What is happening to the supply chain?

Just as the chain is long and complex, the crisis it is currently experiencing is long-standing and made up of multiple components.

However, the current thinking seems to indicate that the source of the industry's most significant problems at this time can be traced to what happened in 2020 during the confinement and health crisis.

Now, the challenges that are shaping up today - which could be summarized as inflation and the virtual imminence of a global recession - may well be viewed as medium-term consequences of what happened two years ago.

Yet, as the discussion goes on, it seems to become unclear whether it is indeed part of the consequences of Covid-19, or whether this event has a nature of its own.

To understand the current state of the supply chain and how we can meet the challenges ahead –at least in those areas where we have control and influence– let us start with what happened in the aftermath of Covid-19 and then ask what lies ahead in the near future.

The (not so) past crisis: Covid-19 and the pent-up demand

The number of organizations reporting some type of supply chain disruption during 2020 reached an all-time high since this metric has been conducted, according to data from the Business Continuity Institute (BCI).

Let's put it in perspective: 27.8% of organizations around the world reported more than 20 supply chain disruptions, compared to the previous year, when only 4.8% reported similar problems.

In the area of $4 trillion USD was the loss of global trade due to the pandemic.

Of course, the consequences of such a pitfall cannot be understood in the short term, and perhaps only in the medium term.

Just look at how the economic recovery following the start of vaccination campaigns around the world meant an aggressive disruption in supply chains.

After decades of operating under the "just-in-time" model (a constant acceleration in the blocks of the chain to speed up distribution), overnight it was required to come to a complete halt and adapt to new market demands, as a result of radical changes in consumer habits.

This is what is known as pent-up demand or the economy of confinement: if consumers were previously interested in going to the movies, the gym, or a concert, circumstances led them to shift their purchasing preferences toward a better screen for watching movies at home, exercising at home, or acquiring musical instruments.

Basically, this effect threw the chain into an imbalance, where goods became increasingly important at the expense of services, which lost the possibility of continuing to operate under their traditional models.

This change resulted in an increase in ocean freight prices. According to a Freightos.com estimate, in one year (September 2020 to 2021) the cost to ship a container from China to the United States went from ~$2,000 USD to ~$20,000 USD.

Moreover, this cost overrun did not imply an optimization of operations; in fact, one could say the opposite, as waiting times at port units increased considerably due to the lack of staff.

In short, the conditions in which the pandemic left the industry are critical, to which we must add the challenges ahead and the particular circumstances in which the industry finds itself.

Therefore, we have compiled 4 tips that can help you face the coming crisis.

4 tips to strengthen the supply chain

EThe BCI indicates that one of the positive consequences that the health crisis had, and leaves as learning for the one that seems to await us in the short term, is that senior management of companies say they are increasingly involved in supply chain risk management.

The 82.7% of the companies consulted in 2020 indicated an increase from "medium" to "high" priority to the tasks involved in risk management for SCM, an upturn of 10 units compared to 2019.

In this regard, we can outline some specific actions that can contribute to the strengthening of the supply chain.

1. Adapt to the supplies you have, not the ones you would like to have

Many businesses were able to survive the pandemic because they figured out the need to pivot, so they took action early and accordingly.

One example is how Healthy Pet Store, a UK pet food and supplies retailer, managed to overcome not only Covid-19 but also post-Brexit regulatory change.

Deborah Burrows, brand manager, noted that their first warning sign was the shortage of dog life jackets, their flagship product during the summer, which was manufactured by a Chinese company located at the epicenter of the pandemic.

Burrows says that at that moment he realized he had to turn to those products for which there was a constant demand. So he turned to local restaurants and producers –detained by the confinement– and offered to buy some of their fresh and frozen stock.

His intention? To make animal and vegetable protein-based pet foods from the straggling inventory of these stores. In the end, The Healthy Pet Store managed to survive the crisis thanks to frozen foods from local restaurants.

2. Strengthen relationships with your suppliers

The safety net for your business that comes from having a loyal and professional supplier in difficult times cannot be underestimated.

For this, there is no other way than a mutually beneficial business relationship, where trust prevails.

The learning comes from Olsam, a startup founded in 2020 that operates as an aggregator on Amazon's European marketplace. According to Damian Conroy, the company's SCM director, after the forced shutdown of their suppliers in China, they decided to rationalize their resources in the most efficient way possible.

To put it simply, they assigned all their orders to the same company for shipments in Europe, another for those in the USA, and a third for the rest of the world. Thus, they tightened their relationship with these three key suppliers.

By guaranteeing high and constant volumes, they managed to get their suppliers to favor their orders, and they opened an agile communication channel with company representatives who support them in solving problems.

3. Invest in scenario planning

A fundamental supply chain management attribute is visibility. This is not limited to the ability to observe step-by-step the different stages a product goes through, but also refers to the scope of your strategic vision.  

One way to understand this," says Les Brooks, founding partner of the firm Oliver Wight, "is that the more you can see into the future, the better your chances of articulating a chain that builds and adds value, while being more prepared to handle disruptions.

While some events are more predictable than others (as the pandemic proved to us), a robust SCM must develop the ability to visualize itself in scenarios where its greatest vulnerabilities are exposed, and think of actions to counteract the adversity it faces.

4. Take control of your inventory and prioritize profits

This is relatively simple (although experience seems to dictate that it is not often put into practice): keep a healthy backlog of the number of products that generate the most profit for you. Prioritize the supply of raw materials from which you make it and invest more time, energy, and resources in getting them.

If a single product generates 80% of your profits, don't spend too much trying to source the remaining 20%.

‍

Environmental sustainability: keywords for the future of supply chains

The year 2021 can be considered as the year in which SCM was made official as a business priority throughout the world and across industries.

Many of the alternatives you hear and read about point towards blockchain applications or the internet of things, however, the truth is that these are still technologies that are in the testing phase.

Nevertheless, public opinion is increasingly highlighting the importance of environmental sustainability in the context of the supply chain.

Gartner figures from 2021 state that 84% of supply chain leaders plan to make some investment in climate adaptation and mitigation actions over the next 18 months.

More or less that deadline has been met, and while it is not the purpose of this piece to certify Gartner's figures, what is certain is that there has been a growing interest in some sectors to make more thoughtful investments (from an environmental standpoint, of course).

It is useful to take into account the growing importance of ESG criteria among investors. According to EY, the three main factors in this trifecta that interest investors are governance, climate risks, and the environmental performance of companies.

Such a change in the context of the supply chain would imply looking at the idea of responsible sourcing, which in operational terms means "shortening" the chain: it is about favoring the integration of local products, and helping small and medium-sized companies to overcome access barriers.