The global pandemic has strained access to consumer goods, pharmaceutical supplies, and electronics. Key components have languished in port backups and delays. Factory production slowed to a crawl due to lack of workers. Then, just as it seemed the world was getting back to normal, a once in a lifetime weather event crippled the U.S. Gulf Coast, halting plastic production. The traffic jam of ships in the Suez Canal soon followed. This convergence of events left U.S. manufacturers and consumers wondering if and when they could ever catch up. The big question that arose was how can companies manage their supply chain risks to ensure future events will not bring them to a halt again? The answer lies in finding opportunities to create capacity in supply chain recycling and circularity.
The supply chain storm
The global pandemic exposed supply chain risks, particularly for industries reliant on Asian-based manufacturing and suppliers. Sources of semiconductor packaging, electronic final assembly, medical supplies, plastic components, resistors were all disrupted. Many countries needed to find alternative supply chains to avoid halting operations. The semiconductor industry in North America became so concerned that the major fabricators, incentivized by the U.S. Government, committed to be more self-sufficient. Expanding sources of supply and near-shore material became the obvious strategy for minimizing risk and improving resiliency.
The plastics industry, with large amounts of automated, sustainable production anchored in the feedstock advantage along the U.S. Gulf Coast, seemed impervious to the disruptions of the pandemic. Companies produced materials to schedule until February 2021. Then a deep freeze hit the region, knocking almost 90 percent of production off line for over 30 days, costing the region at least $80 billion in lost revenue1. Suddenly the near-shore, automated supplier that was slowly recovering from pandemic disruptions was the problem, not the solution. Automotive, aerospace, heavy industrial, food and beverage, consumer goods, electronics, and pharmaceuticals were all now short of a key material. Pharmaceutical companies were in a particular bind due to the need for syringes to administer the COVID-19 vaccine.
No one can accurately predict force majeure like the pandemic and extreme weather. But it is possible to construct more resilient supply chains to prepare for catastrophic events. Companies can proactively reduce risks in the three key ways:
- Developing geographical diversification to reduce exposure to physical risk.
- Creating sufficient buffer capacity in the way of critical material inventory.
- Utilizing a combination of traditional suppliers and innovative companies that are creating circular supply chains.
And of course, each of these options must include measures to maintain or improve the Environmental, Social, and (Corporate) Governance (ESG) performance of the supply chain.
1. Diversify the supply base
What can industries do to offset the business risks associated with critical material shortages? The most obvious approach is to diversify the supplier base, as the electronics industry and others learned during the pandemic, by finding other suppliers for the key raw materials of feedstock and plastic.
Specifically, Asia Pacific and the Middle East have long had capacity and been suppliers. For example, electronics companies with plants in Malaysia, Singapore, and China could benefit from plastics production in that region. Similarly, European manufacturers could leverage capacity of Saudi Arabian plastic manufacturing.
However, as part of this reengagement process, the entire range of ESG and sustainability standards and audits must be addressed. New source of supply can only be brought into the mix for many of the consuming companies with robust auditing to ensure their current goals and programs are not set back.
For example, ERM’s partnership with companies such as Ecovadis provide companies access to easy-to-use and actionable scorecards that equip procurement and supply chain teams with detailed insights into environmental, labor and human rights, ethics and sustainable procurement themes across 200 purchasing categories and 160 countries. This allows supply chain teams the opportunity to assess any new sources to ensure they align with the goals set forth at their organizations.
2. Increase inventory to address shortages
Building up inventory would force plastic manufacturers to shore up their materials to a level suitable for use or conversion in a variety of industries. These stockpiles would require storage and conversion facilities, and the cost of carrying inventory would most likely be passed on to consumers. Developing these new inventory strategies would require in-depth coordination, analysis, and monitoring, likely adding overhead for the supplier and consumer. New storage and processing locations would come with increased transportation needs, and a direct increase in the carbon footprint and greenhouse gas emissions attributable to the supplier and the consumer of the material for ESG scoring purposes.
Increasing inventory levels improves resiliency and decreases risk, but at what cost? Some materials, like paint, mixers, resins, and coating bases, require special storage, labeling, and transportation. The plastic components for some industries like pharmaceuticals and food storage and packaging may have a longer shelf life, but the FDA has limitations on the shelf life for certain plastics used for food storage. These expiration dates will ultimately determine the movement and rotation of these stocks. The need to replace material outside of its approved shelf life would incur additional costs based on transportation distances and times, and increase greenhouse gas emissions.
