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How the energy crisis is impacting supply chains

© Shutterstock / Fly Of Swallow StudioEnergy crisis in Europe.

The energy crunch hitting Europe is threatening already strained supply chains. Unfortunately, this crisis shows no sign of ending, signalling we could be set for further shockwaves as prices continue to rise. The cost of fuel is also reaching new record levels, further intensifying cost pressures on businesses and in Germany, the government is even encouraging energy rationing.

The energy crisis – with gas prices up nearly 600% – is impacting supply chains.

Energy efficiency can help mitigate impact but the supply chain as a whole must be addressed and data will play a critical role.

To survive the crisis companies must engage with suppliers at risk.

With the energy price cap set to rise again in October 2022, organisations must be prepared to buckle down and weather the storm. Supply chains and critical suppliers will be at risk – but what can organisations do to mitigate the impact of rising energy prices?

Fuelling disruption

Soaring gas prices are stirring up intense manufacturing and logistics issues. The average gas price in the UK was 313p per therm in March this year, but in March 2021 it was just 45p per therm – that’s an increase of 595%. This is having a domino effect across the entire supply chain, increasing prices for everything from transport, to food, and manufacturing.

Adding to the challenge is rising petrol and diesel prices. As of June 2022, a litre of petrol costs 182p on average, which is up from 107p from the same period last year.

Logistics firms are struggling to tackle the surging cost of shipping products, parts, and raw materials. As fuel prices continue to hike, organisations are faced with either charging their clients a higher rate or operating at a loss.

Plastics manufacturing has also ground to a halt as it is a by-product of crude oil, further contributing to the logistics crisis. This is leading to increased prices for packaging, delays to shipping, and supply and demand issues.

There has never been more cost pressure on businesses. This is putting suppliers at risk of collapse, which will have a knock-on impact on continuity of supply.

Minimising costs with procurement

To insulate supply chains from these issues and mitigate the impact of delays, organisations need to recognise the role that procurement plays in adapting to the challenge of rising energy costs. Procurement can help organisations cope with the energy crunch in two ways:

Knowing which suppliers are at risk and when to step in to help

Organisations that will weather the storm best will equip themselves with a deep and timely understanding of their immediate suppliers, sub-tier suppliers, and subcontractors, enabling them to learn who is at risk of failure.

Armed with better visibility of their supply chain, organisations can create a strategy to mitigate the risk of failure. With better visibility comes better foresight, helping firms to plan and source alternative suppliers in case of collapse.

Supporting suppliers for survival

Organisations must prioritise finding ways to keep critical suppliers afloat and find inventive ways to maintain supply during periods of disruption. This can be driven through collaboration – taking a collaborative approach to find sustainable cost savings is essential to help minimise the effects of the energy crisis. This is especially critical for when energy costs begin to subside.

Suppliers will be more likely to prioritise organisations that strived to maintain a strong partnership even in times of difficulty. Opening avenues of conversation between suppliers will help to support partners during the energy crisis, as well as bolster critical supplier-buyer relationships.  

Managing crises with data

However, these steps are impossible to achieve without visibility and data on suppliers. Most procurement teams still use outdated tools, follow inefficient processes, and manually collaborate with suppliers. Supplier data is often inconsistent and resides on multiple systems, making it difficult to analyse and gain meaningful insights from suppliers.

Procurement teams need to adapt for the future, and this starts with digitising procurement. This will provide a 360-degree view of supplier activity and spend, helping them to make more informed decisions during periods of crisis.

Visibility and collaboration are essential to tackle the effects of the energy crunch, whether it’s gathering and analysing supplier data to contextualise supply chain risk, or identifying a new provider if a supplier suddenly fails.

A more holistic approach to procurement helps to identify disruption to supply, giving them time to make the necessary amendments before supply completely runs dry.

Embrace energy efficiency

While collaboration and visibility are critical to mitigate the immediate effects of the energy crunch, the longer-term solution should be reducing reliance on fossil fuels.

Organisations should view this as an opportunity to seek carbon-neutral suppliers and processes that can offset any energy crises in the future.

Procurement again takes a key role here, enabling organisations to take a more collaborative approach with suppliers to identify areas to decarbonise. This is critical, because most companies’ CO2 emissions from the supply chain are several times larger than direct emissions.

Procurement teams need to engage with suppliers to ensure that they only choose providers with the strongest sustainability credentials, but also regularly measure their performance. For instance, Amazon is helping to decarbonise its logistics processes by investing heavily in electric vehicles, including its first-ever fleet of fully electric heavy goods vehicles in the UK.

While the energy crisis is causing cross-industry disruption, it’s time for firms to look beyond the current crisis and invest in transitioning away from fossil fuels. As well as the environmental benefits, using renewable energy helps to lower energy bills, mitigate risk, and enhance brand value.

Investing in clean energy will boost recovery and fuel organisations’ growth – opening the door to new opportunities for innovation in supply chain sustainability. 

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