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BUILDING SUPPLY CHAIN RESILIENCE Page
BUILDING SUPPLY CHAIN RESILIENCE
A supply chain is as strong as its most vulnerable link; with the disruption of one element, the entire pipeline will grind to a halt.
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Since the pandemic disrupted global supply chains of semiconductors, the impact has been felt across a wide spectrum of industries. Every industry faces supply bottlenecks and delays from automobiles (with over 40 per cent drop in revenues of some majors) to smartphones, consumer durables, and electronics.
Writing for MITSupplyChains, James B. Rice and Ken Cottril state that supply chain disruptions are caused primarily by supply capacity losses. However, there is not a key capacity that if fixed, can make your system resilient; supply chain disruptions could be linked to an assortment of capacity failures. Therefore, the interdependency between various capacities must be understood to achieve high levels of resilience in the supply chain. However, there is not a key capacity that if fixed, can make your system resilient; supply chain disruptions could be linked to an assortment of capacity failures. Therefore, the interdependency between various capacities must be understood to achieve high levels of resilience in the supply chain.
FIXING CAPACITIES
In a study conducted by Rice and Ken on disruptions caused by natural disasters like Hurricane Katrina (2005) and the US-China trade war (2019), and the pandemic (2020), seven core factors were identified that could “hobble” supply chains in different ways. However, supply capacity was the common factor in all the crises that were studied.
Companies trying to keep costs low are confronted by the perennial question-how much capacity to build in their system. The answer is extremely complex with many inputs, including go-to-market strategy, target and minimum service level, working capital, the projected demand, ability to absorb risk, resilience anticipated and market behaviour. Most importantly, there is an interdependency that links together these seven core capacities.
The first is Supply. It is subject to the intensity of the supply chain, which depends upon the full utilisation of replacement capacity, and the long cycle times required to recreate capacity (from months to multiple years).
The second is Transportation: Availability of mode, route, labour, and equipment. For example, ocean-going conveyances are capital intensive, and acquiring them can be lengthy. Replacing over-the-road transportation requires capital, and cycle times vary from long (e.g., when buying new trucks) to relatively short (e.g., when truck capacity is available for hire).
The third is Converting/Internal Ops: Availability of labour, equipment, and facilities. The time required for a facility will range from short-term for basic ones (e.g., warehousing space) to several years (e.g., building semiconductor fab facilities).
Fourth is Human Resources: People’s availability varies according to skill levels. This is a relatively shortterm constraint, although demographic trends suggest longer cycle times.
Fifth is Communications: Availability of tech equipment and protocols for communicating internally and externally. The cycle time to recreate capacity is relatively short-term.
Sixth is Financial Resources: Capital and cash position, cash conversion cycle or CCC, working capital ratios, profitability, and debt-to-equity or D/E ratio. Relatively short-term issues if the firm has favourable ratios, but longer-term or intractable if the firm’s ratios are poor. Businesses often fail through a lack of cash and/or credit.
The seventh and last is Distribution to Customers. Availability of distribution outlets to customers (i.e., retail and online stores and processes). This factor has become more complicated as e-commerce has grown and brick-and-mortar retailing has declined.
A single link in the supply chain can bring the entire system to a halt. This was seen in the scarcity of baby formula in the U.S when the Abbot plant closed down abruptly, leading to supply shortages at the end of the supply chain. Similarly, the global food and fertiliser shortage is not due to disruption at the start of the supply chain (Ukraine ) but the naval blockade of the Ukrainian ports and a loss of capacity to ship and/or transport products. THINKING AHEAD
The business world tends to conduct its commercial operations on a day-to-day basis with little monitoring of the global geopolitical situation, which may trigger the next catastrophic disruption. A far-off incident, like tensions in the Taiwan Straits, has repercussions in a factory assembling smartphones in Tamil Nadu, India or a sprawling BMW plant in Germany.
Another ‘known unknown’ is a large-scale cyber assault on multiple supply chains concurrently. The most vulnerable is core factors, including supply, shipping/ transporting products, internal manufacturing, and distributing products. Preparations for such attacks are critical for resilience. Suppliers that are connected digitally or use embedded codes must be identified as they will be the most vulnerable targets. All transactions with such suppliers must follow well-established protocols, and before trusting the supply chain on their product, they must be subjected to stringent cyber audits. Alternate suppliers that can create short-term bypasses in the supply chain must be coordinated both upstream and downstream to ensure continuity.
