Supply chain challenges mean new concerns for businesses

Brian Sommer Profile picture for user brianssommer February 1, 2022
Summary:
Ever wonder if it’s time to reconsider your supply chain? Here’s a recap of Brian’s remarks at a recent user conference. Bottom line: smart firms are doing more than just expedite overseas shipments – a lot more.

CHAIN

Everyone who didn’t get what they wanted for the Holidays is now a supply chain expert. Even so, while all of these ‘experts’ might be familiar with immediate supply chain challenges, do they all know and agree on what’s the longer-term view like and what should firms be doing to have a better tomorrow?

I spoke recently to a group of supply chain & distribution executives at the recent Acumatica Summit. Here’s a summary of my remarks:

The changes (slow or otherwise) that shaped modern supply chains

Today’s distributors and manufacturers have supply chains quite different from those two decades ago. Modern firms use Lean manufacturing techniques which dramatically reduced the amount of inventory they keep for production. Safety stocks are often the responsibility of a supplier and the size of these may not be known by a manufacturer or distributor. In fact, a manufacturer or distributor may have an appalling lack of visibility into all of the levels of their supply chains.

I wrote in August:

Products, subassemblies, raw materials, etc. that they expected to receive are being held up. Products are stuck on ships/trains, awaiting truck transport, delayed by road accidents or construction. The biggest consequence of today’s supply chain problems is that J-I-T (i.e., Just-In-Time) deliveries and JIT/Lean manufacturing are less and less likely to occur. Another consequence is that firms must exhaust their (skeletal) safety stock just to complete a fraction of their customer’s orders.

One of the biggest conclusions for US manufacturers (and their purchasing and production planning leaders) is that they can’t go back to making things the old normal way if that method was a lean or JIT production process. For the time being, JIT is DOA (dead on arrival).

An article in the Winter MIT Sloan Management Review says current supply chain woes are not due to just-in-time practices. The author outlines several other causal factors to ponder like:

  • A global reduction in the production of many items (e.g., semiconductor chips) that could not bounce back quickly when demand recovered
  • Government actions (e.g., when countries starting buying huge amounts of PPE)
  • Panic buying
  • Etc.

The author also argues the JIT is really about improving product quality not just cost reduction. While that can be a key driver for the adoption if JIT, users also want to see the reductions in inventory and the capital costs of the same.

But change did occur in supply chains. The chains got long, really long with products often containing parts from half-way around the world. Even when suppliers made capital investments in new plant and equipment, they often chose lower cost countries for these and did not always choose near-shore or local locations.

Newsweek weighed in one the current state:

Supply chains, which once delivered goods to American stores cheaply, quickly and at the right moment, are now, as Jonathan Bass tells Newsweek, "not cheap, not quick and not just-in-time.

The changes over the last twenty-odd years assumed a peaceful, post-Cold War world would trigger an era of global commerce. However, large belligerent nations could make that assumption void.

We know of the challenges and they have compound effects

It’s the combination of challenges, not any one by itself, that are creating headaches for wholesalers, manufacturers and others. We all know about port congestion, labor shortage, rail bottlenecks, etc. and how each is throwing one curve ball after another at firms up and down the value/supply chain.

News stories about these events have been almost ubiquitous over the last year plus.  Last month, Business Insider reported:

Christmas may be a week away, but US ports are just now receiving containers loaded with goods that were ordered for Halloween.

The volume of containers marked "holiday" arriving during and after Thanksgiving week is up roughly 50% over last year, according to logistics data from ImportGenius analyzed by American Shipper. The numbers indicate delays in a process that is usually much further along before Black Friday.

What's different about this year is that Christmas merchandise is still on its way," Noah Hoffman, the VP of ground transportation for C.H. Robinson, said, according to American Shipper.

Believe it or not, Halloween costumes are still coming through the ports. That's how backed up things still are," he said.

I wrote in August about how:

  • Rail lines were being adversely impacted by forest fires
  • Huge backlogs of unloaded train cars were holding up the distribution of goods
  • Shortages of container truck carriages were stopping goods getting to buyers
  • An imbalance of containers means shortages in some countries and mountains of excess containers in others
  • Truckers were part of the Great Resignation and that meant there weren’t enough drivers to meet demand
  • Truckers were seeking better routes and pay
  • U.S. highway infrastructure (i.e., roads, bridges, etc.) is undersized, overtaxed and undermaintained (and this was before the Pittsburgh bridge collapse)
  • Etc.

When I prepared my slides for this presentation, I didn’t know that inflation would now be at 7%. But, even then, you could see lumber, oil and other items were experiencing increasing costs.

