Security of supply chains has been an illusion – how will war affect global transport chains?

The peaceful and balanced period in world transport over the last 10 years has been abnormal. We are moving from just-in-time production to just-in-case production.

We live in exceptional times. Product delivery times extended throughout last year –  there was discussion of a container crisis and sea freight prices are at their peak. Just as the situation was leveling off, Russia invaded Ukraine.

The war in Ukraine is the third consecutive global shock affecting supply chains. The first one was the financial crisis in 2008, which forced states to discipline banks, and the second was a pandemic that hit the structures of health care and other social activities such as culture and jobs. Now the war in Ukraine is making us think about the resilience of supply chains and security of supply.

The war, in addition to  all human distress, has also an effect on flow of goods. Product prices and shipping costs are rising. The price of raw materials such as oil, coal and gas will rise as the supply of products decreases. At the same time, demand and prices for transport equipment are rising, with a significant proportion of the world’s raw material buyers having to find new suppliers due to sanctions, longer journeys and less equipment being available.

It is also clear that Ukraine, one of the world’s main grain producers, will not be supplying grain to the world this year, raising the price and transportation costs of grain imported from elsewhere. At the same time, it is surprising to see that container transport prices have fallen. When ships no longer call at Russian ports, capacity will be freed up and prices will start to level off.

The rise in the price of oil and gas is good for anyone producing non-fossil fuels such as nuclear power, hydropower, solar and wind energy, bioenergy, etc., but the transition will be difficult. The rise in prices may still be sustainable, but at worst we will also see a restriction on consumption.

The unpleasant truth is that capacity bottlenecks in transport chains and fluctuations in energy prices are a normal situation in the global transport system. The peaceful and balanced period in world transport over the last 10 years has been abnormal. Now we have returned to normal, where supply chains must be built taking into account the risks in availability and the prolongation of prices and schedules.

Interestingly, it is worth digging up basic doctrines about the favorite phenomenon of every supply chain student, i.e. the Forrester effect, the whip effect. In it, even small changes in demand at the end user can accumulate into large fluctuations in demand in production if data flow is stuck by interim stocks and data flow delays. With increasing uncertainty in supply chains, the timely flow of information is becoming increasingly important. In the event of a disruption, production programs can be changed, products procured elsewhere or even orders cancelled.

Last December, even before the war in Ukraine, the Financial Times published an article estimating that the world is increasingly moving from just-in-time thinking to just-in-case thinking. It is based on the view that risks must be taken more into account in the continuous planning of supply chains.

For the last twenty years, unnecessary stocks have been filed out of supply chains and at the same time we have relocated operations further and further to low-cost countries. We are now realizing that there are bigger risks in the global economy. Our supply chains are no longer reliable in crisis.

Until a few decades ago, supply chain risks were minimized by holding large inventories. This is how humanity had worked for millennia, stockpiling for a bad day. But today, inventories are just one way to reduce supply chain risks. Now, if ever, capacity flexibility should be introduced, scheduling changes and time buffers, and speeding up the flow of information from demand to production.

So we have returned to the old normal, where transportation is expensive and uncertain. But we have new tools for supply chain information management. Large stocks are no longer the only way to reduce dependence on fast and low-risk supply chains, but we can also reduce dependence on, for example, better information flow, using more subcontractors, designing alternative products, predictability, ordering to the last minute and reducing losses.

The challenge for supply chains in the 2020s is slowing down and uncertain supply chains, which are increasingly vulnerable to disruptions, delays and changes. At the same time, our dependence on fossil fuels is declining. We must both prepare for low-carbon supply chains and reintroduce risk management into the day-to-day planning of transport chains.

This text has been slightly modified from a column published in issue 2/2022 of Sto-ry, a member magazine of the Finnish Production Planning Association.

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