Jokers in the pack: Supply snarls and climate change | Mint
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Business News/ Opinion / Columns/  Jokers in the pack: Supply snarls and climate change

Jokers in the pack: Supply snarls and climate change

Economies across the world will now stay in disequilibrium for a while on account of two big unsettlers

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A deck of playing cards usually has 52 cards, plus two cards with jokers illustrated on them. If we assume that the current state of the economy is like a deck of cards, as its post-pandemic recovery shuffles and reshuffles the status quo, then the broken supply chain and climate change imperatives resemble the two jokers in the pack. Both issues will force a hard re-evaluation of economic structures and processes that the world has taken for granted over the past three decades.

The allusion to jokers is not an attempt to be flippant or facetious, but to emphasize the unpredictable impact these two factors will continue to have on the overall economic environment by inhibiting supply, demand and prices from reaching any semblance of equilibrium in a series of inter-locked markets. In other words, as the very name of this column suggests, disequilibrium is likely the new normal.

Take the example of broken supply chains. The pandemic and the Russia-Ukraine war have amplified the vulnerability, as well as fragility, of existing supply chains. Numerous articles and papers have appeared—including a book by Wall Street Journal writer Christopher Mims, Arriving Today, which traces the journey of a humble cellphone charger from manufacturing centres in Asia to consumption hubs in the West—that highlight how economic trends, management fads and a disregard for risk management have made these supply chains vulnerable.

In the decades preceding the pandemic, forces of globalization fostered extensive transport networks—for goods, services, financial flows and people. This arrangement nurtured a sense of easy availability in which a couple of keystrokes enabled goods to be delivered from one corner of the world to another, in real quick time. This encouraged manufacturers to increasingly produce in geographies different from consumption centres. Why make at home if the same thing can be produced cheaply elsewhere and can be shipped back to consumer markets via always-available transport networks?

This sense of ease and predictability has also given rise to the notion of just-in-time inventory systems, in which manufacturing strategy focused on aligning the supply of raw material inputs directly with production schedules. Production centres received raw materials only when needed and in the specific quantities that the production schedule demanded. Nothing more, nothing less. This technique, first perfected in Toyota’s manufacturing plants, was adopted to reduce wastage of time, materials and manufacturing resources (which included machine down time). J-I-T adherents, among those who suffered severe disruptions once demand picked up and networks lagged in supplying key components, are now stocking up on inventory for demand stretching up to Christmas, putting further pressure on fragile transport networks.

And this is not just about goods movement. Anybody travelling through European airports over the past few months would have experienced the complete collapse of systems designed to handle higher passenger flows. Passengers transiting through Amsterdam’s Schiphol have to spend close to two hours to clear security, compared with 30-45 minutes earlier. Divine intervention is required for passengers to be re-united with their luggage if they are flying to Heathrow; mountains of bags waiting to be returned to passengers has forced this London airport to cap its number of flights. Delta Airlines recently operated a Heathrow-Detroit flight with 1,000 bags and no passengers to help clear the backlog. Lufthansa has cancelled 1,000 flights this week, throwing air traffic in Europe out of kilter.

Flying into Europe this summer is inviting chaos. The reasons are clear: airlines have been slashing staff strength for the past few years, especially ground staff involved in baggage handling, check-in counters and security, among others. These cuts were further deepened during the pandemic. Once lockdowns eased, these airlines wanted to fly as much as possible, but were slow in marshalling the resources required to cope with the capacity increase. The resulting asymmetry is on display now and it’s not a pretty picture.

The Global Risks Report 2022, from the World Economic Forum, predicts continuing disruptions: “A disorderly transition could see more frequent and severe supply chain disruptions due to labour and product shortages, especially as sectors and companies switch operating models or simply go out of business. These disruptions present challenges to the resilience of business models across all industries."

The rapid digitization of global supply chains is another emerging fissure, given the increasing frequency of disruptive cyber attacks. Recall how the ransomware attack on the 5,500-km Colonial oil pipeline in the US last May froze energy supplies for some days.

These breakdowns in the movement of goods and people across the world have illustrated another flaw in prevalent management practices: how 24X7 supply chain operations blinded risk management practices across enterprises and institutions to current and future fault-lines. Hopefully, leaders will henceforth prepare for the worst even when the economy is going gangbusters. The second joker, climate change, has been routinely ignored as a risk, despite its foreboding presence for some time now. Climate change is a threat to both established business practices and existing paradigms. The overarching lesson is that being positive necessarily requires a nodding acquaintance with negative forces.

Rajrishi Singhal is a policy consultant and journalist. His Twitter handle is @rajrishisinghal.

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Published: 31 Jul 2022, 10:24 PM IST
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