3. Embrace the circular economy
Creating capacity, not in new production, but in recycling and circularity would significantly change the game for plastics manufacturers. The physical process, secondary or mechanical recycling¾grinding, melting and reforming plastic material—is already widely used and accepted. A prominent example of this is plastic soda bottle manufacturing: the term “PET to PET” is common and recognized. However, this process often does not produce the purity standards required for certain polymers, polyvinyls (for paints), and electronics components. While many promising solutions in the mechanical recycling industry exist, there are some key challenges to really scale, including: improving primary and secondary sorting to better handle contamination, separating waste streams and materials that are more prone to mechanical processing, improving the overall efficiency of the process (e.g. automation) to reduce cost, and improving packaging design and materials (e.g. additives) to increase yield and minimize downcycling of the materials into less valuable products.
Adding capacity for chemical reprocessing, or tertiary recycling, involves the depolymerization, regeneration, and purification of monomers or oligomers. The regeneration process may require additional purification steps such as distillation, crystallization, and additional chemical reactions. This process shows great promise as a viable competitive source vs. virgin production. However, while the technology and capacity are improving, effective scaling of the “waste” or return supply chain are struggling to scale the large collection and sorting infrastructure required to create a cost-effective supply.
Forward-looking companies with an eye on improving plastic circularity are already building this capacity. Firms such as BASF, ExxonMobil, Eastman Chemical, and SABIC are making the investments. These companies are providing their customers with an alternative supply. The waste plastic business is a $100 billion industry2 and this change in mindset shows that plastic waste is a valuable alternative to virgin plastic. While these facilities do not insulate their customers from all force majeure (pandemics, deep freeze, etc.) they can be more geographically dispersed and do provide a buffer against the fluctuating price of virgin plastic. In addition, the costs of these facilities are relatively modest ($1 billion or less which is insignificant when we consider the $80 billion in lost revenue from the deep freeze that occurred this year). Compared to the potential lost sales from interrupted supply, increased costs, and the reputational and ESG benefit to their customers of using a greater percentage of recycled material, this is an attractive solution for plastic consumers and recyclers.
The future outlook
The current recovery to supply chains is expected to take longer than previously thought and companies must make alternative business continuity plans to ensure strengthen supply chains in the future. Many businesses are successfully re-evaluating their plastics supply chain by defining the risks and opportunities to increase capacity.
Many are also evaluating their programs and realizing the benefit of using recycled material as a key differentiator. This proactive strategy improves ESG scores and reputation, and prevents the operational shortages, price increases, and allocations that have become commonplace over the past 18 months. Undertaking a holistic assessment of the upstream supply chain to make it more resilient to supply disruption, and engaging with suppliers that can be agile, will be key in this evolution. All companies at some point will need to address these supply chain risks. The downside of not doing so may have an even more profound effect next time an event that impacts production occurs. Those that are able to think about opportunities gained by alternative measures now will reap the benefits later.
Photo by Alvaro Pinot on Unsplash
References:
BASF. 2021. ChemCyclingTM: From plastic waste to virgin-grade products. Available at: https://www.basf.com/global/en/who-we-are/sustainability/we-drive-sustainable-solutions/circular-economy/mass-balance-approach/chemcycling.html.
Chemical & Engineering News (c&en). 2021. Eastman will build a $250 million plastics recycling plant. 1 February. Available at: https://cen.acs.org/environment/recycling/Eastman-build-250-million-plastics/99/web/2021/02.
ExxonMobil. 2021. ExxonMobil tests advanced recycling of plastic waste at Baytown facilities. 25 February. Available at: https://corporate.exxonmobil.com/News/Newsroom/News-releases/2021/0225_ExxonMobil-tests-advanced-recycling-of-plastic-waste-at-Baytown-facilities.
Independent Commodity Intelligence Services (ICIS), 2021. US supply chain disruptions to take longer than anticipated to clear up – Fed
https://www.icis.com/explore/resources/news/2021/07/14/10663281/us-supply-chain-disruptions-to-take-longer-than-anticipated-to-clear-up-fed
SABIC. SABIC’s circular solutions helping to address key sustainability challenges. Available at: https://www.sabic.com/en/newsandmedia/stories/our-world/sabics-circular-solutions-helping-to-address-key-sustainability-challenges
1 The Federal Reserve Bank of Dallas. 2021. Cost of Texas’ 2021 Deep Freeze Justifies Weatherization https://www.dallasfed.org/research/economics/2021/0415.aspx
2 Material Handling & Logistics. 2020. Supply Chain Challenge: A $100 Billion Plastic Waste
https://www.mhlnews.com/global-supply-chain/article/21122896/supply-chain-challenge-a-100-billion-plastic-waste
