From disruption to reinvention: The future of supply chains in Europe
May 23, 2022
10-MINUTE READ
May 23, 2022
10-MINUTE READ
Depending on the length and severity of the war the cost of supply chain disruption in the Eurozone across 2022-2023 could amount to €242 billion (2% of GDP) in an ongoing war scenario, or €920 billion (7.7% of GDP) in a protracted war scenario.2
Supply chain shocks
Logistics breakdowns
Ports, vessels and containers are critical to trade. Around 90% of traded goods are transported by ocean shipping.8
The pandemic disrupted logistics networks, and the war is compounding everything. The result?
Rising rates and severe port congestion
With Russia-bound containers stranded in Europe and lockdowns in the Chinese port of Shanghai, global port congestion was still close to peak levels in April 2022, causing delays and low arrival reliability.9 | |
Container shortages and severe port congestion have driven shipping rates rising to nearly 10 times their level compared to June 2020.10 | |
Liners have ordered over 500 new container vessels, but they won’t come online until 2023 or 2024.11 |
Lack of material supplies
Companies are increasingly concerned about the lack of intermediate inputs and critical components.
Supply of these is concentrated: Over half (52%) of the share of EU import value of the most foreign dependent products originates from China.12
Material shortages are a rising concern
A tight talent market
The most complex and enduring supply chain disruptor is the talent challenge.
The changing world of work
Workers in Germany projected by 2035.14
UK workers are planning a job change.15
Heavy goods vehicle driver shortfall in Europe.16
of supply chain leaders say their employees are not advancing enough in the new skills their companies need.17
Energy security
Energy security is difficult to protect, as both world and European economies are still heavily reliant on oil and gas. Together, oil and gas make up nearly 50% of the total energy supply in 2022.18
How can we reduce dependency? Increase industrial and building efficiency and switch to green electricity and low-carbon transport fuels. A few comparisons:
Potential actions to reduce dependency on petroleum-based energy
Primary market forces such as economic growth, inflation and consumer sentiment, already impacted by the effects of the pandemic, will be further influenced by the evolution of the war. As a result, we have considered a number of possible scenarios that may unfold, with varying levels of economic impact. Unfortunately, the controlled impact scenario has elapsed. The ongoing impact is the current baseline.
Market force: Economic growth
The current view among economic forecasters is that the war will lead to a material deceleration in growth.21
Under the ‘ongoing’ scenario, Oxford Economics forecasts that the Eurozone will avoid recession, but Eurozone gross domestic product (GDP) will be 1.1 percentage point lower in 2022, relative to prewar forecasts made in January of 3.9%.22
The Eurozone’s trade relationships make it vulnerable to a slowdown
Market force: Inflation
Inflationary pressure may lead to potential upward pressure on wage inflation in some countries and industries.
Under the ongoing scenario, Oxford Economics forecasts that inflation will rise by 5.9 percentage points in 2022 and by 1.2 percentage points in 2023.23
Inflation is forecasted to rise in the Eurozone
Inflation impacts differ by industry
Industries bearing the most exposure to inflation are those in which material inputs, energy and labor represent a large part of the overall cost structure.
Take the chemicals industry, where material costs tie mainly to the cost of petroleum. Similarly, the high-tech and industrial sectors (excluding logistics/freight) rely on energy-intensive material inputs.24
The critical question: Is it possible to pass increased costs onto customers?
Cost structure of selected industries in Europe (% share of inputs)
The supply chain is the nerve center of the European economy
Up to 30% of total European value added relies on functioning cross border supply chains, either as a source of input or as a destination for production.25
We see particular exposure to supply chain shocks in manufacturing sectors, and even more in industries like high tech (e.g. 80% of final value added comes from inputs sourced across borders, while 75% of demand for final products comes from non-domestic markets), automotive and aerospace.26
Industry exposure to supply chain disruption varies
The value at stake
A protracted scenario could cost up to €920 billion in lost GDP for Eurozone economies as a result of supply shocks.27
Recovery time by scenario: supply chain disruptions could take up to 24 months to ease in a protracted scenario, versus approximately 12 months in the ongoing impact scenario.28
A paradigm shift
From: Optimizing for Cost | To: Optimizing for Value and Resilience | |
|
Real Time data and Intelligent Operations |
Redesigning for the new era
To contend with an uncertain future and build long-term value, European businesses need to redesign their supply chains around three key ideas: resilience, relevance and sustainability.
Resilience
Modern supply chains must minimize day-to-day risk but also absorb, adapt to, and recover from catastrophe whenever and wherever it strikes. Organizations can proactively manage risk and boost resilience by building intelligent and resilient supply chains that are risk-aware, secure, transparent, adaptive, fast-moving and optimized.
86%
of European C-level Executives are planning fundamental changes to their operations as a result of the crises.29
Resilience is enhanced by a combination of visibility, agile processes and robust networks which also offer additional benefits in the mid- and long-term, such as achieving sustainability goals and complying with supply chain regulations.
How to get there
Benefits
Relevance
Customer needs are accelerating and changing – especially in terms of value, choice, and convenience. Relevance requires that companies are there for their customers’ “moments that matter” by prioritizing the customer experience.
71%
of executives say that technology is giving them the opportunity to reimagine the fundamentals of their business.30
The relevant supply chain is intelligent and agile, able to anticipate and adapt to shifting business conditions and remain applicable to customer expectations, stakeholder demands and ecosystem potential with data, analytics and automation at its core.
How to get there
Benefits
Sustainability
Every business must now be a sustainable business. Companies must pursue improved environmental, social, and governance (ESG) performance by transforming their operations to be circular, net zero and trusted.
