Supply chain risk is not new, but persistent issues in recent years look set to culminate in permanent changes to global trade – altering supply chain risk management approaches in the process.

Rarely before considered outside trade or risk management circles, supply chain risks have been thrust into the spotlight in recent years following a series of events which made (and continue to make) national headlines for all the wrong reasons: after chip shortages that began in 2020 led to the shutdown of automotive production lines, affecting high-tech and electronics companies to this day; after the Ever Given ran aground in 2021, leading to bottlenecks the ramifications of which are still being felt; and after Brexit and Covid-related delays led to protracted supply shortages of household basics we had for so long taken for granted.

Now, war in Ukraine, and China’s ongoing zero Covid policy are among the most recent sources of continued supply headaches, leading to further, costly delays and rerouting in goods logistics.

With logjams and dwell times up significantly in Chinese ports, and the North Sea affected by the war in Ukraine, analysts at ING Bank don’t expect global schedule reliability to improve in the near future. Sanctions and other bans on Russia are further fuelling what may be a lasting reorganisation of supply chains, with ramifications the world over, as pressures sit at historically high levels.

As a result of the war in Ukraine, ING foresees permanent shifts in trade flows, as market players that previously purchased commodities and goods from Russia look for alternatives. “That said, other countries may step in and benefit from discounts. On balance, this should lead to longer sailing routes in shipping. There is already some re-routing underway for grains and energy products, for example. India, the second-biggest wheat producer after China, but not a major exporter, has stepped up its exports,” the bank notes. “World food prices surged by 29.8% in April compared to the year before, according to the United Nations Food Price Index, making it lucrative for Indian producers – who usually sell to the government at higher guaranteed prices than overseas market prices – to export. And food inflation is continuing its ascent.”

ING anticipates that trade flows from Russia to Western countries that have sanctioned Russia to be ceased permanently, with some Asian, African and Southern American countries compensating for the loss of Western exports.

There is no doubt that supply chain and logistics issues have created a very tough and uncertain international trade environment, with rerouting, diversification in suppliers and/ or regions, stockpiling and inventory building increasingly commonplace.

According to the Logistics Managers’ Index Report from March, changes in inventories in the eurozone were up by 95% in the fourth quarter compared with the previous quarter; while in the US, warehousing use increased by 32%.

ING notes that importers are considering buffer stocks, multi-sourcing and nearer sourcing among the ways in which they might improve supply chain reliability, but that labour shortages further complicate matters for them, making it vital to plan further ahead than ever before.

This mirrors changes that are already underway in supply chain risk mitigation in the semiconductor industry – decisions that could have enormous economic significance both for the companies that need chips, and the economy as a whole. Writing for the World Economic Forum’s Global Agenda, analysts at McKinsey note that many of the companies whose products use chips are reconsidering their long-term procurement strategies, including shifting from a JIT ordering model, to one in which they order semiconductors far in advance.

Image courtesy Port of Dover

This article was published in the May-June 2022 issue of CIR Magazine.

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