Disruption

Supply Chain Disruption. A Deeper Look Into Context, Causes, and Trends  

You don’t have to look very hard to find alarming headlines about supply chain issues today, as supply chain resilience continues to be maximally challenged by a stubborn snarl of inter-related difficulties. Staffing losses, supply constraints, and continuing pandemic disruptions (especially in major ports throughout China) have made the demanding business of moving goods tougher than ever.

The headline-grabbing issues are foreboding enough on their own, but they’re also undergirded by some systemic problems, including a continuous escalation of challenging macroeconomic factors: increasing wages worldwide; along with greatly heightened consumer expectations for service. The winning formula, “more more, for less…with less,” has always been a tough trick for any business. But as we’ll discuss, these externalities are difficult to overcome, and they’re only part of the problem. 

Supply Chain Issues: Self -Imposed Problems

In addition to the variety of business-environment difficulties, many top supply chain providers have created some problems for themselves. Some of the most successful firms have hung on for too long with failed philosophies and prioritization models — like Lean, and Just-in-Time provisioning. Many of these same players have also shown a resistance to change, particularly regarding the adoption of new technologies. These self-imposed problems are, not surprisingly, endemic to major successes with outmoded approaches, and in the face of today’s new challenges and demands, they’ve exacerbated an already urgent supply chain crisis.

Supply Chain Disruption: A Closer Look at Macro Factors

This is Part One of a multi-part blog, and well be focusing here on the impacts from the evolving macro trends we’ve noted above, with some added perspective on the way the global supply network has become exponentially more complicated in the last 20 years. We’ll also look at the ways consumer expectations have shifted the supply chain into a difficult-to-sustain state of “constant overdrive.”  Then we’ll conclude with a quick look ahead to the future, and our (upcoming) discussion of how we might overcome so much (internal) resistance to it. 

Managing Risks and Supply Chain Shortages

Over the last 20-30 years, supply chain expansion became a global phenomenon in every sense of the word. In the 1990s, supply chain operations were relatively simple: 

1) Build in China; 

2) Ship to the US and Western Europe

But by the early 2000s, as wages continued to increase in China, the lower cost of doing business — which drove the offshore movement in the 70s and 80s — had largely disappeared. Supply networks quickly adapted, and became more geographically dispersed and interdependent. They expanded first into other parts of eastern Asia (Vietnam, Thailand, India), then into eastern Europe (Poland, Ukraine) and Mexico. This expansion occurred at the same time products were becoming more complex and modularized, and also as supply chain management became increasingly software-dependent. Specialization and quality began to drive important sourcing decisions rather than the sole lever of saving partners a few dollars on materials and manufacturing alone. Chief Supply Chain Officers and CFOs became experts at analyzing the total cost of ownership (“TCO”) when making supply chain decisions.

From 2002 to 2013, the cost of manufacturing in China increased almost 500%, making China significantly more expensive than places like India.

Demand also expanded and became more dispersed, as many third-world countries matured into flourishing second-world markets. Although still a net exporter, China evolved to become a major importer of goods as well. India and Brazil arrived on the scene as large, demand-driven markets, adding new depth to the full global picture. While once only a handful of main routes connected the largest suppliers with the largest markets, now there were countless permutations. The global supply chain map grew thick with connections, and providers stepped up to do their very best to figure it all out.

The headline-grabbing issues are foreboding enough on their own, but they’re also undergirded by some systemic problems, including a continuous escalation of challenging macroeconomic factors: increasing wages worldwide; along with greatly heightened consumer expectations for service. The winning formula, “more more, for less…with less,” has always been a tough trick for any business. But as we’ll discuss, these externalities are difficult to overcome, and they’re only part of the problem. 

World trade has increased ~4,000x since 1950

Consumers Demand More

Overlaying and adding a new dynamic element to all of this complexity, consumers became steadily more demanding, which has served over time to remove almost any slack from the system.  

Not too long ago, 1-week shipping was standard — but within the last few years, 2-day shipping has become the norm, with many businesses offering overnight or same-day shipping as a primary means to differentiate (or stay equal). Arguably, Federal Express put this all into motion, but it’s now commonly known as the “Amazon effect.” Amazon has also uniquely contributed to an increased appetite for like-quality goods. As a result, brand-power has given ground to discount-pricing, availability, and immediate delivery as key differentiation levers.

From 2015 to 2018, Amazon’s average delivery time decreased from 6 days to 3 days.

If that were not enough, consumers have also grown to expect (and demand) full transparency of the entire shipping process, down to the item level. Today they want to know exactly when their product ships and where it is on the delivery journey. And a good shipping and delivery experience — formerly a largely invisible aspect of any purchase — now wields major influence on vendor preference and likelihood of reorders. Not surprisingly, consumer expectations have translated quickly into higher expectations for business-to-business transactions as well.

Localization and Sustainability

If you’re keeping track, we have two more layers to add to this heady mix: localization, and sustainability. Many consumers have a clear preference for local products and for products that are sustainably produced. By now you won’t be surprised to hear that this need finds its way back to supply chain partners, who use their creativity and collaborative skills to find cost effective ways to source, make, and deliver locally and sustainably. Fortunately, local and sustainable currently allows for some pricing premium, but experts are already expecting that this advantage may not sustain for the long-term.

Sustainability has gained popularity as more Americans (+50%) think the environment should be a top priority.

Complexity Is Here to Stay

We hope this quick review of long-running business-environment factors has helped convey some of the deeper undercurrents that have combined to make today’s supply chain emergency a front-page item. 

But while we are confident that the most recent spate of urgent externalities will finally pass, long-term trends indicate that more and different complications will take their place. The complexity of sourcing raw materials, moving goods, and constantly updating global supply networks won’t be going away.  What’s needed now are new ways of tackling these problems — this is certainly a good time for supply chain leaders to untie their own hands and feet.

Up Next: Finding New Solutions

In Part Two (our next blog-post), we’ll look inward at the supply chain business itself, at the resistance to change we see throughout this space, and the urgent need to modify both mentalities and behaviors if we hope to see long-term, sustainable improvements in supply chains.  

We look forward to your continued interest!

David Blonski

David Blonski

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