A New Architecture for Supply Chains

When Maersk announced this week that it is seeing congestion challenges at the MTL terminal in Dublin, Ireland, it came as a surprise. Reportedly, MTL terminal reached its capacity to handle all export-laden containers and could not accept more for a brief period. This is a good example of how ports congestion is pervasive. It is not just a matter of global hubs in China or US.

So dire is ports congestion in Europe and North America that it has rendered 12.4 percent of global vessel capacity unavailable, according to data by Korean carrier HMM. In the pre-pandemic era, only about two percent of the global capacity was trapped by delays at any given point in time.

But clogged ports are a symptom of a systemic problem with global supply chains. Despite their sprawling nature, they have not seen much innovation since the last century. Paper-based documentation still plays an integral role, and the industry is yet to achieve unfettered flow of data across companies.

Undoubtedly, the current framework will not see us through in a world riddled with pandemic related disruptions, war and climate change. These shocks present a new challenge to supply chain managers.

“Supply chain management is entering a new era. The relatively benign environment of the last three decades, during which we saw a tremendous growth of the tradable sector and the expansion of the far-flung global supply chains is probably over,” wrote Prof. Willy Shih in a recent article for the Harvard Business Review.

Lora Cecere, a supply chain veteran, is another proponent of a new supply chain architecture.

In a recent article, she asserts that the starting point for stemming out supply chain disruptions has to start by managing emerging variability. Most of it arise from geopolitical competition and the need to decarbonize supply chains. According to Lora, the low levels of variability over the past three decades lulled supply chain leaders to sleep. The current supply chain architecture assumes that governments would be rational, variability would be low and logistics would always be available. However, these assumptions have now proven invalid.

Managing supply chains variability is the opportunity logistics tech start-ups have identified as a point of entry in shipping business. However, as they deploy technology to mitigate supply chain risks, Cecere has a word of caution.

“Today, there is no end-to-end planning system. Just as there is no Santa Claus, companies cannot buy a planning system that stretches from the customer’s customer to supplier’s supplier. Today’s planning solutions contain many optimization engines aligned to take transactional data and improve operational decisions within a function,” she writes.

The answer, she suggests, lies in market data with a lower dependency on enterprise data. Only nine percent of companies actively design their supply networks using technologies that can model market variability levels today. As a result, most companies lack a feasible plan.

Unfortunately, over 93 percent of companies use Excel spreadsheets to develop their plans. This is no longer sufficient, she suggests.

Ocean shipping will still reign supreme in future supply chain architectures. However, there are some points to consider.

Recent supply chain disruptions have led to an increase in logistics costs. This calls to question the practice of moving bulky and lower-value commodities (per unit volume) over longer distances for processing, such as metals ore or rare earth minerals, notes Prof. Shih. Historically, this has been justified by labor arbitrage or environmental concerns around processing, but high shipping rates may cancel these cost advantages out.

Thus, we could be looking at a shift from distant global sourcing to supply chains that are more regionalized - essentially, enhanced development of production and consumption capacities within regional trade blocs. For example, the North American bloc that includes U.S, Canada, Mexico and parts of Central America offers large markets, ready access to both skilled and low-cost labor as well as low transport distances and costs.