Supply Chain Lessons and Opportunities: Notes on a Crisis

Since the last couple of years, the breakdowns of the supply chain of global scale have been on the front page in global news. The escalating shortages of products have affected everyone from large industries to consumers who are faced with the familiarity of empty shelves in stores. The short-term impacts of disruptions to supply chains have had a devastating impact on all kinds of companies across the globe. However, I am convinced that the global economy is expected to emerge more robust than it was before.

As a seasoned financial professional who holds an advanced degree in economics I’ve observed this crisis unfold from the front and have also analyzed the issue from a historical perspective and am convinced it will be a major change in the way we think about and conduct business.

From at least from the Industrial Revolution onward, accelerating along with the growth in global commerce, firms of all sizes have been relentlessly optimizing their processes for efficiency. The search for streamlined operations has increased over the past couple of decades, with companies seeking to eliminate any obvious duplicates or waste in their operations.

Although these strategies have produced significant cost savings over a long period However, the systems based on them have proven fragile and prone to catastrophic failure under pressure. In the wake of the conflict that erupted between America and China that started in 2018and the COVID-19 pandemic in 2020 and the conflict that will be fought between Russia as well as Ukraine in 2022 have brought significant shocks to the world economy, which caught business leaders by surprise and unprepared.

Changes in global supply chains in the last few years have highlighted the interdependence between today’s global economy, as well as the many flaws in the way we conduct business.

This is precisely the point at which essayist and analyst of risk Nassim Taleb’s idea of antifragility, the capacity of a system build strength and resilience as a result of injury or stress–is in the picture. The normal reaction of local, regional and global supply chains will likely be to enhance their resilience in order to prepare for the inevitable future crisis. This will come with inevitable cost, but the need for change also provides the opportunity for businesses to reconsider their current methods of doing business, and create stronger companies which are better prepared for a more uncertain future. Although many companies are grappling with issues related to supply chains It’s a mistake to let the crisis go without considering the long-term solution. It is important to take a look back, analyze the current processes, and make significant investments to improve the current processes will most likely yield dividends in the future.

In this article, I’ll talk about the ways in which businesses that are of any size developing new ways to create stronger supply chains and what they can do to improve their supply chains. One-of-a-kind reforms and changes are taking place. What comes out isn’t likely to be like what came before, it will be more effective.

Rethinking Regional Distribution: A Case Study

In the year 2020 I was commissioned to assist a London-based wine retailer during the initial phases of COVID-19’s pandemic. Demand was at an unmanageable level to my customer. Local wine shops which didn’t close during this time period were forced to find innovative methods to boost their business. They started offering conveniences such as same-day delivery to homes and some storekeepers using bikes to deliver the product to the customers’ homes. This amazing supply chain improvement was not an option for my client, who had to ship lots of products through an online store.

To compensate the lost pedestrian traffic, owners of a few London wine stores have responded to the COVID-19 pandemic by delivering their orders directly to the homes of their customers via bicycle messengers, or even on bikes. (Credit: iStock)

The main issue my client is the storage location. The wine was stored at an e-commerce third-party logistics centre in Wales approximately 200 miles away from London. This facility worked perfectly for the retailer as part of their routine operations prior to COVID-19 in a time where speedy service for orders was not as essential. But , now, because of an absence of employees (to sort and pack the wines) as well as a location away from the city, the facility wasn’t able to process orders in a timely manner to allow same-day delivery, and the business was not able to compete with smaller local businesses which could.

We searched for and found a wine-specialist store that was close to London which was able to work directly with the courier. If orders arrived prior to noon, the manager of the warehouse will pick and package the package, create shipping labels, and make them available for the courier to take them to the loading point. This gave the company an advantage over brick-and-mortar stores which allowed it to offer fast same-day shipping and a greater variety of wines.

Although this particular example might seem to be a bit simple and minimal but it demonstrates the kinds of transformations occurring in businesses of all sizes around the world. From large corporations to small-scale businesses, companies are redesigning and refining their distribution networks in order to make them more robust and resilient.

Restoring Balance: A Reversal of Recent Trends

Supply chain crises have made a number of things abundantly clear. The constant emphasis on optimizing efficiency first has resulted in weaknesses in distribution and supply networks. practices like single-source offshoring as well as Just-in-Time (JIT) manufacturing have allowed companies to boost their profits by reducing the cost of production as well as storage of inventory. However, as we’ve observed, the supply chains that the practices created were unable to withstand even the smallest disruptions to their supply chains.

A variety of optimization strategies that businesses have implemented rely on conditions. For instance, JIT manufacturing requires that the delivery of products from higher up the supply chain are guaranteed to arrive on time. Sole-sourcing with the lowest cost assumes that the source with the lowest cost will always have enough supply and capacity to provide these supplies in a timely manner. These assumptions haven’t been proven valid during our current crises in the supply chain. This is why businesses who have adopted these strategies for optimizing their operations have experienced severe losses in income and production.

As the supply chain in the world gradually recovers, returning back to normal operations–and its fundamental assumption of unrestricted, unlimited, low-cost supplies–will only cause greater frequency and more severe issues in the future. The possibility of disruptions to supply chains resulting from environmental change, political instability as well as other global disasters are bound to happen, and companies that plan for the long-term will be in a better position than those who do not look beyond the next quarter. Two big opportunities arise.

Multi-sourcing: Reshoring, Nearshoring, and China +N

At a fundamental, practical scale the supply chain in the world is suffering due to the numerous reports of problems that stem from imbalances in trade between containers and inadequate personnel for ships and ports in the event of a pandemic. The only way to address these issues, which mostly impact shipping that is long distance is to seek alternatives to supply. After years of shifting production and manufacturing to nations which have lower costs for labor, companies have changed their minds and are now working in order to broaden their supply chain and shift production closer to their home. According to a poll by Kearney’s management consultancy firm’s 2021 Reshoring Index report, 78 percent of CEOs have done reshore or are planning to do the same.

The delivery times of suppliers have been slowed significantly since the outbreak of the COVID-19 epidemic in 2020.

Three popular strategies that fall within the scope that is “multi-sourcing” are reshoring, nearshoring and China + N. Reshoring is the process of reviving the domestic manufacturing industry by moving production as well as production to the business’s country of origin. Nearshoring can reduce the length of supply chains using manufacturing facilities within the region of a business, but not the country they are based in. Also, China +N (or +1) recognizes China’s supremacy in low-cost industrial production across various industries However, it also tries to find alternative suppliers to protect. In contrast to nearshoring or the reshoring process, China +N concentrates on diversification of the supply, without necessarily cutting the length of the shipping path.

These strategies can be politically tense when they involve the massive transfer of both labor and capital across international boundaries. While ignoring this issue the fundamental strategy is the trade-off between short-term outcomes and the long-term viability. Making production move closer the home market generally means paying more wages. This can increase the price of producing, cutting margins, and diminishing short-term profits. But, the current economic crisis has reminded business leaders of a crucial fact: Profit margins that are higher do not mean much in the event that you’re unable to operate your business effectively.

In my case study small and mid-sized businesses are able to apply similar methods at both regional and local scales. Reshoring locally is to invest in resource gathering or production actions further along within the supply chain. Closeshoring as well as China +N are able to be compared at both the regional and local level by diversifying the suppliers even if it requires more spending on higher-cost products.

Transitioning From Just-in-time to Just-in-case Manufacturing

The consequences of failures in transportation or production can be felt throughout all of the supply chains if every component of the supply chain relies on a weak delivery plan. However, these effects are averted by employing an efficient inventory plan.

“Just-in-time” is the term used to describe the practice of keeping a small stocks of components rather than relies on suppliers to provide the essential ingredients “just in time” to be seamlessly integrated to the process of manufacturing. JIT was created through Toyota around the time of the 1970s to improve supply chain and manufacturing efficiency. However, its origins are in the innovations in assembly lines made by Ford and other manufacturers early in the 20th century. Utilizing the containerization revolution, JIT revolutionized the world through storm in the following decades changing industries as broad as microchips, grocery stores and even microchips.

Although JIT greatly improved efficiency by reducing production costs but it’s also extremely sensitive to backups of supply chains. In the absence of warehousing for materials and components that JIT eliminates, any downstream issues can slow production. Retail store shelves could be quickly empty as JIT deliveries are also temporarily interrupted.

To address these issues The pendulum has started to move back in the opposite in the direction of more firms using the “just-in-case” (JIC) method of manufacturing. Like its name suggests, JIC acknowledges the possibility of disruptions to supply chains and tries to reduce the risk by ensuring a certain amount of inventory that is on site. JIC can be retrogressive in certain aspects, more of a change back to the method by which inventories were handled prior to the introduction in JIT strategies. This can result in higher costs due to the stockpiling of critical parts or supplies that need additional storage space as well as staffing. In contrast, where a JIT manufacturing facility is forced to shut down operations in the event that an order doesn’t arrive the JIC facility is self-insured against failures. Production is able to continue until the warehoused resources are exhausted, which is likely to occur before the regular supply is replenished. Because too much stockpiling can be wasteful–particularly for resources that have limited life spans–finding the right balance is crucial.

