Top five supply chain issues, ranked
1. Long lead times and materials shortages
Supply chains have been overextended for quite some time. Bottlenecks at ports around the world were a problem before the COVID-19 pandemic, and lockdowns compounded the problem so severely that they’re still not fully resolved. As a result, lead times continue to be unpredictable at best, and typically longer than expected, causing material shortages around the world. Supply chains have also become increasingly complex, as companies have turned to outsourcing to save money.
Solution: Sourcing and supplier management
To mitigate the risk of long lead times and shortages, look at everything you’re buying and where it’s coming from. For example, you might have saved money by outsourcing to Asia — but how much of your savings could be wiped away if one minor glitch or shortage means production delays or flying in product at your own expense? Consider looking into suppliers closer to your business. Near-shoring and friend-shoring offer more predictability and supply chain visibility and don’t always mean an increase in total cost. If the cost is slightly higher, the risk could be much lower and you’ll often save money in the long term. Another bonus is that, with materials closer to home, lead times are much shorter, and you won’t need to keep so much supply on hand — reducing the capital tied up in the supply chain. Given the unpredictability in consumer demand right now, not only will storage costs be lower, but you’ll also have less risk of oversupply.
Near-shoring and friend-shoring offer more predictability and supply chain visibility and don’t always mean an increase in total cost.
2. Increasing logistics costs
There are many reasons why logistics costs are increasing and making supply chain issues worse, but the primary reason is the cost of trucking. The price of diesel fuel is very high, and it could climb further still. There are also labor costs, which are rising with inflation — an issue compounded by the trucking industry’s longstanding driver shortage. Tighter labor laws, while implemented for good reason, are also highlighting issues in the trucking industry, and California’s proposed “gig law” could further impact independent truck drivers if passed.
Solution: Logistics strategy and network optimization
Minimize the impact of rising logistics costs by revisiting your logistics strategy and looking for opportunities to optimize your network. The goal is to better understand how your network is currently designed. Where do you ship from? Are your warehouses in the optimal location given the needs of your customer base? Consolidation or expansion could help optimize your distribution. Are you using third-party vendors or doing everything yourself? It could be time to consider outsourcing your logistics — when transportation costs do go down, using third-party logistics will help you realize those savings faster. Are you getting the best price you can for trucking? Much like car insurance, we advise requoting your transportation network every two to three years. Annual increases are typical, so it’s likely you’ll eventually be able to find another less expensive option.
It could be time to consider outsourcing your logistics — when transportation costs do go down, using third-party logistics will help you realize those savings faster.
3. Changing and unpredictable consumer demand
The pandemic didn’t just compound the shift toward e-commerce — it changed consumers’ buying habits. Many companies experienced customers buying their products in bulk, so they increased their supply to meet the increase in demand. However, consumers also began buying much less frequently — they weren’t sure when they could go to the store again, or whether the product would be in stock next time, so they stocked up. As a result, many in the industry were left with too much supply on hand. This led to a bullwhip effect throughout the entire supply chain, as materials suppliers produced more to keep up with their customers’ “increased” demand. Companies that experienced inventory shortages also overproduced to compensate, running into the same issue.
Solution: Enhanced S&OP processes
S&OP, or sales and operations planning, is a cross-functional strategic process that should involve all your director-level staff. First, your marketing team will determine how large the market is for your product, and your sales team will tell you how much of that market they can sell to. From there, look at whether you can produce enough to meet the sales team’s projections and adjust capacity as needed. Next, your purchasing team will need to investigate whether your suppliers can provide you with enough materials, and then look for additional options if necessary. Your logistics team will evaluate all of this and determine how much they can store and deliver.
This process forces you to take a good, hard look at your capacity and capabilities. It also helps with scenario planning, as it’s much easier to see what you’ll need to do if you have a dip in demand, an interruption to your supply chain, a logistics issue, and so on. We advise creating a 24-month strategic plan, with ongoing monthly updates.
4. Manufacturing constraints and inflexible operations
There are several reasons why you might have manufacturing constraints, but the primary drivers are people, materials, and equipment. As we’ve covered, materials shortages and long lead times will continue to be an issue this year, as will labor shortages. Capacity constraints, while not necessarily a problem specific to the current environment, will also pose a significant risk that shouldn’t be ignored. When operations are inflexible due to people and equipment constraints, it limits your ability to respond to changes in demand, which we expect to see a lot of this year. Your equipment might be constrained by what it can produce or how much.
Solution: Manufacturing strategy and footprint analysis
To get around manufacturing constraints, look at your operations footprint to refine your strategy. Understanding your own capabilities and capacities is the first step in understanding your ability to react, adjust, and thrive when you experience operational disruptions. How many factories do you have, where are they located, and what’s the utilization of your machines and square footage? You might find that you have extra capacity within your existing facilities or that you could benefit from consolidating. If you decide it’s time for new equipment, you have an opportunity to integrate flexible machinery into your operations. Here, cost analysis will be necessary — find out how long it will take to see payoff, what can be automated, and what impacts to capacity can be achieved. You might also find that while you have enough people, you don’t have the right people. Cross-training your workforce is a prudent strategy for getting ahead of people constraints.
Understanding your own capabilities and capacities is the first step in understanding your ability to react, adjust, and thrive when you experience operational disruptions.
5. Environmental risk and natural disasters
For many of us, the pandemic was a wake-up call to the fact that at any time a single event can cause years of worldwide disruption. We don’t want to speculate about what might happen in the future, but extreme weather events, natural disasters, and geopolitical events will always pose risk. Potential sources of disruption abound, and your ability to produce and deliver your products could easily be interrupted.
Solution: Supply chain strategy and optimization
It’s clear that managing supply chain risk ahead is going to require a more strategic approach to sourcing, logistics, inventory planning, and manufacturing capacity. You’ll need to visualize your supply chain top to bottom: where are you getting your materials, how are you getting them to your facilities, where are your suppliers getting their materials, and how are you getting your products to your consumers? When an interruption hits, supply chain visibility is the key to greater flexibility. Figure out who your critical suppliers and service providers are, with special consideration for your most complex products, and find out who can help you if those critical contacts become unavailable. Do your research now so that when disaster hits, you’ll have backup contacts who you’re already familiar with. Being prepared will enable you to respond faster.
Get ahead of supply chain issues
This year’s supply chain risks are significant, and the best way to protect yourself is to prepare for the worst and hope for the best. Creating long-term plans with built-in flexibility will give you the best chance for success amid disruption, inflation, increased competition, and more.