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

As a result of consumer demand for cheap products, market consolidation, and globalisation a relatively small number of enterprises are responsible for providing billions of consumer with their essentials. Efficient private sector markets have formed supply chains which have enabled high quality of living, access to affordable essentials and quality products.

Market Failure:

Our theory of change focuses on addressing the market failure inherent in supply chain disruptions and resiliency. By providing enterprises with agile resiliency capabilities to manage supply chain disruptions shocks, we help them mitigate the consumer impact, minimise unfulfilled customer demand and prevent shortages. As we will see, disruptions have a social cost, but resiliency also has a social benefit. Dealing with these issues is compounded two other microeconomic failures and tradeoffs.

  • 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

Most risk studies show a perception bias between what companies prepare for and what impacts them. 85% of all the negative financial impact of supply chain disruptions are caused by events firms can not control for; earthquakes, hurricanes, a pandemic. Paradoxically, most firms spend less than 10% of their risk management preparation on these shocks. Firms over focus on operational and compliance risks which make up less than 10% of the financial impact of disruptions.

The Private Costs of Disruptions:

There are two main private costs associated with supply chain disruptions; financial and strategic. The larger the company, the greater its exposure.

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

McKinsey & Company synthesised the impact of supply chain disruptions into a single inevitable cost. They found companies can expect to lose 42% of 1 years profit every 10 years due to disruptions.

The Social Costs of Disruptions

Supply chain disruptions also exhibit negative externalities whereby the social cost of disruption is greater than the private cost to the enterprise. When there is a breakdown in the flow of goods; consumers, workers, businesses and governments all pay a price. There is no standard metric for measuring the social cost of disruptions, much is dependent on the specific product supply chain. However, disruptions in food supply chains can be partially assessed using impact metrics and new accounting methods.

  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

Hidden social costs of food waste extends far. Food that is produced, but never consumed, causes environmental impacts to the atmosphere, water, land and bio diversity without delivering the returns (consumption). These environmental and social costs must be paid for by society and future generations.

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.

Below is a breakdown of the biggest environmental and social costs of food waste per year by the FAO using full cost accounting.

Human cost of Supply Chain Disruptions-Price rises

Economic Cost

The causes of the supply chain disruptions have enormous cumulative costs to economies. Disruptions follow the 80/20 Pareto Rule. 80% of disruptions will be relatively small scale but the rare 20% will generate the majority of the impact. These costs have consequences for government spending, future taxation, consumer welfare and industry competitiveness. Minimising the cumulative economic cost depends on our ability to minimise the frequency and severity or maximise our ability to withstand shocks. Below the cumulative economic cost of the top 10 natural disasters.

The Social Benefits of Resiliency

Enterprise supply chain resiliency has benefits which extends beyond the private benefit experienced by the firm. Enterprises consumes resiliency solutions at the Marginal Private Benefit level which is socially sub optimal. Policy makers, NGO’s, ESG investors and asset managers have an opportunity to unlock social value by stimulating the adoption of resilient supply chains.

  • 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

Supply chain resiliency strengthens the macro financial capacity to deal with existential threats. Business continuity is critical for financing, minimising uncertainty and stimulating investments.

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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