Every corporate organization must build on its own experiences to develop response protocols and test them through scenario playing, as is done by the military in their ‘tabletop war games.’
AMERICAN INFLATION WORRIES
Anticipation of the Federal Reserve hiking up interest rates to combat recession sends shivers down the collective spine of global economics.
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Today, the American political narrative is dominated by inflation concerns. Food prices increased by 0.8 per cent in August, along with shelter prices which rose by 0.7 per cent. Medical care has also risen by 0.7 percent.
As inflation peaks to newer levels in the U.S., experts believe it’s time for the Federal Reserve to step in and raise interest rates more aggressively. Some experts accuse the Federal Reserve of being “overly cautious.”
Globally supply chain bottlenecks have not helped postCOVID recovery as they have caused severe economic blocks. However, there is a widespread view that the government’s generous stimulus in the U.S. has caused more distortions leading to a spike in inflation. “We’re likely to be over-stimulating the economy, and that’s going to generate substantial inflation,” said Lawrence Henry Summers, a former U.S. Secretary of the Treasury.
The Fed has not ignored rising inflation and has already implemented four interest rate hikes in 2022. Federal Reserve chairman Jerome Powell maintained the central bank’s commitment to reducing inflation, stating that “we will keep at it until we are confident the job is done” even if the policy may “bring some pain to households and businesses.” multiple on the common man. The cost of living has steadily increased despite a 10.6 per cent decline in gas prices. Economic growth is doubly impacted by inflation, which erodes spending power, and interest rate hikes, which make borrowing more expensive. For consumers, it also means that the cost of debt will increase for credit cards, auto financing and personal loans.
Beyond economics, the August inflation numbers present a problem for the Biden administration as they try to minimise its negative impact on the November midterm elections.
A STITCH IN TIME…
The Fed is responsible for managing monetary policy for the United States, which means controlling the money supply in the country’s economy. Controlling interest rates is the most prominent and effective monetary policy tool at the Fed’s disposal.
The Fed effectively manages the federal funds rate by raising interest rates, also called the federal funds target rate. This is a reference for the interest rates big commercial
banks charge each other for overnight loans. This somewhat indirect arrangement sets the federal funds rate as the most important benchmark for interest rates in the U.S. economy.
When the Fed raises the federal funds’ target rate, it increases the cost of credit throughout the economy. This, in turn, makes loans more expensive for both businesses and consumers, and everyone ends up spending more on interest payments. It simultaneously encourages people to save money (instead of spending) to earn higher interest payments.
THE DOLLAR STORY
While fears of a recession loom, the U.S. economy is still in better shape than other economies, including the United Kingdom, European nations and Japan. The U.S. dollar has been on a strong path owing to a combination of factors which make the dollar a better bet for investors than most other currencies.
As the growth outlook for the world economy worsens, investors have relied on the dollar, putting their money into safer assets like U.S. Treasury bonds. That has pushed up the currency’s value.“ More recently, it has less to do with the U.S. and more to do with a global downturn,” says Vassili Serebriakov, FX strategist at UBS in New York.
The International Monetary Fund maintains that the dollar has been rising, supported by the Federal Reserve’s policy to increase interest rates. A strong dollar can create inflation for other countries because it increases import prices. For emerging economies, in particular, the impact can be harsh, especially those where the dollar debt represents a large portion of their gross domestic product. Repaying creditors can be daunting to countries with rapidly depreciating currencies like Argentina and Turkey. For Sri Lanka, in its extremely fragile state, it has become impossible.
Other currencies have benefitted from the rise in energy and food prices, which accelerated after Russia’s invasion of Ukraine, like Angola, a major oil producer; Uruguay, a key food exporter; and Brazil, which trades energy and agricultural commodities.
The Russian Rouble has been one of the best-performing currencies against the dollar this year. Capital controls imposed by Russia have kept most of the money inside the country, which has propped up the official exchange rate.