Some management teams I’ve talked to recently have up to six months of inventory, even for noncritical components, whereas prior to the crisis, their inventory levels were typically determined in terms of days. Particularly in the wine industry glass bottle inventory has been exhausted throughout Europe. Glass distributors and manufacturers offer their largest customers preference-based allocations, a trend that is becoming apparent across other industries too. Just as people used to store toilet paper, big industrial wineries are stocking up sufficient glass containers to keep an for the entire year. Many smaller wineries without the ability to bottle the harvest of last year Many are struggling to find alternatives. Some are switching to alternative packaging like Bag-in-Box packaging, some are simply maturing their wines for longer. Such adaptations can be interesting and could be a better option rather than doing things the way they’ve for a long time.

Balanced resilience and cost efficiency in both storage sizing and the accumulation of resources could begin with a session in decision analysis, based on the company’s level of risk aversion. Bayesian probabilities of the probability of different kinds of supply disruptions. While analytical techniques can be useful in determining the best strategy but determining the best compromise between effectiveness and risk reduction cannot be reduced to formulas or algorithms. It is something business leaders have to consider and make decisions on their own.

Reinforcing Positives: New and Emerging Opportunities

The methods we’ve examined thus far have shown reversals as well as revisits of previous strategies. Now, we’ll look at the continuations or accelerations of previous patterns that offer new opportunities to build upon the foundations created by this supply chain disaster.

Mergers and Acquisitions

Globally the financial loss incurred by different freight forwarders and carriers during the current crisis has opened up chances for some of the largest and most successful players to benefit from the misfortunes of counterparts. Maersk and the other major companies are looking at not only purchasing their rivals and expanding their reach to different phases of logistics, transportation and freight forwarding to offer complete solutions for their clients and gain greater control over the whole supply chain. The more control an organization has, the better able to minimize any harm to the chain in the event that unforeseeable events interrupt particular connections.

To tackle new challenges to supply chain Shipping giants such as Maersk are seeking to gain more influence over their supply chain systems by acquiring strategic partners. (Credit: Unsplash)

Local and regional scale, smaller businesses could get similar results by creating stronger relationships with logistic companies and suppliers and if they’re lucky enough to have resources–by buying competitors, suppliers or distributors. In addition, this crisis could provide smaller companies the chance to exit profitably during times of consolidation.

Technological Solutions

Industry and companies have been working to resolve or at least lessen the challenges that arise from the supply chain crises by the application of technology. This is just one of the many factors that can help improve the resilience of the supply chain worldwide when we come out of the crisis.

The key technologies are:

  • Industrial Internet of Things: Although the advantages of industrial IoT have been well documented but the associated costs have hindered some businesses from adopting this innovative technology to improve logistics management, smart stock management and increased floor productivity. In investing into IoT for industrial IoT will not only improve resilience to supply chain disruption in the long run but also to reduce costs associated with just in case warehouses.
  • Improvements in AI Logistics Planning: The combination of deep-learning and advanced algorithms for operations research can increase the efficiency of transportation and reduce costs in the long-term. The latest technology is evolving in this field and I anticipate these systems to continue to deliver efficiency enhancements in the near future.
  • Supply-chain-as-a-service: Giants like Amazon are increasingly enabling other enterprises to use their networks to acquire supplies and distribute products. Walmart is one example. Walmart recently signed up Home Depot as a client for its GoLocal delivery service. For small-sized businesses, particularly working with a competitor that has a reliable distribution network can result in significant cost savings.

The Bottom Line: Optimize for the Long Term

With shareholders, investors and capital markets insisting on businesses focusing on the next quarter, not the next one or even five years from now self-insurance by foresight — and its resultant loss of profits in the near term can be challenging. However, after the chaos and losses of the past three years it is difficult to ignore that supply chain processes and strategies have to be changed. Maybe the bright side is that now it’ll be much easier to convince stakeholders of addressing these issues seriously.

The current economic crisis provides significant supply chain insights and the chance to revamp outdated business strategies system, processes, and relationships. The companies that decide to react to the crisis by making only the smallest changes miss out on the chance to emerge with a more robust, competitive, and ultimately robust business.

Leave a Comment