Supply chains have become a hot topic in boardrooms, the corridors of government and even coffee shops, as the global economy struggles to bring the demand and supply of goods into balance. The pandemic has disrupted the flow of goods, doubling shipment times between China and Western markets. Shipping rates have soared.
Business decision makers require reliable methods of measuring the stress on supply chains so they can plan more confidently. KPMG is helping to meet this need by launching a global Supply Chain Fragility Index that will not only look back at past trends, but also predict future changes in the supply chain. With the aid of the index, the intention is to help companies to forecast the impact of likely trends in shipping and logistics with more confidence.
Whether and when supply chains return to normal is an increasingly important indicator of economic and business health. Changes in the supply chain are a major factor in determining procurement decisions around the world and contributing to the drivers of price changes. Assessing the likelihood of supply chains strengthening will depend on measuring how dislocated they are now and how quickly they can be repaired. The Supply Chain Fragility Index will help to illuminate the stresses in the distribution system and where they might originate. The initial aim is to predict supply chain fragility up to three months ahead and eventually to look further into the future, as the data accumulates.
In the KPMG model, the fragility of supply chains is a function of four factors: (a) the overall volume of goods shipped; (b) the speed at which goods reach their destination; (c) the cost of transporting goods from the source to the ultimate destination; (d) the variability of these factors. The first two factors, when taken together, describe the stickiness of the flow of goods from factory to market—the amount of cholesterol in the arteries of trade, if you will.
Harnessing the capabilities of KPMG in the field of data & analytics and machine learning, it is possible to build a model that measures the fragility of supply chains. Based on the model, the Supply Chain Fragility Index will be able to predict how supply chains may strengthen or weaken in the future. As more data is collected and analyzed, the model will show how the four factors driving the index are likely to change. From this, KPMG will be able to forecast signs of supply chain improvement or deterioration in the future.
Modelers at KPMG created the index by first compiling a list of supply chain disruptions since 2008, such as the global financial crisis, the tsunami that hit Japan in 2011, trade frictions, and the pandemic. They combined the list of disruptions with data from news reports of the impacts of these events on supply chains. The combined information created a representation of supply chain fragility over the past 14 years. The historical data was then used to test different macro-supply chain variables to determine which were leading indicators of fragility. This helped ensure that the data KPMG compiled from a range of variables—including inventories, unfilled orders, manufacturing job openings and freight costs—correlated closely to actual changes in supply chains that were observed around the world.
Variables indicating changes in demand were excluded to improve accuracy. Demand-related influences, however, cannot be eliminated entirely: shipping rates, for example, reflect changes in demand as well as supply. But the aim of the model is to focus as much as possible on supply.
Once the variables were brought into the model, KPMG analysts reviewed the data to confirm that the index was moving in a direction that reflected actual trends in the global economy. The weighting of each factor was then adjusted to align the effect of each variable within the model. Any variables that did not align with the model’s objectives were eliminated and the remaining variables were tested with various lags to see which ones correlated most closely to actual supply chain trends.
The Supply Chain Fragility Index that resulted from all this testing and tweaking can be seen in the chart above. This shows that the fragility index was fairly stable between 2012 and 2019 and then began to rise sharply in early 2020 when the pandemic first struck. Since January 2020 the index has jumped from 23.1 to 61.2 by the end of 2021. In the first three months, the index is predicted to decline somewhat, as supply chains become less fragile. This is a work in progress, undoubtedly. As KPMG collects more data, it intends to enhance the model using more advanced time-series data and possibly additional sets of measurements. Each iteration, it is hoped, will improve the accuracy of the model, both in terms of reflecting the realities of actual supply chains and predicting whether chains will become more fragile or less so in the future.
The aim of this work is to benefit companies that rely on a resilient supply chain to operate their business effectively. They can expect continued volatility in the future, as the effects of the pandemic ebb and flow. KPMG welcomes users’ input into this research. Do the findings align with companies’ experience and expectations? How would they like to use the Supply Chain Fragility Index in their scenario planning? This research will improve with the input of practitioners in the field—clients of KPMG and others. In such a complex topic as supply chain management, the more empirical data the better. Business depends on it.