Supply Chain Challenges In A World Of Uncertain Commodity Prices

A recent article in the McKinsey Quarterly shows how the past eight years have cancelled the steady decline in commodity prices over the previous century. The decline in prices over the past century was achieved despite demand jumping by 600 to 2,000 percent, through dramatic improvements in exploration, extraction and cultivation techniques. As a result, over the 20th century, we coped with a 20-fold increase in the world economy while prices fell.

The situation going forward will not be the same. The three factors that are causing the change are:

• climate change and the need to curtail temperature rise to under 2° C,
• increasing difficulty in expanding supply of commodities in the short run as marginal costs are rapidly rising, and
• linkages between resources are surfacing like a shortage of water leading to escalating energy prices, in turn leading deforestation as poorer sections of the population seek more wood for fuel.

How can this be tackled? The article points out that better resource productivity (reducing waste, improving yields) will account for 20 percent of the increased demand between now and 2030. The rest will have to be bridged by higher pricing that will make new breakthroughs worthwhile.

This will be very disruptive for existing companies and existing ways of working. Preparing for this by making operations as lean, flexible and robust will make the difference between companies that survive and those that wither away. Starting now and looking for ways to build these characteristics into supply chains, and even business models, is a wise move for businesses that seek to survive in the uncertain times of the future.

-Alagu Balaraman