The early 2020s have been marked by an onslaught of supply chain interruptions. Here’s what you need to know about the most common types of risk so you can respond proactively:
Ocean freight bottlenecks: The Suez Canal imbroglio of 2021 highlighted the impact of stuck products on inventory levels, logistics and workforces. The effects of this, as well as COVID-related closures of Ningo-Zoushan and Yantian ports in China, pushed up both raw material and freight prices. While it has been possible to get cargo into ports, it has been challenging to get it out because of the truck driver shortage. It’s expected that the global ocean cargo industry will continue to suffer from port congestion and delays until at least 2023.
Shifting inventory management from just-in-time to just-in-case: The pandemic and other recent disruptions have shown how the just-in-time inventory management system is flawed. An alternative approach is the just-in-case model, which requires greater safety stocks and buffers for critical or high-demand products. Companies that do not shift inventory strategies in the face of disruption historically fail. For example, back in 2000, a fire at the Philips microchip plant in Albuquerque, N.M., simultaneously affected both Nokia and Ericsson. Nokia responded swiftly, found alternative chip suppliers and even re-engineered some of its devices to make them compatible with other components. In contrast, Ericsson was slow to respond and relied on Philips’s reassurances that it would meet the shortfall. In the end, Ericsson struggled and ultimately quit the mobile-phone business.
Talent-related business interruptions: Recent events have changed the way people work and spend their money. Many jobs shifted to remote or hybrid, which gives people more work-life balance, including less time spent commuting; less money spent on gas, transportation, work clothes and eating lunch out; and the ability to work from anywhere. Amid the Great Resignation, burnt-out workers — or just workers ready for something better — left their employers in droves in search of better situations. While this trend did not affect the supply chain industry as much, there’s no reason to think it couldn’t become a problem in the future. Employers must stay ahead of employees’ needs and make sure they are offering a comfortable and fulfilling work environment.
Demand-related business interruptions: Consumers also moved to safer shopping practices during the pandemic. As e-commerce shopping increased and in-store shopping decreased, supply chains had to flex how they fulfilled customers’ needs. Similarly, while consumers were not spending money on vacations, dining out and other in-person entertainment, they switched to buying goods. Products such as puzzles, bread makers and chess sets were flying off the shelves early in the pandemic because of unprecedented demand. This triggered bullwhip effects. When this happens, it’s critical to synchronize the supply chain and improve demand data to avoid overstocking when the demand subsides.
Natural catastrophes: Weather-related disasters are on the rise as a result of climate change. Although the loss of life and access to basic needs are the most tragic impacts, natural disasters also disrupt supply chains. Deep freezes, blizzards and polar vortexes block roads and knock out access to energy. Hurricanes, tornadoes and earthquakes damage or even level facilities and knock out roads and bridges. Storms and flooding make roads impassible and reduce access to power. Extreme heat last summer even created supply-demand imbalances for air conditioners. Natural disasters are going to keep happening, and supply chains need to have plans in place for interruptions, while doing their part to combat climate change.
Cyber incidents: As more business processes are controlled by computers, software and other automated devices, there also are more opportunities for technology failures. Recently, a technical malfunction with air navigation service Skyguide shut down Swiss airspace for at least two hours. Of course, malicious actions cause even greater disruption — whether they go undetected and just siphon personal data or bring operations to a halt. Cybersecurity must be part of every company’s risk management plan. Once internal networks are secured, companies should work with their supply chain partners to ensure they have at least the same level of cybersecurity. Increasingly, hackers are preying on the weakest link in a network, then spreading until they reach all supply chain partners.
Risk mitigation tools and strategies
To prepare for these and other risks, companies must consider inventory cost compared to revenue loss, the trade-off between demand and service versus inventory costs, and if there is enough stock to cushion disruptions. In addition, they should review their entire end-to-end supplier network, financial stability, operational compliance and geographic risks associated with suppliers.
In particular, it’s wise to take a long, hard look at procurement strategies. Global supply chains are more prone to disruptions because longer distances between partners leaves more rooms for interruptions. The best strategy may be to multisource. By developing strong relationships with a variety of suppliers, organizations can nimbly shift workloads from one partner to another during times of crisis.
Once these strategies are covered, evaluate different tools to help manage risk. These can include:
- A robust smart inventory management system that provides real-time visibility about movement and stock
- Supply chain mapping software to track and document the network
- Data analytics to monitor customer demand peaks and troughs, reroute supply networks, assess lead times, check the accuracy of fulfilled orders, identify alternative suppliers and more
- Blockchain solutions that can streamline processes by enabling a free flow of information, inventory and financials among all supply chain partners
Lastly, be sure to implement the prevention, preparedness, response and recovery risk mitigation model. At a basic level, this involves
- Prevention: taking actions to reduce or eliminate the likelihood of an incident and minimize the effects
- Preparedness: creating an effective response and recovery plan that can be activated in the event of an incident
- Response: containing and controlling an incident and minimizing its impacts
- Recovery: taking steps to minimize recovery times.
Once plans are in place, test and refine. Run stress tests to understand where supply chain issues will start to cause a financial impact, particularly for available cash and net working capital. Recovery options will be severely limited if there’s no cash to work with. Perform practice simulations for various types of interruptions to train employees. By learning what to do in advance, team members will be more confident and level-headed when a crisis arises. Being fully prepared to meet disruptions is a mark of business savvy and a must for all supply chains.
Expand your resilience knowledge and skills with the soon-to-be-released ASCM Supply Chain Resilience Certificate.