Research by HSBC claims companies increased inventory by an average of 39% in the past two years to mitigate against severe disruption. But in a slowing economy, keeping warehouses full of inventory no longer stacks up.
Order volumes on our platform dropped sharply in Q4 as buyers sought to wipe the slate clean. We now see evidence that this bonfire of orders is hitting suppliers. Invoice volumes on the Tradeshift platform fell to 7 points below the baseline in Q1, the most significant reversal in two years. Suppliers will feel this in the form of lower cash flow at a time when working capital is already under pressure.
The good news, both in the US and at a global level, is that we’re now seeing evidence that order volumes are trending upward again, suggesting a period of readjustment that, while painful, is at least temporary. The bad news is that there is every chance that this cycle of feast and famine will repeat itself over and over again.
The Need for Agility in an Age of Uncertainty
The current inventory glut is symptomatic of the lack of agility within supply chains that has left them unable to adapt quickly enough to shifting conditions. There aren’t many people out there who could have predicted a pandemic sending the world into lockdown, but the reality is we live in a world where even a single viral video on TikTok can send demand for a specific product line into overdrive overnight.
Long-term planning has become an anachronism, and that’s a problem for supply chains, which tend to be slow-moving and slow-reacting to external stimuli. Agility is the only antidote.
Embedding agility into supply chain management begins with the connection between buyer and supplier. Consensus has long been building around the need to digitalize these relationships to enhance visibility across the supply chain. Many companies are already seeing the benefits of investments in this area. Niels Boersema, supply chain integration manager at Danone, uses the digital connection between Danone and its suppliers to share real-time inventory and forecasting information with suppliers. Niels and his team also translate that information into raw materials forecasts, which can then be shared with suppliers further down the chain.
From Linear Supply Chains To Diverse, Resilient Ecosystems
Large organizations are also ramping up their efforts to move away from highly globalized supply chains that lean heavily on single-sourcing towards shorter models built around a more diverse group of suppliers. Analysis of quarterly US earnings calls in Q4 2022 showed a 122 percent jump in mentions of nearshoring (transferring a business operation to a nearby country, in preference to a more distant one.
Our data shows that Mexico has been one of the key beneficiaries of the shift, with transaction volumes across the region rising at five times the global rate over the past year. India and Vietnam are also benefiting from the ‘China +1’ strategy that has gathered momentum in the wake of Covid-related lockdowns and Sino-US geopolitical tension.
Shorter, more diverse supply chains make a lot of sense from a risk mitigation perspective. Onshoring and nearshoring of supply lines could also lead to significant reductions in shipping, which are a large cost center in highly globalized supply chains. One study by McKinsey found that adjusting transportation modes and routes and distribution footprints around trade tensions, tariffs, possible customs-clearance problems, and likely disruptions can lower transportation costs by some 25 percent.
Emerging Technologies Can Drive Diversification at Scale
Reconfiguring long-established supply chains is no easy feat, however. Another study by McKinsey found that completing a single supplier search takes about three months, with a sourcing professional logging more than 40 hours of work. Stories of burnout among procurement teams are already on the rise.
Like many of us, I have been enthralled by the emergence of generative AI this year, and the applications of such technology seem obvious when it comes to accelerating the process of identifying and shortlisting suitable suppliers. The emergence of a growing number of specialist B2B marketplaces that connect buyers to pre-vetted suppliers in distinct categories and locations also looks set to displace 20th-century sourcing technologies that do very little to expedite the process of identifying, vetting, and onboarding new suppliers.
Time To Take Control of Change
Disruptions may not be headline news in quite the way they have been over the past two years, but according to research from Capgemini, supply chain risk is still the biggest challenge keeping business leaders awake at night. Rightly so.
Supply chains operate best when the world is peaceful and stable. And that’s not the case. Companies that continue to make investments in technologies that can help them mitigate their supply chain challenges will have a huge competitive advantage over those that fail to build for change.
