What’s Causing Port Backups and Shipping Delays? – Interos

Posted on August 30, 2022April 26, 2023 by interos-blogger

By Alberto Coria

Since 2020, shipping delays have been one of the defining supply chain disruptions of the pandemic era. For several years those delays could be largely attributed to port backups, with cargo ships stuck in long backlogs, waiting to dock and unload containers.

Now, the chokepoint has moved further downstream to the “dwell times” containers are facing at ports before being shipped to warehouses. These dwell times have grown due to a nationwide shortage of intermodal chassis (the unique trailer trucks use to move shipping containers between ports, railways, and shipper facilities) which has caused railyards to become congested and affected their ability to accommodate shipments from ports.

While labor issues have not yet become a critical factor in port or railyard congestion, disputes with unions still linger and pose a potential operational disruption in the future. Understanding the complexity of the situation at U.S. ports is critical for protecting your supply chain, as is investing in resilience-focused technologies that enable insight into that complexity.

In this blog, the analysts from Interos dive deeper into the causes behind increased dwell times, and the ripple effect they’re having across the entire U.S. supply chain.

Infrastructure

U.S. ports have now reduced the backlog of ships waiting in port by an average of 70%, but the issue now lies in dwell times, which is how long goods must sit at ports before they can be transported to warehouses or their final destinations. Due to an ongoing backlog at railroad terminals such as in Chicago, ports don’t have the capacity to move goods out of their ports fast enough once they are unloaded off ships.

Shortage of Intermodal Chassis

An intermodal chassis is a rubber-tired trailer under-frame on which a container is mounted for truck transport and is necessary to transport containers from ocean or rail to truck. A nationwide shortage of intermodal chassis is one of the key drivers behind rising dwell times at ports. Additionally, a surge in shipments that has elevated the need for intermodal chassis in the U.S. has occurred at the same time as U.S. tariffs have reduced the imports of chassis units from China. The tariffs, which were announced in September 2018, caused chassis imports from China to decrease by 25,000 – 30,000 units in 2019, with American manufacturers failing to increase production at levels needed to replace the lost units.

Line graph showing chassis imports over time.

Surge in China Shipments

As COVID-19 emerged in China and became a worldwide pandemic in March of 2020, shipments from China to the U.S. dropped. With COVID regulations in the U.S. also beginning to take effect, port labor was furloughed or cut. Once trade resumed, port workers were slow to return to work as shipments began to rise again, creating a backlog of ships waiting to dock at U.S. West Coast ports. This backlog was only reduced to normal levels at the end of Q2 2022.

Line graph showing a rise in Shipments from China over the course of 2019 - 2022.

When the port of Shanghai was under lockdown due to China’s “zero-COVID” policies in May and July of 2022, shipments slightly dropped before surging upwards to levels typically only seen during the holiday season in the U.S. ($48.6 billion USD in June 2022, similar to $49.9 billion USD in December of 2021).

As shipments from China to the U.S. were continuously rising, a surge of imports after the Shanghai port closure occurred at the same time as a national intermodal chassis shortage was occurring in the United States. Railroad terminals had a backlog of containers as they could not find intermodal chassis to offload the containers to trucks, forcing them to reduce shipments from ports, and in turn, causing the dwell time for containers at ports to rise.

Railroad Congestion and Port Dwell Times

Due to the shortage of intermodal chassis in the U.S., railroad terminals such as Chicago are not able to offload their cargo to trucks and have containers sitting on railcars in their terminals, which is, in turn, limiting their ability to take in more shipments from ports.

Chicago’s railyard is the world’s third busiest intermodal hub, where nearly a quarter of the U.S.’ rail shipments arrive or pass through. Chicago is also one of the nation’s prime distribution hubs, as it is within a 500-mile journey of about one-third of the U.S. population. With Chicago playing such an important role within the freight railroad ecosystem, its congestion is one of the key drivers behind the rising dwell times at key U.S. ports such as LA, Long Beach, Savannah, New York, and Charleston.

Another issue causing Chicago’s railyard to experience such high congestion has been a pandemic-driven decrease in the number of rail workers, while railroad operators simultaneously moved to implement precision-scheduled railroading (PSR). PSR is a strategy for railroads to drive more efficient operations on fixed schedules, with the intent to use fewer railcars, and fewer terminals, and provide predictable and reliable service. However, the PSR implementation effectively made railroad operators unable to deal with fluctuations in the supply chain, and with the recent surge of shipments from China, the industry has found itself to have a shortage of equipment to deal with the surge.

