Supply Chain Optimization
Managing Supply Chain Disruptions in the Middle East
Dec 7, 2021
9 mins read
Africa-based executives had by far the highest rate of reporting logistics shocks (48%), not a surprising result given the poor state of infrastructure across much of the continent. Executives based in the Middle East mostly cited a demand shock. – DP World, Trade in Transition, Global Report, Oct-Nov 2020.
Since the onset of the COVID-19 pandemic, businesses in the Middle East fared well in facing supply chain risks compared to those from other regions, despite reportedly facing a high number of logistics shocks as seen in Africa.
A prime example is how governments in the Middle East have begun to rethink food security targets after the disruptions to their food supply chains. They have started earmarking their investments for food supply chain networks since the pandemic. Presently, their major focus lies on local production, warehousing and strategic sourcing.
Major supply chain risks in the Middle East
Transportation: Trade routes blockage – Congestion at ports
About 1.9 million barrels of oil a day go through the canal, according to shipping journal Lloyd’s. That’s about 7% of all seaborne oil. – Lloyd’s Report, 2021
The recent Suez Canal blockage caused a sudden disruption in the global supply chain. This issue has affected shipping goods from Asia to Europe and the Middle East. Egypt’s Suez Canal Authority mentioned lack of visibility due to a sandstorm as the major reason for the blockage.
Broken trade environment and political instability
Since the past five years, the globe has been witnessing a broken trade environment with increasing economic nationalism, trade tensions, complex trade risks, trading blocs etc. With the pandemic and political instability, businesses in the Middle East have begun to reconsider supply chain strategy to improve their resilience.
Oil price fluctuations
Fluctuations in oil prices and oil supply disruptions are majorly caused by political events, supply pipeline issues or weather problems.
Oil price and logistics operating cost follows a linear pattern, and if we double our fuel prices, operating cost would increase by about a factor of 1.8. This factor would vary with the mode of transportation we choose and also how optimized our routing is.
With heavy volumes of goods and sensitive information to be handled, it is necessary for the supply chain industry to strengthen its cyber security systems.
As malware, hacking and phishing attacks continue to take place with greater frequency, businesses should ensure that their supply chains can quickly respond to them in order to maintain supply chain integrity and overall business continuity.
Risk management maturity model
Supply chain risk management maturity levels define how well a company has developed the risk management processes in comparison to industry benchmarks.
The four major supply chain risks areas are:
Supply risks: These are risks associated with the sourcing of raw materials. For example: poor quality, high costs, high lead time, supplier communication.
Demand risks: These are risks associated with fluctuations in customer demand. For example: high or low product demand, excess inventory holding, product distribution.
Process risks: These are risks associated with supply chain strategy and its implementation. For example: inefficiencies in supply chain, process design, logistics
Environmental risks: These are risks associated with social, economic or political changes. For example: natural disasters, changes in regulation and compliance, taxes, free market interest rate, currency exchange rates.
The table below shows what is the industry standard for four major risk categories, this can be used to benchmark what is one’s current risk maturity level.
|Type of risk||Industry Standard Maturity|
|Supply risks||Most mature|
|Demand risks||Moderately mature|
|Process risks||Mid-low mature|
|Environmental risks||Low maturity|
How network optimization solutions help companies counter supply chain disruptions
Network optimization software is a tech solution that helps businesses address disruptions holistically. It helps them plan their supply chain networks effectively based on numerous constraints, changing consumer demands, market dynamics, and business objectives.
Optimize sourcing decisions
Since the COVID-19 outbreak began, the companies that depended on China for assembled manufactured parts or raw material were heavily affected. Being an unanticipated event, they found it very difficult to find alternate suppliers for their products.
Network optimization software assists supply chain planners to optimize their sourcing decisions depending on their business model, profit impact, supply chain lead time and geographic location. It helps them identify the ideal goods flow in the supply chain and model lead times of alternate suppliers. It enables them to develop and implement supplier contingency plans against disruptions, thereby minimizing the impact of the total cost to serve.
How do businesses enable strategic sourcing?
In a complex supply chain, it is of utmost importance to categorise your suppliers using the Kraljic Matrix. Based on the criticality of raw material and difficulty in sourcing, we can have four categories of suppliers. Kraljic Matrix helps you understand for which suppliers you should identify alternatives and where you should focus more on developing long term relationships than minimizing cost.
