Supply Chains: From ‘just in time’ to ‘just in case’

Companies might start operating with higher inventories to increase their resilence to supply chain disruptions. [Friedemann Vogel (EPA-EFE)]

The pandemic and Russia’s invasion of Ukraine have sent shockwaves through global supply chains, leading companies and policymakers to rethink their priorities, from efficiency to resilience.

Until recently, “just in time” was the name of the game in supply chain management. Stocking up on resources, intermediary and finished products was considered costly and inefficient.

Instead, companies tried to buy only what they knew they would produce and to produce only what they knew they would sell.

Well-integrated supply chains, abundant and cheap shipping, as well as data on customer behaviour allowed this to work out for companies – at least for a while.

Then, the pandemic and the war led to highly volatile resource prices, soaring shipping costs, disrupted supply chains, and large swings in customer behaviour. Suddenly, having some resources and products in stock no longer seems such a bad idea.

Turning towards resilience

“Long-standing supply chains of manufacturing have been turned upside down,” Nancy Pallares, international business development director at the defence industry company Teledyne FLIR, told a panel discussion that was held on Wednesday (1 June) in Brussels to celebrate the 60th birthday of the tech and industry employers’ organisation Ceemet.

“Companies are moving from ‘just in time’ to ‘just in case’,” Pallares said, adding that resilience and responsiveness to unexpected developments were becoming essential.

Her argument is supported by a study by the business consultancy Boston Consulting Group that found that firms with resilient supply chains consistently outperformed their peers, especially during crises.

Pallares argued that many companies were trying to find suppliers closer to home and stocking up on their inventories to reduce their exposure to supply chain disruptions. According to her, this development is here to stay.

“Let’s face it, we are going to face more of these risks in the coming years,” said Pallares, who is also vice president of Ceemet.

EU policymakers are also reacting to this new environment.

For example, they are trying to ensure that strategically important parts of the supply chain like semiconductors will be produced in the EU in future. That is why the European Commission proposed the EU Chips Act, which is currently being discussed by member states and by the EU Parliament.

Diversifying supply chains

Another way for supply chains to become more resilient is by reducing their dependency on a single trade partner.

“We need to diversify our supply chains,” said Christiane Canenbley, deputy head of cabinet of the Commission’s Executive Vice-President Margrethe Vestager, while talking to representatives of European industry at the same event on Wednesday.

New trade agreements with Chile and New Zealand might be concluded this year, and the EU is also set to start negotiations for an ambitious free trade agreement with India this month.

Such trade agreements would be a way to diversify away from the one obvious elephant in the room when it comes to trading partners the EU is highly dependent on: China.

However, while there is a lot of talk of “near-shoring” and “re-shoring” production, trade patterns do not yet show much adaptation to a new focus on reshoring when it comes to trade with China.

As the figure below shows, trade in goods increased strongly in 2021 in spite of the pandemic, but also despite the fallout between the EU and China over human rights concerns and the mounting geopolitical tensions.

Of course, aggregate trade figures do not yet show whether the traded products are of strategic importance or not. Nevertheless, it remains to be seen whether the EU and its industry are serious about diversifying their supply and reducing dependency on geopolitically unstable trading partners.

[Graph by Esther Snippe; Edited by Zoran Radosavljevic]

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