In some ways, PSR is a microcosm of the bigger-picture supply chain problems created by the dominant Just-in-Time (JIT) inventory/operational model that has dominated international trade and manufacturing for the past forty years. The JIT model also leverages highly precise scheduling and demand forecasting to minimize storage and shipment costs, prioritizing efficiency over most other metrics for success. Like PSR, the JIT model similarly buckled under the unpredictable demand spikes crated by COVID. Taken together, the failure of both of these systems makes the case that resilience must demand equal or even greater priority than efficiency.

Labor Issues

In contrast to the ongoing infrastructure issues causing port and railyard congestion, labor disputes for both industries appear to be negotiated in good faith by port and rail operators. The majority of labor disputes are regarding port or rail operators seeking to purchase equipment that increases the level of automation in their operations, and therefore threatens the jobs of union workers. As government investment into U.S. infrastructure increases, it is likely that the number of unions filing labor disputes against proposed automation will increase. Interos recommends continuous monitoring of these labor disputes.

Current Labor Market

Interos analyzed official employment data from the U.S. Bureau of Labor Statistics from 2012 – 2021 and found the data suggests that employment in 2020 dropped significantly since 2019 due to the COVID-19 pandemic, but it is not yet at a level of critical risk. Line graph showing jobs in rail transportation over time.

Interos also analyzed employment data for port labor for the years 2012-2021 and found the data suggests that employment levels for port workers dropped significantly since 2019 due to the COVID-19 pandemic but is not yet at a level of critical risk.

Line graph showing water transportation jobs over time.

Potential Outcomes

The chokepoint causing congestion at ports and railyards has moved downstream from backlogs of ships waiting to dock to long dwell times and overflowing railyards. The congestion is also now apparent at ports throughout the U.S. as opposed to just being a West Coast port problem as it was in 2020 and 2021. Interos has modeled three hypothetical scenarios representing possible outcomes:

Best: Government-funded infrastructure projects are implemented quickly, and U.S. intermodal chassis producers meet demand within 6-12 months. The long dwell times and congested railyards are likely to diminish within 12 months in this scenario.

Moderate: Government-funded infrastructure projects are implemented within 2-3 years and U.S. intermodal chassis producers meet demand within 12-18 months. The long dwell times and congested railyards are likely to diminish within two years in this scenario.

Worst: Government-funded infrastructure projects take over 4 years to be implemented, U.S. intermodal chassis producers meet demand within 2-3 years, and the port and rail unions implement a labor strike. In this scenario, the long dwell times and congested railyards are likely to continue for up to four years before diminishing.

Conclusion

Despite massive reductions in cargo ship backups, major U.S. ports and railyards still face significant delays due to supply chain issues surrounding intermodal chassis availability, a workforce that is still slowly recovering from COVID-driven layoffs, and the adoption of new railyard technologies that prioritize efficiency over resilience.

Despite popular belief, labor disputes currently have relatively little influence over these delays, though that may change as both the implementation of — and opposition to — automated port and rail technologies increases.

With enough government investment in critical infrastructure, and a more widespread adoption of resilience-focused approach to operations alongside the technologies that enable it, these delays could be greatly reduced within a matter of twelve months. However, a failure to do so will likely mean continued shipping delays for many U.S. industries and consumers.

To learn more about the potential impacts of supply chain disruptions and what companies are doing about it, check out our annual industry survey, Resilience 2022.

The Global Supply Chain & Operational Resilience are Bigger than Protectionism

Posted on August 18, 2022November 21, 2022 by Geraint John

By Geraint John

Since the U.S.-China trade war kicked off in early 2018, “supply chain resilience” has become a top agenda item for procurement leaders, company bosses and legislators alike.

The case for resilience has been massively strengthened during this period by the COVID-19 pandemic, severe semiconductor shortages, and most recently Russia’s invasion of Ukraine.

But what started out as a largely operational effort by businesses to shore up fragile supply chains is in danger of being subsumed by political considerations, as governments pour money into favored firms on home soil in an attempt to reverse globalization.

In this febrile atmosphere, advocates of operational resilience need to guard against attempts to narrow its focus unduly to national interests and protectionist trade policies.

Globalization & bringing production ‘back home’

Recent years have seen a growing debate about whether globalization — a 30-year-plus stretch in which hundreds of thousands of firms shifted production to far-flung destinations in search of cost efficiencies — is in retreat.