- Partner: Focus on developing long term relationships and growing together
- Bottleneck: Focus on looking for alternate suppliers and reducing risk
- Leverage: Focus on low cost sourcing as a large number of suppliers means greater scope for negotiation
- Non-critical: Focus on setting up an efficient process for sourcing
Identify and rectify bullwhip effects
The bullwhip effect is an extreme change in supply upstream caused by small change in downstream demand. Excess inventory leads to added waste and results in increased lead times, poor customer experience and lost business.
Network optimization solution helps businesses gain insights into such supply chain occurrences. It allows them to perform sensitivity analysis, which in turn, helps them plan in advance for any such disruptions. This tool enables them to build a supply chain network design that incorporates business needs, customer demand and constraints.
Network optimization software also helps businesses to finalize: A push strategy for goods with stable demand, and a pull strategy for goods with erratic demand.
Determine the ideal number of nodes and warehouse service level
The rising trend of express delivery demand requests from consumers has pushed businesses to improve their warehouse service levels. One way to achieve this is to add a warehouse in each of the major demand areas. Though this strategy will yield a high service level, high operating costs will make businesses unprofitable.
Businesses are struggling to find the optimal balance between establishing optimal number of nodes and managing stock-out risks by using optimal cycle and safety stock.
Network optimization software enables businesses to identify
- if they need to open new nodes or consolidate a few, find ideal locations for establishing a node,
- if warehouses are holding excess inventory, and establish ideal safety stock following a Multi Echelon Inventory Optimization.
Build a lean supply chain
Building a leaner supply chain includes eliminating all non-value added activities, unnecessary movements, excess inventory or capacity. One of the major wastes in logistics is extra movement legs, and we need to assess our current transportation lanes, if each of the movements are necessary or we can eliminate some for instance to serve some retailers directly from distribution centers.
Warehouse capacity decisions also play a vital role towards building a leaner supply chain. Maintaining excess warehouse capacity results in locked capital as we have unused space whereas lower capacities create supply-demand mismatches.
With a network optimization solution, businesses can identify mismatches among supply chain nodes, optimize transportation lanes by opening a few lanes and eliminating some. It helps them determine the minimum number of warehouses that can optimize supply chain performance, strategically creates value and enables profitable growth.
Improve supply chain visibility
One of the three important V’s in the supply chain is visibility, others being velocity and variability. Siloed supply chain approach makes businesses ineffective in handling any supply chain risks. In order to have a holistic perspective of the supply chain for risk mitigation, network optimization solutions are inevitable.
The digital twin feature and role-based information sharing in network optimization solution enables businesses to conduct multiple scenario plans and instantly make the information available to relevant stakeholders.
With real-time insights from past disruptions, a digital twin enables companies to build a digital replica of on-ground supply chain operations. It simulates multiple disruption scenarios through ‘what-if’ analysis enabling them to improve the supply chain risk preparedness of businesses.
As economies recover from the impact of the coronavirus, businesses in the Middle East are finding it challenging to fulfill the unexpected rapid recovery in demand. The backlog of cargo owing to numerous supply chain disruptions is increasing logistical delays. During this stage, businesses are at the helm of redesigning their supply chain networks.
With supply chain disruptions destabilizing the business operations at regular intervals, risk mitigation has gained more prominence. Prioritizing risk mitigation has led businesses to work on their supply chain network planning. A proper technological assistance can give them the required edge in managing supply chain disruptions.
Locus NodeIQ enables businesses to identify, classify, analyze and predict supply chain disruptions in their network. Its scenario planning capabilities help companies to gain a granular view of critical supply chain elements and risks. Its actionable insights enable them to identify hidden inefficiencies, drive productivity and improve bottom line results. This allows them to build contingency plans at strategic level, thereby increasing resilience against disruptions and uncertainty.
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ABOUT THE AUTHOR
Lakshmi Narashimman is one of the senior writers at Locus. He is a voracious reader and a passionate writer who loves making complex aspects sound simple.Read other blogs by this author
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Managing Supply Chain Disruptions in the Middle East