The disruption of the global supply chain, thought by some commentators to be short-lived, has become the headwind holding back the global recovery.
To understand why this issue is so pernicious and long-lasting, we have to look at the underlying environmental issues that allowed it to grow so quickly and so widely. Back in 2016, a central plank of Donald Trump’s campaign for the US Presidency was reversing the export of US manufacturing jobs to China through the 1990s and early 21st century. His 2018 trade war with China destabilised what was by then a sophisticated fulfilment arm of US and EU brands. The US/China relationship remains fraught, despite cooperation at COP26.
So when coronavirus hit, there were already disruptions to both the supply of some key commodities and the infrastructure itself as containers clogged ports and vessels couldn’t dock. The collapse in demand during the worst of the pandemic and the subsequent surge following the reopening of most trade has been a stress test that the fine mechanisms of the old supply chain were not built to withstand.
Many of those mechanisms are broken still. The UK Monetary Policy Committee (MPC) blames supply chain problems for unexpectedly slowing the UK economy between July and September this year, with growth a disappointing 1.3%. The MPC has also warned that growth is likely to be suppressed for the next quarter. Our recovery to a pre-pandemic sized economy is now expected late in 2022.
The MPC also expects demand to be suppressed by tax rises and inflation, causing real income squeezes. For most businesses this will mean a simultaneous rise in input costs on materials and wage bills.
The underlying causes of the supply chain issue are still with us. While the supply of containers and the ships to carry them is increasing, it is a very gradual improvement in system capacity. The lack of HGV drivers around the world, but particularly in the UK post-Brexit, is forcing conversations about using rail transport to secure the supply of wine this Christmas. Rail will be part of a future response to supply chain fragility, but it will take years to improve rail infrastructure and so it does little to mitigate today’s acute problem.
If manufacturers are to build supply chains that are both resilient and as efficient and cost effective as possible, it will take a much larger overhaul. The semiconductor issue in the automotive supply chain, for example, isn’t just a loss of capacity but a shift in technology.
Cars have many old style, low bit-count chips in them. The chip makers have largely moved on to making higher value, high bit-count chips. But because the car industry model is to reengineer vehicles over a multi-year cycle, the chips become obsolescent during the build period of the vehicle. This is why Tesla has created an engineering cycle that matches the chip itself. They know that semiconductors will be a problem forever if their processes aren’t synchronised. Others must follow.
Placing the customer first
In 1945, another economy found itself facing acute shortages of labour and material. War-ravaged Japan turned to what were, at the time, novel solutions to acute supply chain shortages by inventing Lean Manufacturing. The revolutionary Toyota Production System focused on eliminating waste, building resilient systems and using the least amounts of both labour and material.
If the UK economy is facing a prolonged labour shortage and supply chain disruption, we would do well to revisit the lessons of Lean. Lean practices have often been blamed for reducing inventory to levels that can’t be sustained in disrupted times, but this is far too simplistic. Lean’s first focus is on meeting customer expectations in terms of quality, cost and delivery. Minimum-level inventory systems have failed the global stress test, and expecting them to be the right answer in future is to ignore the lessons of today.
UK businesses must now listen to their customers. To meet their customers’ needs today, they must revisit their value streams at the fundamental level and use the same ingenuity the Japanese used to overcome their supply chain dislocations. They will need to build a new system founded on resilience and value for money, as well as lowest levels of inventory.
So what can manufacturers consider?
For UK manufacturers, this will mean large-scale technology integration and new applications using AI and robotics. UK productivity is only 80 per cent of Germany’s. Manufacturers will be price takers on materials and skilled labour for an extended period, and interest rates are set to rise. Practically, the only place to look for savings now are in:
- procurement through new commercial arrangements;
- throughput and yield uplifts in their own facilities; and
- end-to-end supply chain optimisation.
All of these will have large technology components, but the technology specification will remain an open question until the fundamental processes and flows are understood.