Managing supply chains in an uncertain world

Who’d be a supply chain manager? The confluence of trade wars, Brexit, climate change, consumer demands for ethical sourcing, rising energy costs and downward price pressures adds up to a recipe for a nightmare job.

Consumers are rejecting fast fashion but don’t want to pay more for their clothing, businesses are demanding reduced carbon footprints but won’t pay the higher cost of goods produced closer to home, and shareholders want to know that workers’ rights are respected by suppliers but, guess what, don’t want to sacrifice their dividends to pay for them.

These issues just add to the challenges posed by increasingly complex supply chains at a time of growing global trade tensions.

The iPhone is a case in point. Apple designs the iPhone at its headquarters in California and sends out orders for components to suppliers around the globe. These include US-based companies Micron, Texas Instruments, and Cirus Logic, which are responsible for the manufacture of flash memory, touchscreen controllers, and audio controllers respectively.

Dialog Semiconductors makes the power management components in Italy; arch-rival Samsung makes the memory chips and application processors in Korea; ST Microelectronics manufactures the accelerometers and gyroscope in Taiwan; the phone network components are made in Germany by Infineon; and Murata makes the Wi-Fi and Bluetooth components in Japan.

And that’s before you get to the batteries, which require lithium from South America and cobalt, mainly from the Democratic Republic of Congo.

All of these various components are delivered on a just-in-time basis to Foxconn in China, which assembles the finished phones. Foxconn holds minimal levels of inventory of the different components and is reliant on them arriving almost precisely on time to go straight into the production line. A hitch or slowdown in the supply of any individual component could bring worldwide iPhone production to a halt and untold anxiety for Apple disciples.

Little wonder that companies like Apple are concerned about the worsening trade relations between the US and China. New tariffs and customs delays could have a severe impact on the bottom line.

But a trade war is a short-term issue which most companies are quite good at dealing with, according to Dr Mark Pagell, professor of global leadership – sustainable supply chain management at UCD School of Business. But longer-term issues such as sustainability pose much greater challenges, he warns.

‘Discussion about uncertainty’

“There is a lot of discussion about uncertainty at the moment, but most companies seem to want to respond to an unexpected or unforeseen event and then return to previous state,” he says. “But they may need to move to a new state. Typically, you hear businesses talking about resilience or having a more robust supply chain but that is sloppy terminology. There is no discussion about what state they should be in after the event. They want a short-term solution and then a return to previous conditions. They are good at recovering from late deliveries from suppliers or strikes. Even Brexit will only happen once. Most companies are pretty good at dealing with that.

“They are not so good at seeing far into the future,” he continues. “Brexit may require them to change some suppliers or routing, but it is no big deal in terms of sustainability, which might require them to change the way they make money.”

Simply seeking a return to the status quo is not always the best policy, he advises, citing the example of Kodak as a company which could see what was happening but failed to change.

“Kodak pretty much invented digital photography but didn’t understand how to move to the new technology without putting themselves out of business. We see similar behaviours in car manufacturing. They know that electric vehicles are coming and some of them will be autonomous. But they have massive investments in the existing platforms for old technology. Volkswagen has invested €15 billion in the last two years to start from scratch in electric vehicles. But Tesla cars are very different. They are not based on legacy technologies and platforms and have longer ranges than those from mainstream manufacturers. Tesla doesn’t have to see every new car sale as one less sale of an older model. Most managers are not good at navigating that.”

Sustainability will be the biggest challenge in the years ahead, according to Prof Donna Marshall, vice-president of research, innovation and impact at the UCD School of Business.

“Key sustainability issues will be split by industry, so for instance the key issue in the oil industry is climate change because of the burning of their product, but in other industries there are other sustainability hotspots,”she says. “Human rights across industries which focus on agriculture or mining operations in high-risk regions, such as the Democratic Republic of Congo, deforestation in industries that rely on palm oil derivatives. It’s really about identifying the hotspots in your industry and ensuring you have a plan and are taking action to minimise these issues.”

And things will never be the same again, she argues. “What is clear is that traditional business as usual, focused solely on costs, profit and growth, is dying. Companies now have to think about societal issues, how their designs affect the environment, are products designed for circularity, are business models ripe of servicisation, who is involved in your supply chain and how do they treat workers in the supply chain, particularly the most vulnerable. All these issues are gaining in prominence.”

Not a viable strategy

And hiding beyond consumer buying behaviour is not a viable strategy. “Many firms point out that consumers aren’t reacting to sustainability issues and are still buying from companies who have been singled out during tragedies or major crises, but this view is fundamentally flawed,” she says. “With any societal action, it will start with a handful of knowledgeable consumers or an NGO or an investigative journalist who uncovers a problem. This will then be picked up by the media, other consumers and NGOs. In the long run, if issues are continuously connected with your company, the mass of criticism will erode your brand value and your reputation.”

And there is a scientific basis for that belief. “Nudge theory means that planting seeds of disquiet in the mind of the consumer when it comes to environmental harm or inhumane working conditions will eventually lead to the wearing away of brand value or reputation for companies,” Prof Marshall says.

“If this was an economics discussion, we would be talking about creative destruction and no one would be complaining,” Pagell adds. “They would say it is a good thing that companies sometimes go out of business and are replaced by others. Yet when we talk about sustainability, people are uncomfortable. Companies are good at responding to things like trade wars. No one likes it, but they can see it coming and everyone suffers equally. It makes it harder to do business, but it is not existential. Sustainability is existential for most of them.”