Bringing sourcing and manufacturing activity back to home countries (onshoring or reshoring) or neighboring ones (nearshoring) is seen as proof that global supply chains are not the panacea they once were.

After several false starts, in which there has been plenty of talk but relatively little action, Wall Street is now pointing to evidence that suggests a reverse trend may finally be real.

Last month, analysts at Bank of America and Barclays were among those who noted a growing number of references to reshoring by CEOs and other senior executives at S&P 500 companies during second-quarter earnings calls.

Data from Bloomberg shows a 1,000% increase in use of the terms onshoring, reshoring, and nearshoring in these calls compared with pre-pandemic levels (see chart).

The business drivers for changing global operating models in this way include:

A closing of wage differentials between offshored locations — especially China — and home nations
More expensive logistics costs to transport components and finished goods by air and sea
Extended lead times and shortages of materials and labor caused by COVID lockdowns and other disruptive events
The need to respond more quickly to evolving customer requirements in local markets

An expanding national security agenda impacts operational resilience

At the same time, governments in the U.S., Europe and elsewhere are pushing for the rebuilding of domestic supply chains in the name of national security and self-sufficiency.

In practice, this means reducing dependence on China and Russia as tensions escalate and a largely stable and benign era of international free trade is fractured by the battle for global economic and geopolitical supremacy.

Russia’s war in Ukraine highlighted just how reliant many countries are on it for supplies of oil and natural gas, as well as many critical industrial and agricultural commodities.

China, meanwhile, remains the world’s preeminent manufacturing base, and an electronics powerhouse that dominates supply chains for everything from 5G networks to lithium-ion batteries.

Both countries have been subjected to an ever-growing list of Western sanctions and export controls, with Russia essentially closed for business and China’s access to U.S. and European chip-making equipment and related technologies heavily restricted.

U.S. House Speaker Nancy Pelosi’s controversial visit to Taiwan at the beginning of August shone a spotlight on that island’s almost total control of advanced semiconductors — used not only in the latest smartphones, but also cutting-edge military systems — and its vulnerability to a Chinese takeover.

A&D semiconductor supply chains rely on Taiwan and China

An analysis of Interos’ global relationship platform data shows that:

The major U.S. aerospace & defense (A&D) companies each have as many as 85 direct (tier-1) relationships with semiconductor suppliers
The vast majority of these tier-1 relationships are with U.S.-headquartered companies, led by the likes of Intel, Broadcom and Nvidia
At the tier-2 level, big Taiwanese chip makers such as Taiwan Semiconductor Manufacturing Co. (TSMC), Advanced Semiconductor Engineering (ASE) and United Microelectronics Corporation (UMC) have hundreds of connections to U.S. A&D supply chains
SMIC, China’s largest semiconductor manufacturer, has over 300 connections to tier-1 suppliers serving U.S. A&D customers, and there are many other Chinese-owned suppliers present in these supply chains at tiers 2 and 3

In a survey conducted by Interos in the first quarter of 2022, U.S.-based respondents in A&D said that, on average, almost two-thirds (64%) of their suppliers were located outside North America, with 16% in Asia (see chart below).

They expected just over half (53%) of these contracts to be reshored or nearshored during the next three years.

Public subsidies incentivize regional production

Regionalizing semiconductor manufacturing to reduce over-concentration in Taiwan makes sense to the West for risk diversification and national security reasons — particularly in the light of China’s extensive live-fire military drills in the area following Pelosi’s visit.

Manufacturers such as TSMC, Intel, Samsung, and Micron are being showered with billions of dollars in public subsidies to build fabs in the U.S., buoyed by the recently passed CHIPS and Science Act.

It’s a similar story for the lithium-ion batteries needed to power a new generation of electric vehicles (EVs) and clean energy solutions.

The climate measures of the new Inflation Reduction Act promise over $15 billion in subsidies for EV and other manufacturers to expand capacity within the U.S.

As it stands, this legislation goes further in a bid to reduce dependence on China by withdrawing consumer tax credits from vehicles that contain Chinese battery components (in other words, most of them).

In practice, however, replicating entire supply chains onshore, whether for silicon chips or lithium-ion batteries, is likely to be prohibitive for both cost and time reasons, putting operational resilience in jeopardy.

An in-depth article by Nikkei Asia lays bare the fact that semiconductor supply chains are reliant on a complex network of specialist sub-tier suppliers, not all of whom are going to set up shop next door to shiny new wafer plants.

The U.S. government appears to accept that domestic supply chains have their limits, judging by recent speeches from top officials.

