In this episode of Lehigh University’s College of Business ilLUminate podcast, we are speaking with Zach Zacharia about the biggest threats facing the global supply chain heading into the 1st quarter of 2023, as reported in the latest Lehigh Business Supply Chain Risk Management Index (LRMI).
Zacharia is an associate professor of supply chain management and director of the Center for Supply Chain Research at Lehigh. LRMI was developed in 2020 by the Center for Supply Chain Research at Lehigh University and the Council of Supply Chain Management Professionals.
Zacharia spoke with Jack Croft, host of the ilLUminate podcast. Listen to the podcast here and subscribe and download Lehigh Business on Apple Podcasts or wherever you get your podcasts.
Below is an edited excerpt from that conversation. Read the complete podcast transcript.
Jack Croft: Barring any unforeseen events, Russia's war on Ukraine will mark its first anniversary in February during the first quarter of 2023. Now, the war has clearly been one of the most disruptive things to happen to the supply chain over this past year, in addition to the tragic loss of life that's been involved there. So what are the main ways that the war continues to disrupt the global supply chain?
Zach Zacharia: There has been a profound shift in the way we view globalization. For over 50 years, there was an inherent belief that you built the product where it was cheapest to produce in terms of labor and raw materials, then had efficient transportation systems to bring that product into the market. But that entire strategy has now been questioned, has been shifted because companies are realizing that even if you produce in some of these locations where it's cheaper to produce, you can be completely affected by what the government does in these other countries. So this is a profound shift that happened when Russia invaded Ukraine.
So now, companies are starting to look at other locations, and maybe everyone is talking about bringing manufacturing back to the U.S., but this has been an incredible challenge. And one of the things we're going to talk about is, some of the labor shortages that we fear here in the U.S. But the war in Ukraine has really made companies thinking about near-shoring, and a new term that has just sort of started to become more popular as friend-shoring—that is, finding companies that are still friendly to the U.S, that you could get some of the benefits in terms of lower labor costs and things like that, but making sure that their government has policies that will enable the free flow of goods, which are critical when you're thinking about that and supply chain.
Croft: Let's turn to the new Risk Index Report. And just to recap quickly, the LRMI, as we've discussed on previous podcasts, is a number between 0 and 100, where greater than 50 suggests increased risk, 50 suggests the same risk, and less than 50 suggests decreased risk.
The overall average risk heading into the first quarter of 2023 is 66.96, which is slightly higher than it was in the fourth quarter of 2022, which we're just wrapping up, but down pretty significantly from the all-time high of 72.79 in the first quarter of this year, 2022. So what does that tell us?
Zacharia: First of all, there's been a significant reduction in risk. I mean, that clearly is there. And it is also important to note that the way the index is calculated, the relationship is not linear. So a decrease of 5 points is significant. This suggests that a lot of uncertainty surrounding COVID, surrounding even the Russian-Ukraine war, has settled. And people feel that they're better able to plan so that they can be more prepared.
One of the things is all business managers and supply chain managers specifically … hate uncertainty. When there is greater certainty, there's greater efficiency. For example, … if a supplier says, "Look, the product will absolutely arrive in five days," that you can plan for. It's actually a lot more difficult to plan for if the supplier says, "Well, it could arrive in three days or two days, or maybe four days or five days," because you don't know when you need to have the staff available to unload the product.
So I think that the reduction in risk that you're seeing is that people are getting more comfortable with the kind of impact that's gone on to the economy, and they feel more prepared going forward.
Croft: In the new LRMI, economic risk leads the index for the third straight quarter and is, far and away, the highest risk index out of the 10 categories that you look at every quarter, at 87.97. And just for comparison, the second place, which we'll talk about shortly, is cybersecurity and data risk at 73.42. So what are some of the main factors that go into economic risk? And what are some of the issues the supply chain professionals participating in the index see as the most threatening?
Zacharia: The kind of things that we ask our respondents to consider when they think about economic risk is things like energy costs, commodity price volatility, labor shortages, demand shocks, global energy shortages, border delays. As far as some of the things that supply chain professionals see as most threatening related to the economic risk index is clearly the war in the Ukraine and the impact that it has on the global economy, the rising price of oil, and the rising price of diesel and natural gas, again, very much affected by the war in Ukraine.
Another factor that people wrote about in the report was, they're worried about inflation. Inflation has come down a little bit from the last quarter. But still, it is relatively high compared to what it was a year ago. Another issue is, still, there is a lot of pent-up demand in certain sectors. You could see that when COVID came, a lot of that was sort of reduced demand and was waiting for a time now when products are available. So there is that kind of increased demand.
And finally, a big issue is labor. There is still a significant shortage of labor in many key industries. And the companies that I've talked to still talk about the fact that they have very high hourly wage rates, at $25 an hour, that is still not attracting the kind of people that they expected to attract a few years ago. So these are definitely the kind of things that affect the economic risk going forward.
Croft: For the second quarter in a row, cybersecurity and data risk has the second-highest index number, as I had mentioned before, at 73.42, which is down just slightly from the previous quarter. So what factors enter into that category, and what are some of the biggest threats in cybersecurity and data risk that concern supply chain professionals?
Zacharia: The kind of factors we ask them to think about are cyberattacks, data corruption, data theft, system viruses, hardware-software issues, security platform controls. And the biggest threats that the people who wrote on the report were-- one of the things is that there's greater labor turnover, which means that the new people that are coming in are not trained as well on the security protocol workers. There's more reliance on increased remote work. And when you're working remotely, obviously, that often leads to greater risk. And attacks are also getting more and more sophisticated. So this is always sort of a game where, as we put better controls in place, the cyberattackers just come up with some new method.
But the basic issue is actually people. People can get fooled. You can have incredible security systems. Even some of the largest data breaches have just been people being careless or being fooled into thinking something. So of course, I'm sure you're aware there's a lot of the companies have used a two-step data verification, all sorts of things to try and figure out ways because this is a real problem going forward.
Croft: The dawning of a new year is usually a time for optimism. So what do you see in the supply chain that gives you hope for 2023?
Zacharia: The biggest thing that I'm seeing in talking to companies and also in the LRMI, my sense is that we are going to have a very mild, if any, recession … The economy will be able to be back up by even the third quarter of next year. In other words, I see that the economy is going to recover. Now, companies are working with their employees to find more ways to be more flexible, find ways to improve efficiency.
And another sign of optimism is, real discussions are going on for ways to reduce greenhouse gases. Companies are rethinking their supply chain to have more inventory available and to make sure that production is closer. So we're getting better at handling large disruptions, especially if it's across the globe.
Overall, I have a strong belief that the U.S. economy is going to continue to grow. And I'm very optimistic that companies are going to become more resilient so that they'll be able to overcome any disruptions because we know that disruptions are going to happen. And I think that we've learned a lot over the last few years on how to handle major disruptions. And I think that that will enable us to become even more successful when these disruptions happen going forward.