The prognosis for the dollar appears strong as Europe faces an energy crisis, Japan resists raising interest rates, China’s COVID-19 lockdown policies clog its supply chains, and many other countries struggle with high inflation.
INDIA IMPACT
The Fed’s action has already put the global equities markets on the run. The Indian equities markets key indices plunged three days in a row. The Indian rupee has slipped to 80.86 against the US dollar.
The Fed’s rate hike puts pressure on the stock market. Investors pull assets away from emerging markets when the US raises interest rates, and capital flow moves towards the American economy.
The US Fed has been more aggressive in increasing interest rates than the RBI. The policy interest rate gap between the US and India has been steadily narrowing. It stood at 3.85 per cent at the beginning of the year and has now come down to 2.25 per cent. It is widely expected that the RBI will hike repo rate by 35 to 50 basis points at the end of this month.
The Indian economy is heavily linked to the U.S. Federal Reserve interest rate action. The high-interest rate in the U.S. has a direct impact on Indian equities as they become less attractive to foreign investors. This could lead to capital outflow from India and further pressure the Indian rupee. A weak rupee makes imports costlier and further widens the current account deficit. This could impact the trade deficit as well. The situation may lead to prolonged inflation forcing the RBI to go for an aggressive policy rate hike.
Currently, the Indian economy seems to be in relatively good shape, with growth coming from all quarters and inflation relatively under control. It is expected that a softening of crude prices will augur well for the economy, and we could start the interest rate cut cycle from the early part of FY24.
“We may see some correction in the U.S. dollar once the central bank acknowledges improvement in the inflation situation. Another challenge for the U.S. dollar could be aggressive tightening by other central banks to control inflation and possible central bank interventions to support their currencies,” says Ravindra Rao, head of commodity research at Kotak Securities.
Assessment
The rest of the world closely watches the American economic situation. The U.S. is not alone in the current economic quicksand as developing economies, in particular, struggle with the energy crisis and rising inflation.
The dollar now stands strong, devaluing currencies around the world. This unsettles the outlook for the global economy as it disturbs the costs of nearly everything, from the cost of a vacation abroad to the profitability of multinational companies.
SAND SCARCITY?
Sand has come to occupy a principal role in industrialized societies and is now viewed as a precious resource, thereby prompting another front in gray zone warfare.
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It may sound ludicrous, but the world is facing a growing shortage of sand. This is when the Earth is overflowing with sand, from Thar to Sahara to the Sahel, in beaches girdling our oceans and along river beds flowing into the seas.
Human civilisation has essentially been built on sands- from great sprawling ancient cities to modern megapolises and ancient Roman roads to modern expressways; all consume an astonishing amount of sand. Concrete and asphalt have sand as the bulk component, while glass and silicon chips too, need their share of sand, albeit of the rarest and purest kind.
RUNNING OUT OF SAND
As per a March 2021 article in the CNBC blog, “Sand is the world’s most consumed raw material after water ”.
Sadly, like all other commodities, there is Sand, and there is Sand; only some variety of sand is worth the vast uses it is put to. Gulf countries that are seeing a huge construction boom for the last three decades, import sand from as far as Australia. Even sand bunkers in golf courses being constructed in luxury resorts all over the Gulf need fine white imported sand.
Desert sand, as plentiful as it may be, is just not of the right shape- it is too rounded and too smooth and cannot be used in strong concrete. For that, angular sand is needed that is found in riverbeds and floodplains, lakes and on some seashores. Similarly, high-quality glass needs white sand, which as per industry experts, is just enough for the next two decades.
Speaking at a Chatham House event, Pascal Peduzzi, a climate scientist with the UN Environment Programme, is quoted as saying, “We just think that Sand is everywhere. We never thought we would run out of Sand, but it is starting in some places. It is about anticipating what can happen in the next decade or so because if we don’t look forward, if we don’t anticipate, we will have massive problems about sand supply but also about land planning.”
There is only limited availability of sand, and nature needs it too. Hectic construction activity has resulted in depleting levels of sand which natural processes can’t replenish at the same rate. Coastal erosion, diversity loss, and flooding are only some of the threats facing us as we battle sand scarcity.