Treasury Secretary Janet Yellen and Trade Representative Katherine Tai are among those who have been busy promoting the virtues of “friendshoring” — doing business only with trusted allies and not authoritarian regimes.

While this concept, and government intervention to support domestic production, seem like sensible strategies to boost supply chain resilience in critical industries, they have come under fire from a number of respected commentators.

Earlier this month, Financial Times trade columnist Alan Beattie questioned whether fashioning an anti-China trading bloc will really be that simple and argued that subsidies and tax credits have the potential to distort markets and increase prices.

And a cover story in The Economist on reinventing globalization warned: “The danger is that a reasonable pursuit of security will morph into rampant protectionism.”

Resilience is about more than security

Where does all of this leave procurement, supply chain, and operational resilience leaders?

For starters, they should be wary of attempts by some politicians and journalists to equate supply chain resilience solely with re/near/friendshoring and national security (including in the otherwise excellent Nikkei article mentioned earlier).

Research by the International Monetary Fund (IMF), discussed in a previous blog, concluded that diversifying sources of supply abroad is a more effective way of building resilience than concentrating it at home.

This finding is supported by a newly published Gartner survey of 400 global supply chain leaders, which found that diversification away from China to other low-cost countries in Asia was more prevalent than nearshoring to developed markets.

A balanced view of supply chain resilience in a changing trade environment comes from Christine Lagarde, a former IMF boss who is currently President of the European Central Bank.

In a speech in Washington, DC, in April, Lagarde pointed to “three distinct shifts in global trade”:

Reducing dependence and geographic concentration risk by diversifying suppliers, stockpiling essential materials, and operating “just-in-case” supply chains.
Focusing less on cost efficiency and more on supply chain security through industrial policies and other government measures.
Developing regionalized import-export and risk-sharing models where the first-choice “rules-based multilateral trading system” no longer functions effectively.

Lagarde argued that the goal for Europe should be “open strategic autonomy” — defined as striking “a careful balance between insuring against risk in areas where our vulnerabilities are excessive and avoiding protectionism”.

At a time when the benefits of globalization and free trade — including prosperity, innovation, openness, and integration—– are under attack, this is a message that the U.S. and other developed economies would be wise to embrace.

To learn more about how the Interos platform can help your firm face challenges relating to globalization, supply chains, and operational resilience, visit interos.ai.

Build Operational Resilience into your Extended Supply Chain

Posted on August 17, 2022September 7, 2022 by interos-blogger

What is Operational Resilience?

Operational resilience is the ability to continue providing products or services in the face of adverse market or supply chain events.

At first glance, it’s easy to confuse operational resilience with concepts like business continuity or being agile. Business continuity refers to the specific contingency plans organizations put in place for known emergency scenarios. Agility is simply a quality any business can have, referring to how quickly it can react to a disruption. Both of these are limited in scope and focused on the tactics needed to overcome an immediate, individual problem, such as a tsunami that closes a particular port or a cyberattack through a known software vulnerability.

Operational resilience incorporates these concepts but is a bigger-picture strategy that:

Maps entities in your supply chain to the business functions they ultimately enable, as well as the strategic goals they support
Accounts for both known and unknown threats to operations
Establishes repeatable processes that convert lessons-learned into institutional knowledge

In a time where supply chain disruption is costing organizations an average of $182M annually in lost revenue alone, building resilience has never been a greater priority. An operational resilience strategy consists of three core principles:

Deep Planning: By broadening the scope of risk-related planning, organizations can move from a response-driven model to a prevention-focused approach that enables supply chain resilience. Deep planning requires creating a complete inventory of your extended supply chain and the latest risks within it, connecting those entities to the strategic business objectives they support, and modelling potential future scenarios.

Per Interos’ research, most organizations only have visibility into half of their suppliers, and only one-tenth of companies continuously monitor them for risks.

Cross-functional Coordination: A threat to the supply chain is a threat to the entirety of your organization. This makes the job of managing risk the responsibility of not just your entire enterprise, but also your immediate partners and vendors. 8 in 10 supply chain leaders agree that this kind of collective responsibility is necessary to protect against disruption. This requires close coordination between different business units to set objectives, develop KPIs, and execute on tactics.
Data-based Decisions: There are countless new technologies changing the way businesses understand and make decisions about their operating environment, including AI, machine learning, big data storage and processing – and more. These tools can create a new depth and breadth of supply chain resilience and understanding —if they are leveraged correctly.

