Firms shift supply chain approach prioritising resilience over profit, Economist report finds

Wed 18 Jan 2023
Posted by: Phillip Adnett
Trade News

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Businesses globally are prioritising long-term resilience over short-term profits, are growing by selling to new markets and are changing how they handle their supply chains, according to an influential report on international trade.

The 2023 edition of Trade in Transition by the Economist Impact research programme,  sponsored by logistics giant DP World, aims to “capture private-sector sentiment on international trade”.

The report’s findings are based on a survey of 3,000 responses from business executives across Europe, Africa, Asia-Pacific and the Americas, with additional input from trade experts and economic data.

Business resilience

A key emphasis of this year’s report was how businesses are improving their resilience to global economic headwinds and supply chain shocks, from events like the Covid-19 pandemic to Russia’s invasion of Ukraine and other geo-political incidents.

The findings examined how businesses were changing the way they were improving their supply chains, with diversification remaining relevant but concepts like ‘reshoring’ and ‘nearshoring’ starting to become more widely adopted.

Nearshoring is the practice of moving supply chain operations to a location closer to the business, whereas reshoring refers to bringing back an activity that was previously moved further away – effectively, reverse offshoring.

Supply-chain trends

Diversification remains the primary strategy with 48% of respondents saying they had prioritised this in 2022, although nearshoring (20%) and reshoring (15%) became increasingly popular last year, partly driven by ‘protectionism’ from various governments.

The proportion of those reducing the length of their supply chain fell significantly in 2022, with only 10% of executives saying they are attempting to do this, down from over 35% in 2021.

One effective method of building demand-side resilience was exporting goods to new markets, with 42% of respondents saying they were doing this to mitigate risk.

Threats

The vast majority (96%) cited geopolitics as being a major factor in how they managed supply chains.

Another major threat identified was inflation, with exports expected to rise only in Africa if this continues at the same rate as in 2022. South America and the Middle East are expected to be the worst hit regions by rising prices.

The Economist Intelligence Unit is predicting an average global inflation rate of 6.9%, down on 2022’s rate of 9.9%.

“The report is tangible evidence of how globalisation is changing as companies are forced to adapt to new challenges,” said DP World chairman Sultan Ahmed bin Sulayem.

“By bringing production closer to the final customer, firms can reduce the number of touch points involved in the supply chain and build greater resilience into the flow of cargo around the world. But the trade environment is always changing.

“The next challenge that will alter these trends is an economic slowdown looming over regional markets.”

Davos report

Some of the findings are echoed in the Chief Economists Outlook from the World Economic Forum, which surveyed a number of leading economists on their predictions for the year ahead.

The majority of respondents pointed to a triple threat of issues facing businesses, including weak demand, higher input costs and increased price of borrowing.

Ira Kalish, chief global economist at Deloitte Touche Tohmatsu, predicted a global economic “slow down” with declining inflation and tight labour markets, “thereby compelling companies to focus more on supply chain resilience and redundancy.”

On a positive note, 68% anticipated an easing of the cost-of-living crisis by the end of 2023, with a similar number (65) predicting the same for the energy crisis.