The Global Resource Information Database in Geneva, a partnership between the United Nations Environment Programme (UNEP), the Swiss government, and the University of Geneva, estimates that “every year, the world builds the equivalent of a wall 27 meters high and 27 meters wide
Speaking at a Chatham House event, Pascal Peduzzi, a climate scientist with the UN Environment Programme, is quoted as saying, “We just think that Sand is everywhere. We never thought we would run out of Sand, but it is starting in some places. It is about anticipating what can happen in the next decade or so because if we don’t look forward if we don’t anticipate, we will have massive problems about sand supply but also about land planning.”
spanning the whole equator.” That’s 50 billion tons each year. At this rate, Earth will run out of sand sooner than later.
A LUCRATIVE BUSINESS
This enormous global demand is centered around China, India, and Nigeria, where development has placed enormous pressure on cities and construction. With good quality sand getting scarcer, prices have skyrocketed, drawing powerful criminal mafia networks into the business. Governments have failed miserably to curb the illegal sand mining out of riverbeds, beaches, and floodplains, largely because many countries like India have a strong politico-criminal nexus in the sand business. Unsurprisingly, a slippery black market for sand has emerged globally, and blood, money and killings dominate it.
The damage caused by rampant illegal mining has been enormous in China, leading even to the Communist Party calling it irreparable! Since 2000, central authorities have declared limitations on dredging of sand from the Yangzi river basin to save embankments which are in danger of collapse during the rainy season. This has, however, only resulted in driving diggers to the country’s largest freshwater lake, Poyang where its wildlife, including rare cranes and porpoises, are now under threat.
SAND GEOPOLITICS
Geopolitics also play a part, with China on top of the list of countries exploiting this natural resource to the hilt, driving global demand and prices and leaving environmental havoc in its wake. China imports hundreds of millions of dollars worth of Sand from around the world, including Taiwan and Sri Lanka, leading to environmental degradation.
Taiwan has responded by assigning a new frigate, the Hsinchu, to Taiwan’s Northern Pacific Flotilla to protect one of Taiwan’s most precious maritime resources: Sand. China’s dredging of sand is causing maritime degradation in Taiwan, and the frigates are already costing Taiwan almost $400 million. This puts an extra burden on Taiwan by diverting vital financial and military resources to its coast guard. This has been viewed as a prime example of gray zone aggression which, while not military, is still damaging to the targeted country.
THE INDIAN SCENE
Along with China, India is one of the top consumers of sand, and the market is largely unregulated and working on the margins of legality. Internecine fighting amongst the sand mafia results in hundreds of homicides every year. These include police and government authorities, environmental activists and just ordinary folks all over India.
The real estate boom and construction projects caught everyone’s attention, and demand for sand has risen. Construction has now become a huge poll issue in Punjab. Parties are vying with one another to make sand cheaper as an election ruse, while others are vowing to bring an end to illegal mining. The political-sand mafia nexus figures strongly in the political narrative of the Indian state of Punjab.
Politics dominates the sand business in the South Indian state of Andhra Pradesh also. Shortage of sand and a slump in construction activity have led to acute suffering and even suicides in the state capital! In response to the previous government’s alleged favor of gangs, the new government initially banned sand mining, creating a severe shortage and skyrocketing prices. Several lakh laborers were rendered jobless due to the complete halt on construction activity.
A new sand policy was introduced, promising to provide sand at low cost from government-owned stockyards. The government has proposed to track the movement of sand and ensure adequate supply, thereby preventing black marketing, hoarding and artificial supply shortage. However, this did not play out as planned as against a daily demand of 1.50 lakh tonnes, state authorities could only make 40,000 tonnes of sand available.
Assessment
Embedded in the mining, evacuation and transportation of sand is the deeply divisive debate on sustainability. Sustainability has become a political battleground, translating into people making choices through the governments they elect which in turn puts focus on how much emphasis they wish to place on sustainability. The sand wars are indicative of this sustainability dilemma.
The tussle for sand has myriad socio–economic implications and the involvement of politicians and a mafia connection has further soiled the plot. This dangerous nexus is hard to break as we witness it globally.
Can technology provide any solutions to the environmental degradation caused by sand mining, construction and rapid industrialisation? We need to ensure a sustainable combination of economics which works for everyone. And perhaps technology can provide some solutions to sustainable alternatives for sand in the future!
