For the past two years, data scientists at Tradeshift have been analysing billions of dollars worth of transactions across our digital platform and publishing the findings in our quarterly Index of Global Trade Health. At the end of 2021, the Q4 report had offered some hope of a gradual easing of the bottlenecks that had hampered global trade throughout the year.
The world had other ideas, however. War in Ukraine and fresh lockdowns in major cities across China brought fresh havoc to supply chains already bearing deep scars from a prolonged period of disruption. It may be some months before the true impact of these events can be assessed, but patterns in ordering activity give a strong sense of how large organisations at the top of the supply chain see the road ahead.
Order volumes on the Tradeshift network dropped by nearly 20% at the beginning of 2020, when many businesses were predicting a long and painful recession. When consumer purchasing bounced back unexpectedly we saw huge and unpredictable spikes in order volumes as buyers rushed to fulfil demand. Supply chains, built for stability, found the feast as hard to stomach as the famine.
The 16-point fall in orders we observed in the first three months of 2022 is alarming and indicates buyers are once again bedding in for a challenging economic period. It also suggests an end to the ‘demand-crunch’ cycle of the past year and the return to a ‘supply-crunch’ triggered by geopolitical tension and lingering Covid-19 restrictions.
Deep systemic issues in the global trading system have been bubbling beneath the surface for some time now. The past two years have merely accelerated these challenges. The trade war with China, Brexit, simmering geopolitical tensions, climate change... the writing was on the wall long before anyone had ever heard of Covid-19. Resilience might be the number one strategic priority in global boardrooms right now. The question we should be asking, however, is: what took us so long?
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Reconfiguration gathers momentum
Businesses used to thinking in terms of quarterly shareholder meetings are now having to make long-term strategic decisions, often at incredible pace. Research by Goldman Sachs suggests US companies are ploughing ahead with efforts to diversify supply chains with a particular focus on moving manufacturing imports away from China. Meanwhile Larry Fink, CEO of BlackRock, used his annual letter to shareholders to call time on globalisation, saying that countries including Mexico stood to benefit from what he referred to as a ‘large-scale reorientation of supply chains’.
Our data suggests the trend towards nearshoring is gathering momentum. Transaction volumes from suppliers in countries bordering the US have risen at their fastest rate over the past year. Invoice traffic from Canadian suppliers was 3.2 times higher in Q1 2022 than during the same period in 2021. Mexican supplier invoices were 4.1 times higher.
Away from the US, European textile manufacturers are increasingly looking to move operations to Turkey, and in South East Asia, politically unaligned countries such as Malaysia are benefitting from a growing ‘friend-shoring’ trend, where businesses look to shift local supply away from areas of geopolitical tension and into more neutral and stable territories.
Reconfiguration on this scale is complex, requiring sustained and coordinated investment from governments and business. Supply chains will need to evolve from single-node, linear relationships to multi-node networks with redundancies built in. To achieve this, buyers will need to identify, vet and onboard an entire ecosystem of new suppliers.
Analysts at IDC believe cloud-based, business-to-business marketplaces, which connect multiple buyers with multiple suppliers, have a key role to play in helping large organisations build resilience by offering easier access to suppliers and enabling far greater visibility all the way down the supply chain to source.
Old habits die hard
The tectonic plates of global trade may be shifting, but in the short term at least some habits are proving harder to break as the economic outlook darkens. In a perfect world buyers and suppliers would be working together to plan for and address such challenges as they arise. Unfortunately, our data suggests the opposite, with late payments to suppliers trending at almost double the rate we saw in the six months prior to the pandemic.
Buyers seem to be focusing on building up cash reserves to offset challenging market conditions. As we learned early on in the pandemic, such acts of self-preservation on the part of buyers can quickly turn into acts of self-harm as cash flow pressures begin to take their toll on vital supply lines.
Regardless of where suppliers are located in the future, businesses must be more cognisant of the impact their actions will have on the partners they rely on. Crucially, they must find ways to protect their own interests without cutting off the access to liquidity that keeps trade moving.
The road ahead
Businesses used to extended periods of relative stability are now seeing crises begin to merge into one another. In this new reality backlogs and breakdowns are the new normal while connectivity, transparency and agility have become basic operating principles.
Globalisation may be on the wane, but globalisation itself was never really the problem. What is really at issue here is short-term thinking, enabled through decades of relative stability that has allowed businesses to build ever leaner but more fragile supply chains.
Ultimately, the most efficient and resilient supply chains are, in effect, networked ecosystems of suppliers, distributors, retailers and every other partner. An uncertain future will demand that supply chains become a more connected, more diverse and more collaborative community than ever.