This post is the second in the series Raw Materials and Natural Resources in the Supply Chain, which explores the understudied, and often misunderstood, processes for sourcing natural resources used as raw materials by the industries that make the products we buy every day. The first post discussed the dilemma farmers face in how to use their land.
By now, we have all felt the impact of COVID-19’s disruption of global supply chains. In 2019, the supply chains of North American firms were the most internationally focused, with the lowest percentage of raw materials sourced domestically. It shouldn’t come as a surprise then that, when an unprecedented pandemic occurred, it had the most impact on our supply chains at home. And it wasn’t just retail and manufacturing that were disrupted. Further up the supply chain, more than 230 mines in 36 countries were shut down within weeks of the outbreak of the virus. With nowhere to take their crops and livestock herds, farmers euthanized millions of animals.
Three years later, according to a study by Reuters and Maersk, over two-thirds of manufacturers and retailers have changed where they source raw materials and components. Over one-third of firms are considering moving their factory locations to eliminate supply chain risks. These firms aim to build more supply chain resiliency by shortening supply chains, reducing complexity, and “reshoring” key operations closer to consumer demand locations.
This sounds like a rational decision. However, these risk-reducing changes could dramatically increase the costs of your products and services. It won’t be easy to implement upstream; in the raw materials portion of globally designed supply chains, their availability is already tenuous and inflexible.
In 2023, there are at least three pieces of must-know information about global raw material supply risks.
First, the availability of raw materials can easily be overestimated. It is common for companies to assume that basic raw materials, such as water, sand, corn, gravel, apples, etc. are standard commodities readily available at any location, and that they should be bought at the lowest possible cost. Unfortunately, this is not always true.
Many multinational firms do not have visibility beyond three tiers back in the supply chain. And they don’t expend management resources to fully understand where their raw materials are sourced. If they could see the full supply chain, they’d realize that raw material availability and the potential for natural resource scarcity is often a matter of perception and could differ greatly from reality.
Secondly, it is important to understand that world-class, 21st-century industries require very specific and heterogeneous raw materials, as defined by the product specifications determined by design engineers. Even a relatively basic raw material, such as sand, can be scarce if it fails to meet the exact engineering specification. In the oil industry, over 48 million tons of sand were transported from Wisconsin and Minnesota to the Permian Basin oil fields of Texas in 2018. This high-quality sand is required to support the oil fracking process; it typically travels between 400 and 1800 miles on thousands of rail cars yearly.
Thirdly, many raw materials sourced eight or nine tiers back in the supply chain come from low-cost locations where a mix of geology and poverty create the perfect low-cost sourcing location for the world. Why are these locations used over local, less risky locations? Climate and ecological conditions impact the location of renewable natural resources used as raw materials (e.g., crops, timber, fisheries), and where they can be harvested. For example, the two leading nations for the growth of cocoa for chocolate have traditionally been Ghana and the Ivory Coast—two small countries in West Africa where the climate, soil, and labor conditions combine to make them ideal locations to grow this crop at the lowest cost. Since growing cocoa in Kansas is not an option, global chocolate supply chains often stretch back to these far-off locations. It would be difficult, if not impossible, to reshore raw materials sources for crops such as cocoa, coffee, vanilla, and cinnamon. They don’t grow everywhere, and the skills required to grow these crops don’t exist in all agricultural communities.
The case is similar for non-renewable metals, minerals, and oil. The geology of the planet leaves some nations and their companies in situations of local scarcity: the world has the necessary resources, but they are not available in your country or region. This can be a real problem for nations like Japan and the United Kingdom, where many of the raw materials for their industries come from outside their borders. Since domestic mining and reshoring are not options, recycling metals and other raw materials has become a matter of necessity for firms in these nations. However, even for resource-rich nations such as the United States, there are metals, such as nickel, titanium, and platinum, that simply don’t exist in large quantities in the nation’s geology. They must be imported until new ore deposits can be found or better technologies created.
The heterogeneity or specific requirement for the type of raw materials needed by industry has led global supply chains to source from many of the same locations. In fact, many raw materials for multiple industries are sourced from only a handful of global locations (in some cases, even a single low-cost nation). Over 65% of the cobalt used in the aerospace and auto industries’ metal alloys is sourced from the Democratic Republic of the Congo (DRC), where child and slave labor are common. Similarly, Madagascar, where defending crops with armed guards at night to prevent theft is common, has dominated vanilla production.
Here is the dilemma: to ensure the availability of specific, heterogeneous raw materials, firms will be exposed to sourcing risks in globally designed supply chains. They cannot simply reshore every raw material problem away.
To be successful in 2023, supply chain managers must ask what kind of performance they want out of their supply chains as they deal with this dilemma. Suppose they focus solely on low costs to capture and control market share. In that case, their approach to raw materials sourcing undoubtedly exposes them to a range of transportation, sustainability, and production risks in far-off corners of the globe. This will quickly erode profits when the next unexpected disruption hits the commercial world. Jumping on the reshoring bandwagon seems like the speedy response needed to improve resiliency after COVID-19. But reshoring may not be possible for the raw material portion of supply chains.
In my next post, I will talk more about what can be done to counter the raw material problems created by heterogeneity and global single-sourcing of raw materials in the supply chain.
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