Pathways to profitability amid supply-chain disruptions

Even before the war in Ukraine, inflation induced by supply-chain disruptions was one of the most pressing issues for executives around the world. In a survey conducted in October-December 2021 as part of the second edition of its Trade in Transition programme, Economist Impact found that inflation was among the top two reasons for pessimism about the global trade outlook, cited by 29% of respondents.

Since then covid-19 pressures may have eased in most parts of the world (although not in China, a critical source of current supply-chain disruptions), but the global trade outlook has changed dramatically for the worse due to the war in Ukraine. This is a result of two main factors: first, sanctions on Russian oil, which have caused a surge in global oil prices and thus transport costs; and second, sanctions on Russian fertiliser and a loss of wheat and other grains from Ukraine, which have led to a shortage in food supplies and higher prices worldwide.

In the March-April earnings announcements the impact on the corporate bottom line was evident. For example, although consumer goods companies such as Procter & Gamble and General Mills reported an increase in sales, profits declined year on year.^1,2 Against this backdrop, companies are adopting a variety of strategies to minimise disruption and, ultimately, their operating costs and the price of their final products. In this article we showcase three strategies that are popular among the world’s largest consumer goods and retail companies.

Strategy 1: Chartering cargo chips

As an economic recovery took hold in the US in 2020-21, the world’s shipping carriers shifted operations to cater to the more lucrative Asia-US route. This led to congestion at major US ports and a surge in container costs. Container costs on the China-US East Coast route were up by over 500% in August 2021 from the year before, according to freight-tracking firm Freightos.³

In response some of the largest firms—including Home Depot, Walmart and Amazon—have made moves to take control of their logistics by chartering private cargo ships. This has enabled these firms to determine their own routes and destinations, avoiding more congested ports (such as Long Beach and Los Angeles in the US), reducing the cost of delays in delivery and thus improving their bottom line. This strategy is of course only available to the world’s corporate giants, which have sufficient finances and volumes to justify chartering ships. Smaller firms may remain at the mercy of shipping carriers.

Strategy 2: Increasing substitutability

In a recent report on global value chains the IMF points to “substitutability” as a key strategy that companies are adopting to increase supply-chain resilience. This entails standardising inputs so that manufacturers have a wider pool of suppliers to tap into at times of disruption. The IMF reports that General Motors recently reduced the number of unique microchips by 95%, using only three main types of microchips.⁴

There are calls for greater standardisation for a range of critical inputs, from packaging for consumer goods to batteries used in electric vehicles (EVs). In India, discussions are under way about a battery swapping policy that requires standardising EV batteries.⁵

Strategy 3: Expanding more profitable production and distribution

As the pandemic unfolded, consumer behaviour evolved accordingly, leading to a spike in demand for certain products and an increase in online shopping. A study by Economist Impact showed that in 2020 online spending as a share of total spending in North America and Europe rose from 38% in January to 45% in June. In response, many companies established more profitable direct-to-consumer (D2C) channels. Nike, for example, expanded its D2C platform, where profits are 10% higher compared with wholesale distribution, according to its CFO.⁶

Some companies have also developed a new customer base. At the start of the pandemic, as demand for cars collapsed, the semiconductor industry turned away from the automotive industry and towards the more profitable consumer electronics industry, which experienced a surge in demand as people equipped themselves to work remotely.

These are just three examples out of the multitude of strategies that firms developed to improve their profitability during the pandemic. Other strategies, such as identifying inefficiencies in the supply chain using data analytics and hedging financial risks using derivatives, have been explored in this year’s Trade in Transition report.⁷ What’s clear is that companies need to have a wide range of strategies in their arsenal to combat inflation and disruption. But amid a protracted period of disruption—caused first by the pandemic and now by the war in Ukraine—companies must find even more creative ways to sustain the effect.