Organizations looking to do so will need to continuously evaluate multiple risk factors across the many tiers of their extended supply chain, including geopolitical, financial, restrictions, cyber, operational, and environmental/social/governance (ESG) risks.

As the intense disruption of the past several years has shown, the connections that make up the global economy are incredibly complex and fragile. Even the well-prepared cannot totally insulate themselves from its effects. But they will be able to develop plans to mitigate its impact and emerge as a more competitive player in its wake.

Organizations without an operational resilience framework:

Struggle to react to disruptive events as they occur
Duplicate efforts as a result of disparate/siloed business units and suboptimal communication
Face revenue losses and brand damage resulting from product/service disruptions

Meanwhile, organizations with a successful operational resilience strategy:

Monitor both potential and imminent risks continuously, preemptively adjusting to mitigate disruption and maximize opportunities
Efficiently and cooperatively identify disruptions, assess the possible business impact, and act decisively
Anticipate and plan for potential high-risk disruptive events, and build both the institutional knowledge and organizational structure to quickly respond to them

Only organizations with operational resilience are able to minimize disruptions, recover from shocks faster, protect their reputations, and ultimately capitalize on opportunities. Operational resilience will be the new standard sought by corporate boards and government leaders. Neither can afford to wait days or weeks to understand a disruption when competitors or hostile actors are acting faster. They need to act now. “I didn’t know,” is no longer an acceptable answer.

Interos is the operational resilience company — reinventing how companies manage their supply chains and business relationships — through our SaaS platform that uses artificial intelligence to model and transform the ecosystems of complex businesses into a living global map, down to any single supplier, anywhere.

But the right technology isn’t the only part of being an operationally resilient organization. Keep reading to learn more about the organizational steps you can take to become one, or you can contact us here to learn more.

Creating an Operational Resilience Strategy: Rethinking Your Personnel

Both commercial and government entities seeking to build operational resilience will find challenges inside and outside their organizations. Overcoming these requires three key organizational shifts:

Instill collective responsibility: Risk management is often confined to the purview of individual persons and business departments like procurement, compliance, or information security. Instilling a culture of collective responsibility and breaking down interdepartmental barriers is essential for any organization looking to get proactive, increase effectiveness, and decrease response times when it comes to risk.
Focus on prevention over response: Far too many organizations adopt a reactive posture to risk management. To instill operational resilience, they need to instill a culture of prevention and anticipation, pre-modelling potential disruption scenarios and assessing potential alternative supplier options.
Manage external risk: Organizations typically focus on managing risk within the walls of their company. But most companies rely on an expansive collection of partners, suppliers, and vendors they fundamentally know little about. Discovering third, fourth, and fifth-party relationships across the extended supply chain is critical in determining which of those connections are ultimately positive or negative for the business.

To help organizations address this challenge, Interos has developed the concept of a Resilience Operations Center (ROC), a cross-departmental center of excellence focused on centralizing the personnel and capabilities needed to manage risk and build resilience. The fundamental principles of the ROC are laid out on this page.

Institutionalizing Operational Resilience Requires New Tools

While assembling the right people and processes is essential for building resilience, an effective strategy requires adopting the right tools. Traditional solutions such as manual surveys, Governance, Risk, and Compliance (GRC) tools, or Supply Chain Management (SCM) software are limited in both scope and function. Because of the limited scope of their design, they often contribute to the siloing of risk information, and do not have sufficient information on external supplier relationships or risk-relevant events as they occur.

Successfully building operational resilience requires tools that are able to:

Automatically map your entire supply chain to the Nth Tier
Continuously monitor suppliers for risk-related events across multiple risk factors
Model the effects of potential changes in your greater supplier ecosystem

Effective mapping, monitoring, and modeling of global supply chains requires access to a large amount of data on a continuously shifting number and variety of companies and risk-related occurrences. The only way to accomplish this at scale, efficiently, is to leverage the power of technologies such as machine learning, AI, and Natural Language Processing (NLP). These force-multipliers enable businesses to:

Instantly visualize multiple tiers of their business and supplier relationships
Assess latent supply chain and vendor ecosystem risk across multiple factors
Identify opportunities for building supply chain resilience through supplier diversification and potential avenues for cost-savings via acquisitions or supplier consolidation

Achieving operational resilience will not prevent disruption. But it will:

Provide the intelligence and advanced insights needed to mitigate losses and identify new opportunities within your business ecosystem
Enable you to plan effectively with full knowledge of the supply chain implications of major business decisions and respond as a unified organization when acting to address disruption
See and understand relevant business relationships and the inherent risks those relationships create – while communicating that information with the entire organization

The past few years have exposed the intricacy and fragility of global supply chains. Major disruptions are more common and impactful than ever before, but fortunately advanced technologies and improved business processes can help organizations map, monitor, and model their global supply chains to build resilience and create new opportunities.

