Supply Chains Need to Adjust Now to New Global Factors

For the past 30 years, business leaders have been able to operate their supply chains mostly unencumbered by geo-political constraints. Global economics was highly integrated and multilateral economic principles and agreements created efficiencies for companies, expanding the volume of global trade from $28.5 trillion to $32 trillion from 2021 to 2022.

This unencumbered environment no longer exists.

The freedom-of-action that resulted from an international commitment to trade liberalization has been greatly reduced, and in some cases eliminated. Because of this, many business leaders are worried about the impact these events and geopolitical factors will have on companies’ operations going forward.

The world is at an inflection point over growing questions, and in some cases resistance, to globalization and economic interdependence. Concepts of supply chain sovereignty are rising and threaten a company’s ability to retain operating flexibility and competitive advantage. The changing global economy, impacted by rising geopolitical tensions, a shifting geoeconomic environment and climate change, is drastically altering the way international trade is conducted.

Rise in deglobalization

The sudden shockwaves felt because of the impacts of Covid-19 and Russia’s invasion of Ukraine have increased support of deglobalization. The fragility of supply chains that was highlighted during the pandemic, combined with a recent rise in both deglobalization and protectionist policies has created a distrust in international trade. Policies are beginning to reflect this change in mindset as well, pushing businesses to look domestically for their supply chain operations.

The Biden Executive Order on Supply Chain Security states “more resilient supply chains are secure and diverse—facilitating greater domestic production, a range of supply, built-in redundancies, adequate stockpiles, safe and secure digital networks, and a world-class American manufacturing base and workforce.”

Rise in protectionism

Protectionist policies are on the rise, as shown by the U.S. and China trade war, the U.S. increasing tariffs on imports from the U.A.E., and Biden’s Executive Order 14017 that suggests reshoring critical supply chains, and places preference on U.S. based manufacturing for both partners and allies. The United States is not the only nation pushing these ideas. Earlier this year, Yasutoshi Nishimura, Japan’s Minister of Economy and Trade noted the G7 countries should take a coordinated approach to counteracting the economic coercion China has implemented against its trading partners. Countries viewpoints are shifting, as the Center for Strategic and International Studies noted, with many feeling that “interconnection with China (and in some instances, dependence) has become the primary source of geopolitical risk,” leading countries to move toward supply chain sovereignty.

As countries implement protectionist policies, the general public’s support for both cooperation and trade with other countries declines, increasing the likelihood for protectionism in both locations. In addition, protectionism tends to increase as global trade slows as a defensive reaction to protect regional markets from rival economies, creating an environment that further promotes the implementation of protectionist policies.

Climate change commitment

The apparent economic effects of climate change are recasting companies’ focus on their operational resilience and creating a pervasive discussion about ESG (environment, social and governance) management models. Countries have begun to curb the negative effects of climate change through the implementation of new taxes and regulations. Thus, requiring companies to begin transforming the way they operate supply chains.

The United States has recently passed the Inflation Reduction Act, which includes over $400 billion in green subsidies from which EU companies will be excluded unless they relocate to the United States. In addition, tax breaks will be given to those buying an electric car, but only if it was assembled in North America. Policies like this will be implemented across the globe.

Not only will new policies like this be put into place, but as the Earth’s temperature increases, the severity of storms will increase, impacting trade routes and the physical ability to trade. The OECD states, “maritime shipping, which accounts for around 80% of global trade by volume, could experience negative consequences, for instance from more frequent port closures due to extreme events. More importantly, climate change is expected to decrease the productivity of all production factors (i.e., labor, capital, and land), which will ultimately result in output losses and a decrease in the volume of global trade.”

The need for companies to adapt their business models and supply chains at a moment’s notice, as changing weather patterns impact capability to produce goods and trade internationally, is accelerating. Transformation and digitization of operations will be critical to executing with agility.

The path toward solutions

As these factors converge and reshape global economic conditions, new models are needed if companies are to retain supply chain decision making flexibility and mitigate these external constraints.

Constellations of Value (CoV) are coming to the fore as one such solution. CoVs are a selected network of suppliers, chosen to advance the efficacy and security of the supply chain owner. They are comprised of suppliers, manufacturing and service partners, logistics service providers, and supply chain stakeholders that contribute to the visibility, predictability, and security of company’s customer delivery requirements. CoVs are three-dimensional networks that resemble a constellation and their connected stars (or nodes).

As supply chains are required by customers to be more “present” with them and their requirements, constellations of trusted, secure, and expert partners are a must. CoVs are the next critical phase for companies going direct or getting closer to their customer. By flipping the supply chain from the back end of the business to the front side – or completing a Frontside Flip – the supply chain can be extended beyond the enterprise and create a more expansive Constellation of Value that includes a selected number of partners and stakeholders.

Differing from typical linear supply chain networks, Constellations bring advanced digital capabilities to the members. Functional boundaries are less of a barrier, as there is increased collaboration and data sharing throughout the group. Constellations contain operational nodes, such as warehousing, 3PL fulfillment or component manufacturers, that are connected through critical pieces of data between members.

Constellations also provide increased cyber and operational security by the sharing of data within nodes or the entire constellation. Increased collaboration between constellation members allows an enterprise to act proactively to their partners’ operational changes rather than reactively and rebuild the trust that is threatened by deglobalization. As companies adjust their supply chains to curb the effects of new taxes, policies, regulations, and other factors of change, those within a Constellation of Value will be able to adjust their operations quicker and more smoothly.

The changes confronting companies and their supply chains are neither temporary nor minor. They will reshape markets and global economics for decades to come. They are requiring companies to learn through testing and collaboration with others they trust, and to begin their transformation with disciplined urgency.

About the authors

Marko Kovacevic is Managing Director, Digital Supply Chain Institute (DSCI), a non-profit a research institute focused on the evolution of enterprise supply chains in the digital economy and the creation and practical application of supply chain management best practices.

Sarah Lahti is the Director of Operations and Program Management for DSCI

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