The Social Costs of Supply Chain Disruptions

To simplify, the causes of the hunger pandemic can be categorised into demand and supply challenges. Demand relates to the macroeconomic slump causing an affordability problem. Supply relates to disruptions in the flow of food across global supply chains.

The social cost of disruption are mirrored by the social benefit of resiliency

  • The Market Failure Problem: Supply chain disruptions and resiliency have negative and positive externalities which are not captured in the market price. Policy makers, ESG investors/asset managers and NGO’s should see this as an opportunity to mobilise resources and create shared social value while improving the competitiveness of their companies
  • Private Cost of Disruption: Disruptions have two types of private costs for enterprises; financial and strategic. Both have a detrimental impact on competitiveness. Financial refers to the impact on the bottom line and shareholder value, while strategic focuses on market share
  • Social Cost of Disruption: Disruptions have a catastrophic social cost which can be measured using impact metrics and new accounting methods. Amongst others, these include measurements in food waste, malnutrition, starvation and economic livelihood.
  • Social Benefits of Resiliency: Resiliency has financial and strategic private benefits for enterprises, but also exhibits social benefits. However, due to market failure resiliency solutions are consumed at a socially suboptimal level

The Problem: Market Failure in Concentrated Markets

Market Failure:

  • Risk management culture is non-existent
  • Discovered and reacted to the disruption too late
  • Asymmetric information failures & siloed working
  • Decision making crisis between c-suite and front line
  • No playbook or scenario planning

The Disruption Risk Paradox

The Private Costs of Disruptions:

Supply chain disruptions negatively impact profitability, shareholder value and share price volatility for up to 2 years

The Social Costs of Disruptions

  1. Collapse of food services industry: Not all food reaches consumers through supermarket channels. E.g 50% of US dairy and 40% of US onions are destined for food services (restaurant chains, schools, hotels etc). These supply chains have specialised packaging and distribution to drive efficiency. As demand in food services collapsed due to lockdown measures, these products could not be redirected to other channels where there was unfulfilled demand. Supermarkets could not absorb the stock. All of which led to mountains of food waste and excess supply.
  2. Covid Outbreaks: As a labour intensive industry, Covid-19 outbreaks impacted the labour force at various parts of the supply chain which led to reduced capacity and outages. Harvest, transportation and processing were all impacted leading to further food waste and unfulfilled customer demand.

Quantifying the Social Cost:

Food Waste: Social & Environmental Costs

The FAO estimates the annual economic cost of food waste to be $1tn. However the environmental costs could reach around $700bn per year, and the social costs around $900bn per year.

Human cost of Supply Chain Disruptions-Price rises

Economic Cost

The Social Benefits of Resiliency

  • Economic Resiliency: Supply chain resiliency is central to economic resiliency. The ability to deal with our grande challenges such as climate adaptation requires strong macro financial resiliency and capacity. Supply chain resiliency strengthens this capacity.
  • Maximising Consumption: Resilient supply chains maximise fulfilled demand to maximise the number of consumers who can fulfil their essential needs for sustenance. Consumption is also an economic multiplier

Climate change mitigation and adaptation requires strong public and private balance sheets — World Bank

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Founder & CEO Kavida.ai | Supply Chain Digital Twin | Artificial Intelligence | Supply Chain 4.0 | Social Impact | www.kavida.ai | www.anamrahman.com

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Anam Rahman

Anam Rahman

Founder & CEO Kavida.ai | Supply Chain Digital Twin | Artificial Intelligence | Supply Chain 4.0 | Social Impact | www.kavida.ai | www.anamrahman.com

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