Adapting the SOC Model to Become an Operational Resilience Framework

For years businesses and organizations have centralized IT security functions using the Security Operations Center (SOC) model, which has been an invaluable organizational structure for managing and responding to security risks and many supply chain threats.

Today we know that cyber threats only represent a small portion of the risks posed to supply chains. Continuous disruption — driven by geopolitical and operational risk, as well as environmental, social, and governance (ESG) risks — has done considerable damage to the global economy. How companies operationalize around risk has changed as well, including newly prominent business uniters such as risk managers and procurement teams taking on greater responsibility for risk management. All of these teams need actionable, data-backed risk intelligence and a coordinated approach to be effective.

By bringing formerly isolated business units together, the Resilience Operations Center (ROC) helps organizations address these challenges, creating an enterprise-wide operational model that infuses effective supply chain risk management (SCRM) across the organization. With a shared understanding of risk, business can react to risk in real time and improve outcomes.

Where Does Supply Chain Vulnerability Originate?

Everyone in the business community has experienced the intense disruption of the past several years. The immediate causes are often easy to understand — inflation, geopolitical conflicts, and a wide array of disasters have all played their part — but we have to look back even further to understand why these individual events have had such immense impact.

One of the major causes has been a decades-long reliance on Just-In-Time (JIT) or lean supply chains. This approach emphasizes cost-efficiency over all other priorities — purchasing components from the lowest-cost supplier and maintaining the lowest amount of inventory possible to save on storage costs.

JIT supply chains naturally incentivize outsourcing to many different suppliers who often hyper-specialize in production of just a few kinds of components. Their components (either physical or digital) are then passed onto other suppliers responsible for assembling the final product. This approach also encourages regional specialization, and production of specific components has become concentrated in areas with favorable economic conditions.

This created highly globalized supply chains that are incredibly cost-efficient — but also incredibly fragile, greatly magnifying the potential impact of individual supply chain threats. During previous periods of minimal disruption detailed contingency planning may have been of limited value, but we have all seen the consequences of this approach. Disruption is not a matter of “if,” it is a matter of “when.” The next big supply chain upheaval is coming, and you need to be prepared. “I didn’t know” is no longer an acceptable excuse.

A New Approach to Supply Chain Resilience is Needed

While many companies use traditional risk management teams to perform disruption and contingency planning, those activities are often narrowly focused on known, predictable threats to first tier/direct suppliers, such as establishing alternates for suppliers located in regions that regularly experience monsoons. However few organizations plan for, or even consider, the potential impact of a global pandemic or the Nth-tier implications of a sudden war.

This lack of comprehensive planning is often exacerbated by the limitations of traditional models for risk management, which frequently rely on manual, survey-based supplier risk assessments. These tools provide limited, often unverified assessments of risk that check the box in regard to compliance but offer little insight into real-world risk exposure and resilience.

Organizations can no longer rely on these outmoded and subjective tools. More and more executive leaders are recognizing the need to respond to risk as it happens and to pre-empt systemic fallout wherever possible, safeguarding business continuity and building value even under adverse circumstances. This is operational resilience, and an effective operational resilience strategy can only be achieved by demanding real-time and continuous visibility into multifactor supply chain risk.

ROC Capabilities Build Operational Resilience

What does a Resilience Operations Center (ROC) do?

A ROC helps to solve the challenges listed above and construct an operational resilience framework by:

Creating a centralized business unit that can effectively manage risk across your entire supply chain and within the walls of your organization
Pre-identifying key resources within your organization and preparing them for action when a supply chain risk manifests
Offering an up-to-date lens into enterprise risk and extended supply chain resilience to enable swift proactive and corrective action for identified issues
Enabling proactive risk monitoring and shortening response times
Increasing operational resilience to risk events by providing a meaningful and transparent measurement and reporting structure, increasing an organization’s ability to incorporate lessons-learned from past events
Enabling easy sharing of risk-related information across the organization and with external suppliers and partners, building a trust-based environment
Providing comprehensive supply chain insight that makes it easy to deduplicate redundant suppliers or identify potential alternatives for critical commodities

Operational resilience executed within the ROC concept leverages four fundamental ideas to achieve these results.

Closely pairing SCRM and enterprise objectives
Eliminating organizational silos
Creating a new, more-effective approach to threat detection and response
Providing the necessary speed and knowledge to exploit previously invisible opportunities

You know you’re only as secure as your weakest link.

In a structure as complex as an enterprise’s global supply chain, the weakest link could be your direct vendors’ partners, or their vendors, or any one of the hundreds of thousands of individuals whose labor you directly or indirectly rely on to provide your business’s products or services. This makes operational resilience the responsibility of not just a single business unit, or group of leaders, it’s everyone’s responsibility.

Organizations have long accepted the idea that cybersecurity risk management is an organization-wide responsibility, given that any individual employee or technology asset is a potential in-road for malicious actors. The same viewpoint applies to supply chain risk and resilience, where weakness in any individual segment creates a risk to the entire system, given that suppliers, vendors, and partners rely on each other to vet vendors, partners, and buyers.

Executive Leadership & A Top-Down Approach is Essential to Building Operational Resilience

The ongoing slate of supply chain disruptions has made supply chain risk management and operational resilience a C-level and board-level concern. This is a significant change from just a few years ago, where supply chain concerns were largely viewed as the purview of one or two departments.

Now that operational resilience has the attention of senior leadership, it’s up to those leaders to drive change across the organization from the top-down. Organizations cannot rely on disparate departments to individually recognize the need to create a collaborative, resilient, and cross-operational supply chain practice – leadership needs to step in and coordinate an operational resilience strategy.

Leaving it up to individual teams contributes to gaps in understanding and prioritization, generating more risk. For example, purchasing may select a supplier that generates costs-savings but creates potential compliance issues that legal will have to address. One team wins at the expense of another, potentially negatively impacting the organization as a whole.

Cross-functional business units like the ROC help leadership cut across departmental lines, establish a shared vision of resilience, improve communication and metrics reporting, and keep the organization focused on shared success using procedures and tools such as:

Coordinated risk assessment
Supplier relationship mapping
Continuous monitoring
Incident response teams
Single-source-of-truth dashboards
Insight sharing and real-time alerts
Closed-loop processes for lessons learned

Activating these functions within a traditional SCRM program is difficult, largely due to reliance on out-of-date surveys, spreadsheets, and siloed operations.

The next major supply chain shock could come tomorrow, next week, or next year, but it will come. The time to implement operational resilience is now.

To learn more about how Interos can help deliver operational resilience click here or reach out to one of our representatives here.

Battery Supply Chains’ Reliance on China threatens the Electric Revolution

Posted on August 15, 2022April 28, 2023 by Geraint John

By Geraint John

Global sales of electric vehicles (EVs) hit the accelerator pedal last year, with their market share speeding past 10% of new car registrations in the first half of 2022.

That’s great news for the planet, since passenger cars account for more than 40% of total carbon dioxide emissions annually worldwide, whereas EVs emit zero.

But from a supply chain perspective, the rapid growth of EV sales poses two particularly significant and worrisome challenges:

The supply of key raw materials used to make rechargeable lithium-ion (Li-ion) batteries – the most important component in every EV – is not expected to keep up with demand.
The processing of these raw materials and battery production are both dominated by China, at a time when geopolitical tensions are rising and developed economy governments want to reduce their strategic dependence on the country.

The importance of building a strong EV supply chain strategy

In recent months, the CEOs of several auto makers, including Tesla, Rivian and Stellantis, have spoken out about a looming supply shortage of Li-ion batteries during the next 3-5 years – one potentially far worse than the current semiconductor crisis.

Their concerns center around a projected deficit in the availability of lithium and cobalt – two of the main ingredients in battery cells – along with a lack of future capacity to refine these materials and manufacture the much higher battery volumes required.

Last week, the world’s biggest producer of lithium for EV batteries warned of a tight supply market for the rest of this decade.

High demand and constrained supply have already caused significant raw material inflation, particularly for lithium. Prices for battery-grade lithium carbonate are up 375% year on year, and 116% in 2022, according to Benchmark Mineral Intelligence (BMI).

Raw materials now make up 80% of the cost of a Li-ion battery, reports BMI – double the share in 2015.

This has forced auto makers to raise list prices for EVs, and at least temporarily halted the notion that lower battery costs will make EVs more affordable for consumers.

The EV battery supply chain is dependent on China and Russia

Concentration risk is also a major concern. The latest global mining data shows that extraction of cobalt, graphite and lithium are highly concentrated in the Democratic Republic of the Congo (DRC), China and Australia respectively, based on the Herfindahl-Hirschman Index.

The DRC, which produces 70% of the world’s cobalt supply, is tainted by the use of child labor. And the second biggest source of cobalt is Russia, which is also the leading producer of battery-grade nickel.

Concentration risk for Li-ion batteries becomes even more pronounced further downstream in the supply chain. A new report by the International Energy Agency (IEA) notes that China:

Owns more than half of the world’s processing and refining capacity for lithium, cobalt and graphite.
Controls 70% of global production capacity for cathodes and 85% for anodes – the two key battery components.
Manufactures three-quarters of the world’s supply of Li-ion batteries, and accounts for 70% of new production capacity set to be added through 2030.

An Interos survey of 750 procurement executives in Q1 found that 85% were concerned that their supply bases were too concentrated in certain geographic regions, such as China.

A similar share of participants in the aerospace & defense (A&D) and IT & technology sectors – both also significant users of Li-ion batteries – took the same view.

Chinese producers are heavily embedded in key industry supply chains

An analysis of Interos’ global relationship platform data reveals that:

Almost 300 A&D entities in the U.S., Europe and Japan have the leading Chinese lithium firms Ganfeng Lithium Co., Tianqi Lithium Corporation and Zijin Mining Group in their supply chains.
China’s primary cobalt miner – and the world’s second largest after Glencore – China Molybdenum indirectly supplies a slew of leading automotive components, car manufacturing and A&D firms operating in Japan and China.
Almost 167,000 U.S., European and Japanese firms have indirect (tier-2 or tier-3) relationships with Chinese cathode and anode components firms, notably Ningbo Shanshan, BTR New Materials Group Co., Shenzhen Capchem Technology Co. and Tianjin B&M Science and Technology Co.
Almost 500 technology and automotive manufacturers in the U.S., Europe and Japan use the top three Chinese Li-ion battery makers, Contemporary Amperex Technology Co. (CATL), BYD and China Aviation Lithium Battery Co. (CALB).
South Korean battery makers LG Energy Solution, Samsung SDI and SK Innovation are rated as “low risk” (average i-Score of 79), whereas Chinese battery makers BYD and CALB are rated “medium risk” (average i-Score of 63).

Alternative strategies deployed by governments and OEMs

The dependence on Chinese refining, component and battery manufacturers is of concern not only to companies, but also to many Western and Asian governments.

Last year the U.S. Department of Energy published a blueprint for lithium-based batteries. In the context of a market that is expected to grow 5-10 times in size by 2030, it calls for the development of a domestic supply chain to support EVs, electrical grid storage, aviation and national defense.

The plan includes more secure access to raw materials; the elimination of cobalt and nickel from battery formulas; and the expansion of onshore processing, cell production, pack manufacturing and recycling capacity.

Source: National Blueprint for Lithium Batteries, 2021-2030, Federal Consortium for Advanced Batteries

The European Commission unveiled a similar strategy back in 2018, while in Japan the Battery Association for Supply Chain was established last year, with 55 member firms spanning all industry segments, to develop policy recommendations.

Auto makers aren’t waiting around for national governments to reshape battery supply chains. Many are now pursuing their own strategies in an effort to head off future supply chain disruptions. The two main ones are:

Direct sourcing from mining companies. During the past 12 months, Tesla has signed contracts with lithium, nickel and graphite miners, including BHP and Vale, as it ramps up its battery raw material purchasing. BMW and General Motors have each made multi-million dollar investments in lithium mining projects, while Ford, VW, Renault and Stellantis have all done their own lithium supply deals. GM has also signed a multi-year agreement for cobalt with Glencore.
Diversification of battery manufacturing.S., European and Japanese OEMs are also extending their cell components and battery pack production capacity outside China. Suppliers Panasonic, LG Energy Solution and Samsung SDI have announced new battery manufacturing plants on the U.S. east coast. Redwood Materials, an electronics recycling specialist, is building a new cathode material plant in Nevada, close to Tesla’s Gigafactory. And Europe’s Northvolt is planning new factories in Germany and Sweden.

Changing battery chemistries is another strategy being pursued by auto makers such as VW and Tesla to improve range, lower costs and reduce dependence on raw materials such as cobalt. But, as with the development of new manufacturing plants, this will take several years to fully implement.

In the meantime, vertical integration – a characteristic of the early automotive pioneers, but out of fashion in recent decades – seems to be the order of the day, as the industry seeks to minimize its vulnerabilities and regain control of electronics supply chains.