BS

Inflation will cause changes within distributors, wholesalers and more. It’s likely been a generation or so since many firms have dealt with rapid and high inflation. Businesses need to rethink how they’ll price goods and who, among their customers, will get access to scarce, ever more costly goods. Businesses might want to change sales compensation methods as it takes little salesmanship to move scarce products especially when the sales price is approaching your firm’s replacement cost.

Accounting for inflation is also a challenge as some firms have never configured their accounting software to create inventory and cost accounting entries that reflect the gains due to inflation.

Inflation AND supply chain issues both point to a pressing need for firms to do a far better job of planning and forecasting. More specifically, businesses must utilize more game theory and systems thinking to better:

  • Anticipate how other firms are likely buying/overbuying currently
  • Anticipate when certain supply chain challenges (e.g., rail backlogs) may ease and which ones (e.g., port congestion) may not
  • Model how a more local collection of suppliers/producers can impact the need for safety stocks
  • Model how cost increases will affect profits, COGS (cost of goods sold), etc. and to determine when (and by how much) to raise prices
  • Understand how freight expediting costs are impacting the bottom line now and going forward
  • Etc.

It may also be time for distributors to rethink their business model.  More specifically, distributors may want to:

  • Disintermediate some sources of raw material, parts and/or subassemblies. Any third-party in their supply chain that doesn’t add a lot of value but increases the risk of product shortages may need to go. Instead, distributors may want to bring these aspects of their supply chain in house.
  • Acquire design specs for key parts and manufacture these locally. This could be a great opportunity to use additive manufacturing devices (aka 3-D printing), CNC machines, robotic welding and other equipment to produce key components close by. Taking some of the overseas risk out of the supply chain could improve a firm’s responsiveness and its ability to fill more orders.  This is one kind of vertical integration that may be necessary to remain competitively viable in an increasingly volatile business world.
  • Consider new product/solution capabilities like:
    • Kitting of components
    • Light manufacturing of subassemblies not just component parts
    • Offering financing to customers
    • Bundle support with product sales
    • Offer Implementation/Installation Services
    • Provide extended warranties as a revenue generation tool

The future

Well-run operations will plan for a volatile world and not a return to the pre-pandemic space they knew. The old world is now irrelevant.

Sophisticated planning is the new order of the day. A recent Global Finance piece stated:

"Transparency across the extended supply chain is critical,” explains Kouvela.  Most companies found it difficult to act quickly during the pandemic, as they did not know where their stock was or how resilient their tier-two and -three suppliers were. In addition, many companies had become complacent and failed to proactively manage risk by devising backup plans and strategizing “what if” and “then what” scenarios.

Kouvela says that companies are addressing all of these challenges: “In the short term, [they are] relocating inventory and creating buffers. Much of this work [began] during Covid.” Corporations are also “collaborating more extensively with suppliers, including providing training, to improve resilience” and trying to diversify their supplier base, she notes: such efforts will necessarily only bear fruit in the longer term.

One of those longer-term items, additive manufacturing, is at the heart of a new book, The Exponential Age, by Azeem Azhar. The book tells the story of how additive manufacturing makes us think differently about global manufacturing and distribution. Here’s their story regarding Pix Moving:

Pix Moving was using only the most modern “dematerialized” manufacturing techniques. Rather than exporting cars, Yu explained that his company “exports the technique that is needed to produce the cars.” Vehicles are not loaded onto container ships and sent to their destination. Rather, the company sends design blueprints over to colleagues in the US, who use additive manufacturing techniques to print components locally. From those components, the finished product can be assembled. Yu’s approach could skirt around customs inspectors (and tariffs). Additive manufacturing lets him build wherever his customers are, trade conflicts be damned.

If you don’t read the book, you need to read this excerpt in Strategy + Business.

My take

Bloomberg BusinessWeek’s recent article laid out a clear mandate for supply chain (and other executives) to re-assess threats to their supply chains (beyond COVID):

An analysis of 405 extreme weather events over the past decade by Carbon Brief, a website in London devoted to climate science, shows that 70% were more likely to occur, or made more severe, because of global warming. “It’s not the next big supply chain crisis. It’s the next big supply chain crises, plural,” says Jason Jay, director of the Sustainability Initiative at the MIT Sloan School of Management. “What it ends up looking like is a set of individual crises in different places at different times. They’re hitting a different part of the supply chain, and they’re hitting it in a somewhat unpredictable way.”

Hopefully, something above will trigger at least some interest in redesigning and altering your supply chains to be, not just flexible, but highly functional no matter what geopolitical, environmental, economic or other factors are whipsawing your competitors.

Good luck…

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