63%
of European executives state that becoming a truly responsible/sustainable business is a top priority over the next three years.31
The sustainable supply chain factors in current and future needs of all stakeholder groups including business leaders, employees, customers, investors, ecosystem partners and society at large.
How to get there
Benefits
Finding ways to grow amid uncertainty is the new perennial leadership challenge.
For leaders and their organizations, there is no return to the relative comfort and safety of the not-so-distant past. The war in Ukraine, on top of the effects of the pandemic, has made clear that many of the comfortable certainties on which business leaders have long relied are no longer there.
Success may ultimately depend on how well leaders adapt to the demands of this new, testing environment. More than ever, their resolve will be critical.
The material in this document reflects information available at the point in time at which this document was prepared as indicated by the date provided on the front page, however the global situation is rapidly evolving and the position may change. This content is provided for general information purposes only, does not take into account the reader’s specific circumstances, and is not intended to be used in place of consultation with our professional advisors. Accenture disclaims, to the fullest extent permitted by applicable law, any and all liability for the accuracy and completeness of the information in this document and for any acts or omissions made based on such information. Accenture does not provide legal, regulatory, audit, or tax advice. Readers are responsible for obtaining such advice from their own legal counsel or other licensed professionals. Accenture and its logo are registered trademarks of Accenture.
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References
1 Accenture Research analysis of Oxford Economics data
2 Oxford Economics Global Economic Model results for scenarios designed by Accenture Research
3 “Commodity Markets Outlook April 2022”, World Bank (2022)
4 Everest data, used with permission
5 “Commodity Markets Outlook April 2022”, World Bank (2022)
6 Oxford Economics data
7 “Russian and Ukrainian seafarers make up 14.5% of global shipping workforce, according to ICS," International Chamber of Shipping (2022), used with permission
8 “Ocean shipping and shipbuilding," OECD
9 “Container shipping: Volume growth calms, tariffs remain strong,” ING Bank N.V. (2022)
10 “Harper Peterson Charter Rates Index,” Harper Petersen, used with permission
11 “Container shipping: volume growth calms, tariffs remain strong,” ING Bank N.V. (2022)
12 “Strategic dependencies and capacities,” European Commission (2021)
13 VDA Press Release (“Production and market also down in April,”), from 4 May 2022, used with permission
14 “Nur mit einer jährlichen Nettozuwanderung von 400.000 Personen bleibt das Arbeitskräfteangebot langfristig konstant,” Institute for Employment Research (2021)
15 “The great resignation: 69% of UK workers ready to move job,” Randstad (2021), used with permission
16 “European road freight rates index up 4.3 points in Q1, hitting a new record,” IRU (2022), used with permission
17 “Skilling the future supply chain workface is easier than you think,” Accenture (2022)
18 Thunder Said Energy 2022, used with permission
19 “The war in Ukraine: A moment of reckoning for the oil and gas industry,” Accenture (2022)
20 ibid.
21 Accenture Research analysis based on Morgan Stanley, Barclays, Goldman Sachs, BNP Paribas, Credit Suisse and J.P. Morgan 2022 GDP & Inflation Outlooks
22 Oxford Economics Global Economics Database. Prewar refers to forecast as of January 2022
23 ibid.
24 Accenture Research analysis of OECD World Input Output tables
25 Accenture Research analysis of OECD TiVA and Oxford Economics Industry Databank
26 ibid.
27 Oxford Economics Global Economic Model results for scenarios designed by Accenture Research
28 ibid.
29 Accenture Survey of 1,100 C Suite executives in Europe; 10th December 2021 – 21st January 2022
30 Accenture Survey of 300 C Suite Executive in Europe, 10th January – 28th February 2022
31 Accenture Survey of 545 C Suite Executives in Europe, 1st October – 30th November 2021
Cost of supply chain disruptions
Oxford Economics estimated the impact of supply disruptions for 2021 in two stages, focusing on energy and non-energy bottlenecks separately:
STEP 1: The impact of non-energy bottlenecks (logistical disruptions, and shortages of labor and materials) was estimated:
STEP 2: We estimated the impact of higher energy bills:
We ran another counterfactual scenario on the Oxford Global Economic Model to estimate how the economy would have developed if energy prices had remained at more ‘normal’ levels.
STEP 3: We then compared the counterfactual with the outturn in 2021 to estimate losses from these energy-related disruptions.
The estimated impacts resulting from energy and non-energy disruptions were combined to produce total cost estimates (based on output losses and measured in nominal Euro terms) for the Eurozone. These were then aggregated to estimate the total impact.
Industries of focus include manufacturing, construction, retail and wholesale trade and transportation and storage.
Scenario analysis
STEP 1: The Oxford Global Economic Model was used to project forward the path of the Eurozone economy under three alternative scenarios relating to the Ukraine conflict:
STEP 2: Potential losses of the ongoing baseline scenario and those of a more protracted scenario are measured as the differential relative to prewar forecast, adding both 2022 and 2023 losses in real Euros.
Recovery times are based on Oxford Economics baseline assumptions and draw on a range of Oxford Economics forecasts, market data, and other indicators of future supply capacity.
Industry dependance on cross-border inputs and demand
STEP 1: As demand impacts, we estimate the share of non-domestic demand for a country’s total production. Using data from the OECD TiVA tables, for each industry in each country we estimated the following shares:
STEP 2: As supply we compute the share of value added of a country’s final demand that comes from inputs of rest of the world. Using data from the OECD TiVA tables, for each industry in each country we estimated the following shares: