Supply Chain Isn’t for the Faint of Heart | Elementum

Supply Chain Isn’t for the Faint of Heart

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Tl;dr

Supply chains are facing historic disruptions more than 18 months since the start of the pandemic. In reflection, we’ve seen three distinct waves of challenges, with the most recent being defined by inflation and labor shortages. Nevertheless, supply chain leaders are unrelenting, and they are optimistic about the future.

 

Hard Times Aren’t Going Anywhere

There’s a lot to complain about in supply chain right now. Shortages are seemingly everywhere: parts, materials, labor, and containers, just to name a few. The challenges and repercussions seem unrelenting. Spot prices for shipments from China to the US increased 5x last week alone.

In a conversation I was having with the COO of a Tier-1 auto supplier this week he candidly admitted that “the microchip issue is slowly but surely killing our industry.” The CSCO of a midsize food manufacturer put things bluntly when he told me “employee turnover is bleeding us dry.” 

I’ve been in supply chain for almost 20 years now, and I’ve never seen such stiff headwinds facing almost every single sector. Then again, I’ve never been in the third wave of a global pandemic. For those of you keeping track, yes, we are officially in wave #3 of supply chain disruptions related to the pandemic. Notably, today’s challenges are less as a result of COVID-19 directly as they are indirect consequences of the pandemic’s wide ranging ripple effects. Here’s a quick recap of the different waves in case you lost track:

 

How We Got Here

Wave 1 – Q1-Q3 2020: Wave 1 was a story of winners and losers. While demand for certain products spiked (e.g. at-home-cooking, protective equipment, webcams, and more), demand for other products cratered (e.g. formal wear, office supplies, alarm clocks, and more). Even within the same sector, we saw massive mix shifts from B2B to D2C. For example, many food suppliers shifted distribution from restaurants to grocery stores, and almost every retailer shifted in-store to 100% online. Not to mention the all-too-publicized run on toilet paper, but did you realize that there was a massive glut of industrial toilet paper?  All the while, we were dealing with rolling shortages as various suppliers and manufacturers worked through COVID-related shutdowns and worked to get classified as “essential.” 

Wave 2 – Q4 2020 – Q2 2021: If the first wave of supply chain disruptions from COVID-19 was marked by wild demand swings, then the second wave will be most known for its extreme shortages. We all saw the headlines, with severe shortages spanning everything from semiconductors to pallets to resins to lumber. According to reports, 57% of US companies experienced an average of 2x longer lead times for components sourced from their tier-1 suppliers in China. That didn’t even begin to quantify the impact from their “invisible” lower-tier suppliers who they did not deal with directly, as highlighted in an article by Harvard Business Review. These unprecedented backups came from two sources. First, the notorious bullwhip effect came out in full force. At the onset of the pandemic, many companies expected a prolonged shutdown, causing them to cut orders and go into hunker-down mode. As noted, in Phase 1, however, demand didn’t decrease for long, and in many cases, it actually surged. As a result, inventories rapidly evaporated causing companies to place massive orders in an effort to resupply. As we all witnessed, capacity at key suppliers was quickly overwhelmed and historic bottlenecks ensued. 

The second major source of backups came from efforts to limit further spread of the virus. What were deemed best practices at the time – social distancing, deep cleaning & sanitization, 14-day quarantines, etc – created even more friction in an already gummed-up system. Factory lines grinded to a halt while major ports saw ships back up by the hundreds. International Trade Unions fought with local governments to get port workers prioritized for the earliest vaccines, as described by the Daily Breeze. A survey by the Institute for Supply Management found that nearly 75% of companies were disrupted in some capacity due to coronavirus-related transportation restrictions.

Wave 3 – Q2 2021 – Present: Even as challenges from Phase 2 continued, we saw a third phase of challenges put extreme pressure on the global supply chain. Like the challenges in Phase 2, which resulted in large part as derivatives from the challenges in Phase 1 (e.g. reduced forecasts in Phase 1 caused a bullwhip effect in Phase 2), the challenges in Phase 3 are even less directly due to COVID as to its wide ranging ripple effects. Most notably, supply chains around the world are suffering from hyperinflation and other pricing-related problems. Because of all the pent-up demand (Phase 1 problem) and the relatively slow movement of goods (Phase 2 problem), the availability of shipping containers is at an all-time low. Consequently, the price to transport goods is at an all-time high. Spot prices to ship containers from Asia to the US have seen prices increase 5x in only a week. Those rates are up 14x from two years ago, according to the Freightos Baltic Index. Companies are wrestling with the fact that, in many cases, the price to move goods is now more expensive than the costs of the goods themselves. 

At the same time, companies are struggling to keep their factories staffed with capable workers. According to Industry Week, 54% of manufacturers are struggling to find skilled workers to fill open positions, and nearly one-quarter of companies are missing production targets because of employee shortages. In the US, 90% of local chamber of commerce leaders surveyed by the U.S. Chamber say that labor shortages are limiting economic growth. And, in the UK, the CBI warns that labor shortages may extend 2+ years, as reported by the Financial Times. Reasons for these shortages are numerous, but the end result is the same: the global supply chain, and therefore the global economy, is still facing significant, prolonged disruptions.

 

Where Do We Go Next

Despite all the challenges, the world’s industrial heartbeat keeps on beating; parts are still being assembled and finished goods are still being shipped.  

Last week, I was in Chicago for the North American Supply Chain Executive Summit. For many of the attendees, me included, it was the first time getting together in-person for a supply chain event in nearly two years. I imagine that when we all signed up for the conference several months ago, we were expecting it to be an unofficial celebration that the pandemic was behind us and that the “return to normal” was already here. Unfortunately, as mandatory masking, testing, and vaccinations reminded us, things are far from back to normal.

Nevertheless, I spent two full days in presentations, workshops, and meetings. I attended lunches, happy hours, and dinners. I must’ve spoken with 100 supply chain leaders. Every single one of them was energized and optimistic. As one SVP of a global consumer brand said on stage “Leaders always find a way to persevere.” 

I’m not sure whether this third wave of supply chain disruptions will be the last one. I hope so, but I have a sinking suspicion that it won’t be. Fortunately, our supply chains – although battered, bruised, and depleted – are in good hands. As one supply chain Director told me “Supply chain management is not for the faint of heart.”

David Blonski

David Blonski

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