With the war in Ukraine and massive lockdowns in China exacerbating an already fragilized global supply chain due to the ongoing pandemic and skyrocketing transportation costs, manufacturers have had their hands forced to adopt new approaches to not only improve their resiliency but also protect their bottom line.
SUPPLY CHAIN ISSUES AND THE DEVASTATING IMPACT ON BUSINESSES
The major ripple effects of COVID-19 and the Ukraine crisis have indeed caused many a cog in material and manufacturing supply chains. But apart from issues arising from short-term business operations, these crises have catalyzed major economic problems for companies.
In its survey entitled The Business Costs of Supply Chain Disruption, The Economist reported that 2/3 of respondents have experienced revenue losses of between 6-20% due to supply chain disruptions. Similarly, Interos’ 2021 Annual Global Supply Chain report shows that the companies, on average, lose $184 million—again due to supply chain disruptions.
Research firm McKinsey projects that if companies don’t change their supply chain management strategy, billions of profits will evaporate. Experts even calculated that supply-chain-disruption losses will amount to 42% of one year’s earnings before interest, taxes, depreciation, and amortization over a decade. As Conexiom indicated from McKinsey’s assessment:
Within 10 years, supply chain disruptions tally to close to half (45%) of a year’s worth of profits for companies. One long-term disruption to production could cost companies 30-50% of a year’s EBIDTA. A disruption lasting just 30 days or less could equal losses of 3-5% of EBITDA.
ESG LEGISLATION AND ADVOCACY: ADDING COMPLEXITY TO SUPPLY CHAINS
The pandemic and geopolitical uncertainty are not the only factors impacting supply chains across the board.
Mounting stakeholder pressure as well as global and national legislation are impelling companies to rethink their environmental, social and corporate governance (ESG) goals, which will inevitably spark changes in procurement and their supply chain strategies.
According to the Circle Economy’s Circularity Gap Report, the world consumes 100 billion tons (Gt) of material a year. And with today’s linear economy of take-make-use-dispose, this means that the world is only 8.6% circular, leaving a huge circularity gap—and potentially devastating consequences for future generations.
Whether it’s the Paris Agreement, which aims to drastically curb greenhouse gas (GHG) emissions on a global scale, national legislation, such as the EU’s Sustainable Product Policy, or even company investors demanding better ESG compliance, companies have begun developing new strategies—or even completely transforming their businesses—to circumvent their impact on climate change and societal issues. Indeed, circularity, in many instances, has become top of mind for C-Suite executives.
What is particularly interesting is how C-Suite executives and industry experts alike are now envisioning how circular economies can actually help businesses resolve many supply chain issues, opening up a whole new frontier for more sustainable sourcing as well as less waste and GHG emissions—all without compromising profitability.
CIRCULAR ECONOMY INITIATIVES: A KEY TO BUILDING SUPPLY CHAIN RESILIENCE
Remember that aforementioned statistic of 8.6%? Considering that only 8.6% of the 100 billion tons of fossil fuels, minerals, metals and biomass that enter into the economy are reused on a yearly basis, there is a wealth of untapped opportunities to reduce material consumption through many different circular approaches, such as:
- Designing products that use fewer resources and are easy to disassemble for reuse or recycling
- Rethinking packaging to minimize the need for it
- Partnering with local suppliers for procurement and production, instead of overseas suppliers; even if initial costs may be higher, this type of strategy may mitigate the significant economic burden that ensues from supply chain disruptions
- Working with local recycling suppliers to obtain much-needed materials, rather than opting for virgin materials that often have to be sourced internationally
- Repurposing or recycling excess stock that cannot be sold through traditional or alternative channels, which again can be an excellent source of high-value materials
- Offering product repair and maintenance services to keep products in use for as long as possible, which can unlock new revenue streams with pay-per-repair models or extended warranties
“The circular economy creates an ecosystem of materials. What was previously viewed as waste now has value.”
These solutions are clearly highlighted in Gartner’s recent article on 3 Supply Chain Strategies to Accelerate Circular Economy Outcomes:
The beauty of these solutions is not just helping companies hit their ESG targets by changing their supply chains. Rather, it’s a win-win situation as circularity can help take the pressure off supply chains by developing local capabilities that can actually build resilience and ensure business continuity.
EY had identified many business benefits of circularity and closed-loop supply chains, including: long-term value for stakeholders (customers, investors, communities, partners, etc.), cost reductions, increased sales and regulatory compliance.
C-Suite executives and supply chain leaders are taking notice. A Gartner Survey conducted even before the pandemic showed that 70% of supply chain leaders plan to invest in the circular economy.
Bringing it all together: How end-to-end traceability solutions foster circularity and supply chain resiliency
In Supply Chain’s interview with analyst Sarah Watt, while circularity is enabling companies to address supply chain conundrums, there is one missing piece of the puzzle that must be taken into consideration: the role of technology. She said:
“[Circular ]ecosystems are complex and include many interdependencies and feedback loops. Digital technology has the potential to provide visibility and enable improved decision-making when it comes to raw materials and services. Already, 35% of companies believe that digital technology will be a key enabler for their circular economy strategies, but very few are leveraging the technology for this purpose yet.”
But that doesn’t mean the shift isn’t occurring. Because companies have to prove ESG compliance, they will be required to be fully transparent with respect to their supply chains.
For example, the Greenhouse Gas Protocol provides a framework to standardize GHG accounting so that businesses can better measure and manage their emissions. The Global Battery Alliance’s Battery Passport will require EV and battery makers to fully disclose their sourcing, production, recycling and disposal practices throughout the value chain.
This is where digital technology, namely OPTEL’s end-to-end traceability solutions and intelligent supply chain platform come in. With these robust tools, companies can gain complete visibility of their supply chains—not just to prove compliance but also to optimize their operations on the road to circula