Supply Chain Pulse: No More Get-Out-of-Jail-Free Cards | Elementum

Supply Chain Pulse: No More Get-Out-of-Jail-Free Cards

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Tl;dr

Despite the headlines, the worst of the pandemic is over for supply chains. While some challenges still exist (e.g. selective shortages, price increases, and covid variants), look for high-performing companies to leave the excuses behind and start differentiating themselves through meaningful investment and innovation in supply chain management. 

 

A Year (or Two) to Remember

As we enter the final month of 2021, let’s take a look at where things stand in the supply chain world. While the topic of supply chain is still trending across social media, news headlines, and political speeches, the reality is that the dynamics on the ground are starting to change. There’s good reason to believe that 2022 will bring relief to certain, long-running problems while new areas of concern take center stage. What can be sure is that the world’s patience for supply chain delays has all but run out, and we’re about to see which companies actually made their supply chains better during the pandemic.

 

How Supply Chain Got Here

It’s impossible to understand where we are today without a recap of what got us here. The three biggest factors were a combination of:

  1. 1. Order cuts and the bullwhip effect
  2. 2. Unexpectedly high demand 
  3. 3. Covid-specific operational challenges

Seeing this list, it’s easy to be sympathetic for supply chain managers. What chance did they have against the world’s worst pandemic in over a century? What could they have done to prevent a trifecta of unforeseen circumstances? Well, let’s remember that they didn’t do themselves any favors in the decades leading up to this epic crisis. Decades of cost cutting in the name of efficiencies (e.g. lean manufacturing, Just-in-Time supply chain, etc.), left supply chains brittle. Instead of bending with the flows of supply and demand, supply chains shattered. 

We’re all focused on the future to make supply chains better, but let’s remember that it was underinvestment and excessive cost cutting that left supply chains susceptible to long-term disruption. In reality, it was just a matter of time before the global supply chain landed itself in gridlock.

As it has played out, since the first signs of trouble nearly 2 years ago, we’ve seen four distinct phases of supply chain disruptions:

  1. Q1-Q2 2020: Companies cut all orders
    • – Initiated a ripple effect of idling machinery and laying off workers
    •  
  2. Q3-Q4 2020: Orders rebounded, but supply chains were slow to restart 
    • – Factories were operating below capacity due to Covid restrictions and high infection rates
    • – Workers were reluctant to return to frontline jobs
    • – Demand skyrockets because people have extra money from more savings (due to cancelled vacations, less eating out, etc.), government stimulus, and a rising stock market, plus they’re motivated to buy homegoods and it’s even easier to shop online from home
    •  
  3. Q1-Q2 2021: Demand continued to grow, passing pre-pandemic levels, but supply chains were in gridlock
    • – Ports were bottlenecked for weeks because operations were at half capacity 
    • – Rolling factory closures were still occurring upstream in the supply chain
    • – The Great Resignation hit supply chain particularly hard
    •  
  4. Q3-Q4 2021: Selective dysfunction persists, inflation enters the picture
    • – Delta variant slows re-openings, but business conditions generally improve
    • – It’s still difficult to hire and some components/supplies are still notoriously backlogged (e.g. semiconductors)
    • – Limited supply starts leading to higher prices
    • – Hype starts exceeding reality → easy to blame supply chain

 

What’s Happening Now

I don’t want to be the one to jinx things, but it seems as though the worst is behind us. We still see areas of selective dysfunction, which are likely to continue for a while, but we’re also seeing general improvements across most areas of the supply chain.

Where Things are Still Challenging

  • Labor: There are still millions of open positions across the supply chain industry. Given that jobless claims in the US hit its lowest rate in 52-years, we’re unlikely to see meaningful labor relief for 6-12 months or longer. Most companies have found ways to adjust by culling profit-neutral SKUs or encouraging overtime while others have started increasing wages or offering sign-on bonuses to attract talent. 
  •  
  • Supply: Some components are still backlogged for months. Everyone knows what these are because they’re seemingly in the headlines everyday: semiconductors, housing supplies, etc. For semiconductors, the issue seems more structural than a bullwhip impact form covid. We are now in a world that’s surrounded by computer chips. At the same time, major economies have pushed chip manufacturing to just a few places around the world. In hindsight, the pandemic may have accelerated the chip squeeze because of the bullwhip effect, but that squeeze was coming eventually. As such, it’ll also take longer to work through, whether that be from new factories like Samsung just announced or new infrastructure investments from congress.
  •  
  • Covid Variants: The Delta variant was a material setback to the supply chain in Q2 and Q3’21. Just when it seemed like everything was returning to normal, infection rates skyrocketed, making it difficult to keep frontlines fully staffed and putting pressure on businesses to maintain restrictions for a while longer. Now, the latest variant is Omicron, and there are sure to be more variants in the future

