Suketu Gandhi, global co-lead of the Strategic Operations and Performance practice of Kearney, covers the various factors that are causing global supply chain costs to soar.
The latest projection of global supply chain costs by Kearney’s Supply Chain Navigator forecasts a number that’s up to 7% above U.S. inflation, which is running at just above 3%. Why are supply chains feeling the pain so acutely?
It all comes down to availability of product, Gandhi says. Supply chains are built for resilience, but all possess a defined timeframe — typically, 10 to 12 weeks of inventory — beyond which they’ll be seriously affected by disruption. In those early weeks, he says, the effects are often linear in nature, but beyond a certain breaking point, “they tend to be a little bit exponential — now you’re building cost on top of cost.”
The chief cause of the current disruption is, or course, the conflict in the Middle East, which is having a direct impact on transportation and logistics. And the most important element in that equation is diesel fuel.
Damage to critical oil and gas infrastructure is long-term in nature, effecting the ability of companies large and small to survive. But the pain is especially acute for the big global players, for whom billions of dollars of revenue could be at stake.
Physical damage to infrastructure isn’t the whole picture, Gandhi says. Of equal important is “the mentality infrastructure of the people who are leading these supply chains.” The same goes for transportation service providers, with shipping lines forced to decide whether to keep rerouting vessels from the Red Sea around the Cape of Good Hope — a detour that’s raising shipping costs by 30% to 70% in the near term.
All of this is creating a great deal of uncertainty, but Gandhi believes global supply chains are better able to cope now than they were during the COVID-19 crisis, having since acquired better visibility over operations and the ability to examine various scenarios that are most likely to play out.