Making the most of a crisis: reinventing value chains

Global trade relies on the free flow of supplies around the world. A storm of disruptions - the Covid-19 pandemic, the war in Ukraine and climate change - have already demonstrated what can happen when events block that flow. From failed harvests to backed-up ports, closed production centres, regulatory barriers and workers without livelihoods, many of the complex workings of global value chains, built around a just-in-time delivery model, stopped delivering.

Companies are working hard to get value chains back on track, but few factor in how disrupted the future in which those value chains need to operate will be. With most of the focus on mid-term solutions to fix immediate problems, we're in danger of missing the fact that in the longer term, value chains will have to significantly change.

Take, for example, agricultural value chains. Climate change is already impacting crop production, and this will get much worse. As droughts, storms and floods increase, agricultural yields will fall, sending reverberating shocks across global economic and trading systems. As recent analysis grimly shows, all global cotton growing regions will be exposed to increased risk from at least one climate hazard by 2040. Key food crops may face up to a 25 per cent decrease in production by 2030.

This is going to create fierce competition for viable agricultural land. Decisions will need to be made about whether land is used for food, feed, fuel, fibre, or for vital carbon capture and biodiversity solutions. Feeding the world's growing population amidst high uncertainty about where, how and if crops can be grown will mean some radical and unavoidable changes to value chains.

It's not just crop production that's being hit: climate change will disrupt every stage of the value chain. Take shipping: in this summer's heatwave, freight ships weren't able to travel fully-loaded on the Rhine, one of Europe's most important rivers for transporting cargo across the continent, because water was at its lowest level in 15 years. This severely impacted the delivery of energy supplies to Germany, and also caused a supply shock within manufacturing.

Reaching net zero emissions already calls for radical mitigation across value chains, from production to transport and beyond. But at the same time, we need to build resilience against some looming future challenges. If we seriously track and join the dots between trends, from changing regulation and increasing protectionist policies, to emerging technologies and consumer expectations, there is no scenario in which most value chain models of today work in the future. And anyway, we need to solve value chain issues not just to ensure reliable supply so business can thrive, but for social and environmental good. If we are to create an industry that is equitable and fair, and resilient to a significantly altered climactic and social context, that means addressing long-standing structural inequalities and power dynamics too.

Responding to the challenge 

Some corporations are responding to the challenge, but in piecemeal ways. Looking to reduce bottlenecks, some are putting their faith in reshoring. Others are opting for 'friendshoring' which like reshoring brings production closer to home, but isn't restricted to domestic production, and focuses sourcing from reliable friends and allies.  Companies may opt for vertically integrated supply chains, retaining control over the different stages of production, or developing new pathways to market to reduce the complexity of the supply chain and link producers more closely with consumers. Regional trade agreements are gaining momentum.

Though a move to national or regional supply chains might reduce supply risks, it may present challenges to growth or scale, and it won't be the answer for commodities that can't be produced locally. Siloed, partial or technical solutions - designed to improve existing value chain models, but not fundamentally reinvent them - won't guarantee resilience in a world reverberating from the shocks of climactic and social discontinuity. As the context of global value chains continues to change, rather than a 'return to normal' we should prepare for an inflection of pressure points and continuing disruption.

With these trends in view we need to look at alternatives - models which will better prepare all value chain actors, from smallholder farmers to brands and retailers, for the turbulent decades ahead. Every commodity and geography will have its own unique set of conditions, so cookie cutter solutions won't work. We'll need to look at how to evolve each value chain as a whole, unique system -  albeit informed by common trends, models and prototypes.

Today's crisis is our chance to reset our ambition - to reinvent value chains to mitigate vital carbon emissions and foster resilience while addressing critical social issues, so that business, people and the planet can flourish. The cost of investing in deep transformation now will be much less than the long-term costs of volatile, or broken, supply chains. Let's not miss this opportunity.