 

Where Things are Better

  • Demand: Demand has stabilized. Consumers are still buying – which is good – but not at the frenzied pace from six months ago, which is even better. 
  •  
  • Ports: The backups at ports have largely been eliminated. Policy changes to keep ports open 24/7 and incentivize overnight pickups seem to have worked. The Port of LA reported normal conditions for the first time in several months.
  •  
  • Covid Requirements: All those covid precautions that hampered operations are largely things of the past. With effective vaccines, most companies are able to operate as normal.

 

No More “Get-Out-of-Jail-Free” Cards
In 2021, supply chain disruption was the ultimate get-out-of-jail-free card. Executives at S&P 500 companies blamed their supply chains for missed earnings more than 3,000 times in 2021, which was up 50% over 2020. With conditions generally improving and earning estimates already adjusted, expect analysts and customers alike to be much more skeptical. Execs will need to explain exactly which supplier, part, or port is the hold-up. It’s time to be much more skeptical.

Just as notable as the number of times supply chain was blamed in 2021 for poor performance is the number of supply chain execs who were fired. We’re not aware of any notable departures due to performance reasons. It turns out that when everyone is suffering, it’s difficult to separate the macro issues from the micro issues. Now that those macro headwinds are normalizing, expect more pressure on executives to deliver results

 

Inflation
Another theme in the headlines is rising prices. You don’t need a degree in economics to realize that higher demand and lower supply will lead to higher prices. Wherever supply is squeezed the most, you can expect to see the biggest price increases (e.g. new cars). As the supply-demand imbalance normalizes over the next couple quarters, there’s good reason to believe that inflation will also subside. Although, that’s a whole other blog.

 

Supply Chains are Still Vulnerable
Yes, it’s great news that operating conditions are improving. However, the majority of supply chains spent the last two years just trying to survive. That meant putting out fires one order at a time. As a result, we did not see the type of structural improvement in supply chain like we saw in other industries. Take, for example, education, healthcare, and e-commerce, which all fundamentally changed the way they operate, digitizing 10 years in a matter of only 10 months. Supply chain, however, opted for survival and the status quo. This isn’t overly surprising for a risk-averse industry, but it is something that we all need to be mindful of.

 

What to Expect

Here are a few themes that we expect for the end of 2021 and early 2022:

  • • Supply chain problems peaked in late Q3’21 and will improve throughout 2022
  • • Those companies still blaming supply chain for their problems will see repercussions
     
    • The Fortune 1000 will return to normal course of business by pressing suppliers again with costly SLAs and strict delivery windows
  • • Companies will be forced to raise wages to fill open supply chain positions
  • • Prices are likely to continue going up in Q1’22 but may level-out afterwards
  • • There will be more covid variants, but business output will not be impacted

 

Expect to See Record Innovation in Supply Chain
Remember the Ever Given? We may be exiting the pandemic, but lightning can strike the supply chain at any time. Unfortunately, there are more contributing factors to dysfunction than ever before: 

  • More natural disasters
  • More operational headwinds:
    • – Tariffs (US vs. EU, US + EU vs. China, etc.)
    • – Supply chain’s role with ESG (e.g. lower carbon footprint)
  • Higher consumer expectations: Same-day shipping, locally sourced, etc.
  • Prolonged covid, related ripple effects

The chaos of the pandemic made it difficult for supply chain leaders to innovate. The universal nature of the pandemic also made it so they didn’t have to. But, that’s changing fast. With customers and analysts alike out of patience, supply chain executives will be pressured unlike ever before to ensure they’re staying ahead of the competition. 

Resilience is a common buzzword associated with supply chain improvements, but you don’t build a safer castle by digging a deeper moat. You do it by creating a network of scouts to identify risks early and spread information fast. Similarly, fortifying supply lines is ineffective in a world that’s constantly evolving and accelerating. Resilience is not a strategy, it’s an expensive delay tactic.

Instead, companies need to be digitizing their supply chains. That means investing in innovative solutions to make their operations more flexible and more agile. Real-time and automated will be the characteristics that define the winners of the post-pandemic economy. 

Every supply chain exec is afraid of getting asked the question: “You had two years of delays in order to innovate, why didn’t you?” Look for the best companies in the world to answer this question with real, meaningful investment in 2022. 

David Blonski

David Blonski

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