Risk and resilience in the new post-global supply chain environment

In a rapidly evolving global landscape, supply chains face unprecedented challenges driven by geopolitical complexity, climate change, and technological innovation. All major players in international trade now face the critical process of adapting to a new era of heightened volatility and uncertainty by prioritising resilience, regionalisation, and risk mitigation.

The industry in which we work is undergoing a profound transformation with implications for all parties involved in international trade. Supply chain decisions are being driven as much by politics, ideology, sustainability, and risk as by economics. The market is now characterised by Volatility, Uncertainty, Complexity and Ambiguity – so-called VUCA – and everything that we learnt about supply chains is being challenged.

Drivers of de-globalisation

One of the themes of the last decade and beyond has been concerns among the electorate about a lack of democratic accountability - the ‘democratic deficit’, as it is known. This discontent led not only to Brexit but also to the growth of populism in many parts of the world, as many sections of the population feel their concerns are not being taken seriously by ‘globalist’ politicians. This is mirrored in a growing sentiment in the emerging world that globalisation has resulted in greater levels of inequity. These grievances over the distribution of wealth have led to many politicians, most notably President Trump and subsequently President Biden in the US, imposing tariffs and initiating trade wars to attempt to protect domestic manufacturing sectors.

In terms of geopolitics, the West’s dependence on increasingly adversarial foreign countries for critical materials and products has become a major political concern. Security tensions between the US and China have heightened, not least because of China's Belt & Road Initiative, which has allowed it to project soft power throughout the world. The US is increasingly worried about China's military and political expansion, and to address this has moved to prevent the export of advanced technologies to China and its allies such as Russia and North Korea. This is leading to the development of ‘dual supply chains’, so-called ‘friend-sourcing’.

Thirdly, sustainability is at the top of the political agenda. Many in the West are worried about the carbon emissions generated by global value chains – raw materials and intermediate products transiting the world before final assembly and shipping to the end market. There is also the threat of ‘carbon leaking’: that is, the offshoring of manufacturing to markets which do not have the same environmental standards as those in Europe or the US. Western countries are putting in place a range of new regulations and legislation to address these issues – all of which will have cost implications for global businesses.

Fourthly, there are very strong economic reasons why manufacturers and retailers are restructuring their supply chains. Rising labour costs in China have reduced the importance of this key imperative behind offshoring. Supply chain risk has also been catapulted to the top of corporate priorities over the last decade, beginning with the 2011 tsunami in Japan and the floods in Thailand. These events highlighted the threat that dependence on single markets or sourcing from sole suppliers presented. Other economic risks which became evident involved infrastructure weakness, not least the US’s West Coast ports disruption during the COVID-19 pandemic.

Finally, there are the new technologies which make up the Fourth Industrial Revolution. Innovations such as robotics, automation, 3D printing – and AI, of course – are transforming business models and supply chains and reducing the need to offshore production to remote manufacturing locations.

Heightened risk awareness and the realignment of trade

During the pandemic, parts of the international logistics industry were significantly disrupted, highlighting many of the risks inherent in global supply chains. For decades supply chain managers had ignored ‘invisible’ costs, partly due to the difficulty involved in their quantification (as opposed to labour, inventory, and transport costs). These include economic risks as well as natural disasters, climate change, geopolitics, corruption, cargo crime, societal and ethical risks, cybercrime and, of course, pandemics. Add to these other factors, such as the volatile price of oil, the lack of shipping capacity, and the unreliability of transport networks when faced with huge stresses, and a rebalancing of supply chains is inevitable. This means that there is now far more interest in reshoring and nearshoring than there was in the years preceding the pandemic.

This rebalancing has resulted in a changing relationship between economic growth and trade. During the 1990s and for most of the 2000s, trade volumes grew at a rate which was roughly double that of GDP. Since the economic recession of 2008, the ratio between GDP and trade growth has shifted to one of direct parity: 1:1 or less. In 2019, before the onset of COVID-19, global GDP growth grew at 2.5% whilst trade volumes decreased by 0.1%.

A new supply chain paradigm

Over the past few decades, we have already seen a major transformation of supply chains from ‘vertically integrated’ to ‘virtual’ - outsourced, unbundled, and offshored production has replaced in-house and localised. Whilst this has had many benefits, it has meant that strong oversight of processes and controls has been lost. Manufacturing has moved from developed compliance regimes to countries in which governance can be at an early stage of development, impacting labour and environmental standards. High levels of supply chain visibility have also been compromised. Lean inventory strategies have resulted in lower financial risk but, as COVID-19 showed, they also created a high degree of vulnerability to disruptive events.

Rather than a reversion to a high inventory environment, however, I believe a ‘Supply Chain 3.0’ scenario is more likely. One in which vertical re-integration and re-shoring become far more prevalent as companies seek to enhance quality control, reducing risk by locating production in more developed compliance regimes to improve environmental controls and ethical labour standards. This would also increase logistics efficiency whilst reducing transport costs.

Companies are already employing ‘China Plus’ strategies to diversify risk across multiple geographies, and supply chains risk managers are now far more vigilant at identifying dependencies on single and sole suppliers.

In terms of the impact on international trade, I believe there will be far more regional movement of goods, resulting in headwinds to intercontinental trades. The growth of intra-Asian trade volumes is a case in point, as is Mexico’s development as a near-shoring market for the US. In conclusion, trade will continue to grow (albeit not at rates seen in the 2000s) but the patterns of trade will change. All supply chain stakeholders, including those involved in financing trade, will have to remain agile and responsive to meet the changing needs of the market.