Supply chain disruptions cost over 900 billion euros

Published by Accenture at the World Economic Forum's annual meeting in Davos, "From Disruption to Reinvention - The future of supply chain in Europe" examines three possible scenarios for how the war could unfold in the coming year. It models the impact of each scenario on the eurozone in terms of cost and recovery timeframe.

Costly supply chain disruptions

According to the study, supply chain disruptions related to COVID-19 cost the eurozone economies approximately €112.7 billion in lost GDP in 2021. Even before the war, material shortages, logistics disruptions and inflationary pressures undermined economic recovery in Europe, with resurgent demand and precautionary hoarding of products overwhelming supply chains. Russia's invasion of Ukraine has exacerbated the situation, according to the study. For example, semiconductor shortages that were expected to ease in the second half of 2022 are now expected to last into 2023. A protracted war could result in a further loss of up to €318 billion in 2022 and €602 billion in 2023, while inflation could be as high as 7.8 percent in 2022 before declining in 2023. "Although experts agree that Europe will avoid a recession this year, the combination of COVID-19 and the war in Ukraine has the potential to significantly impact the European economy and cause a substantial slowdown in growth," said Jean-Marc Ollagnier, CEO of Accenture in Europe. "While before the war some normalization of supply chains was expected in the second half of 2022, we don't expect it now until 2023, maybe not even until 2024, depending on how the war develops."

Reinventing supply chains in a new economic order

Solving supply chain problems will be crucial for Europe's competitiveness and growth. According to the study, up to 30 percent of total value added in the eurozone depends on functioning cross-border supply chains, either for sourcing materials or as a destination for production.

The study suggests that supply chains need to be reinvented to meet a paradigm shift. Supply chains were designed primarily to optimize costs. However, in today's world, they must also be resilient and flexible to respond to increasing supply uncertainties. At the same time, they are becoming a key competitive advantage to enable future growth. The focus for addressing supply chain disruptions is on three key areas:

• Resilience: Supply chains must be able to absorb, adapt to, and recover from disruptions whenever and wherever they occur. Improved dynamic insights, risk identification, and mitigation solutions enable companies to deal with sudden changes in the supply chain. Scenario planning and risk and opportunity analysis help adapt to evolving supply and demand. Network modeling and simulation, stress testing, strategic buffer sizes, and multi-sourcing options enable companies to manage uncertainty.
• Relevance: Supply chains must be customer-centric and flexible to adapt quickly and cost-effectively to changes in demand. Capturing new data sets, including real-time data, inside and outside the enterprise across the value chain will be critical. Automation and artificial intelligence will enable companies to quickly identify new data patterns to make better decisions. Moving from centralized, linear delivery models to decentralized networks with on-demand production, and in some cases moving production closer to the point of sale, can help companies better meet customer expectations for order fulfillment.
• Sustainability: Modern supply chains must support companies' sustainability goals, if not accelerate their achievement. To gain stakeholder trust, companies need to make their value chains transparent, for example through blockchain or similar technologies. A shift from linear to closed-loop, circular processes that reduce waste will also be essential.

"Transparency in supply networks, including Tier 2 and Tier 3 suppliers, is critical," said Kris Timmermans, head of supply chain & operations at Accenture. "Companies need to move from a just-in-time to a just-in-case approach by diversifying their supply base, planning alternate freight routes, flexing their distribution centers, and building inventory. This comes at a cost, but it is a form of 'insurance' against future shocks. Key to this is investing in new technologies to make better use of data - from digital twins and analytics to supply chain control instances - as well as the cloud continuum, which delivers massive computing power in a cost-effective, flexible and sustainable way."

Energy security and availability of talent as further challenges

The study also highlights two deeper and longer-term challenges arising from the pandemic and the war: first, energy security, as European economies must address their heavy dependence on oil and gas supplies while accelerating their net-zero agenda; and second, the imbalance of available talent resulting from an aging population, changing workforce expectations, and shifting skill requirements.

Michael Brueckner, chief strategy officer at Accenture in Europe, said, "The war in Ukraine will increase the number and duration of disruptions in supply chains. The extent will depend on how the war develops. Nothing short of reinvention is required, as the inflationary environment, increasing regionalization, the energy transition and a tight talent market are already shaping a new economic order. To achieve greater security, it will be critical to improve energy efficiency and accelerate the transition to green energy sources. In addition, the ability to recruit, retain, retrain and upskill employees is emerging as one of the most pressing issues of this decade."

Source: Accenture