Disruptions to Global Supply Chains, Sustainability, and the Inventory Time Bomb

Mike Wilson and Aris Syntetos, PARC Institute

Sometime during 2018, before the Covid pandemic took over the world, Professor Aris Syntetos interviewed Professor Mike Wilson, the two Directors of the PARC Institute – an industry and academic partnership which researches global supply chains and their performance. Both of them were in agreement and were already predicting that supply chains were under threat and that a rethink on global supply chains was needed. We were beginning to see supply chain continuity becoming more important within many organisations; re-shoring, localisation, disruptions, congestion, and shortages were threatening supply chain continuity and grabbing more C-suite attention. Now, four years later, we look back at their predictions for global supply chains and ask, were they right?

You can read the original interview, published in November 2018 here. The first thing Professor Mike Wilson admits is that he didn’t predict a global pandemic, “I think there were very few people who anticipated how fast the world would change, and it’s true that when we did the interview, we certainly couldn’t predict a global pandemic and the impact that it would have on everybody. What we were aware of was that elongated global supply chains were already fragile. The traditional supply chain, where products are manufactured centrally, typically in low-labour cost countries and finished goods shipped long distances into a distribution network was a well-established model that had been honed and improved for many years. All this time, chipping away at lead times and inventory levels meant that the stretched supply chain was exposed to any external threat. Our research had showed that continuity of supply was becoming a larger topic as disruptions, natural or otherwise, were causing shortages and people were looking at how to protect the continuity of supply of products. The pandemic further exposed the fragility within supply chains, we all saw the shortages and time it took to supply protective equipment. We saw the automobile industry, which largely runs on a just-in-time supply chain to minimize inventory and waste in their whole production system, come to a stop – their elongated supply chains exposed. With Covid we saw an acceleration of some of the trends we identified, and some of the changes that we predicted would take many years, will now happen in a shorter timeframe”.

Professor Aris Syntetos adds that the pandemic highlighted the need for business leaders to radically rethink global supply chains. Aris explains, “In the original interview we explained that we were seeing a transition away from centralized manufacturing to a more distributed model and, we were seeing localisation of supply chains. In a white paper we published last year, we saw an overwhelming post-covid response, the ambition to move more towards multi-sourcing, again to protect continuity of supply. Companies see the threat of having an elongated supply chain and need to protect against the inherent insecurity built in to running these lean, but long supply chains.”

Mike goes on to point another phenomenon that is accelerating post Covid and that is the general levels of inventory, as he explains, “Over the last three decades we have seen growing levels of inventory, firstly due to the nature of globalization, centralised manufacturing and distribution of finished goods meant that we had more product in a longer supply chain, we then saw an increase on the back of e-commerce as more product was distributed through different channels and that inventory was typically held closer to the consumer, but now we are seeing another increase not only with the increased uptake of e-comm post covid, but also because companies are buffering inventory to protect against supply chain disruption. Even though the world is gradually getting back to normal, we still have the supply chain disruption hangover as well as extra caution built into the system and therefore organisations are buffering inventory to protect against any further unknowns.” He points to recent data published by the Federal Reserve Bank of Saint Louis, which shows that inventories in supply chains are continuing to rise after Covid on a steeper trajectory before the pandemic.

Sourced from FRED Economic Data, https://fred.stlouisfed.org/series/BUSINV).

As Aris explains, “Major increases in inventories are not economically viable in the long-run, companies don’t want to tie up working capital in inventory, they don’t want to be paying for warehousing and storage of products and what’s more, increased level of inventories mean an increased risk of product obsolescence. Whilst we are seeing shortages due to disruptions in some sectors and even increased consumer spending causing inventory stock-outs, overall, the inventory level has continued to rise at a rate greater than before the pandemic and that means there is more pressure across the whole system.” As Mike continues, “The pressure that Aris refers to comes from many aspects all coming together at once, we have in some geographies space constraints as warehouses are full of inventory, we have labour inflation post Covid and skills shortages – truck drivers, for example, as well as post Covid energy demands driving up costs, without even talking about the situation and impact of Ukraine.”

Both Mike and Aris concur that the current situation is not viable, and companies will be reacting to the new reality in front of them as Mike says, “Companies are looking to transform and protect supply chains, but that is something that doesn’t happen overnight – it is costly, time consuming and must be future proof as it needs to be a supply chain that will last. We are already seeing multi-sourcing and distributed manufacturing leading to more localisation, but on top of that we are seeing the demands for future supply chain design to be environmentally sustainable as well. The traditional, elongated take-make-dispose supply chain is under more threat than ever post Covid and we are seeing and will continue to see a movement towards supply chains that are shorter, flexible, and circular – it makes sense – to protect continuity of supply, to reduce inventory levels and be more environmentally sustainable.”

To conclude, what Aris and Mike were predicting in 2018 for future supply chains is coming to fruition, but unexpectedly and somewhat unfortunately, the Covid pandemic, supply chain disruptions and even now more potential turmoil in Ukraine throwing more insecurity and disruption into the equation means that their predictions not only turn into reality but go somewhat further than anybody could have imagined.