For supply chains, the pandemic has brought unprecedented levels of disruption. However, risks of severe stress and even failure are built into modern supply chains — unintentionally, but they were there for everyone to see.
The very idea of a globalized “supply chain” is at least in part defined by risk. When linking up dozens or even hundreds of firms, with thousands of workers among them, all trying to move in coordination across continents to complete the task of of getting products on shelves — all sorts of things can go wrong. The question for retailers, brands, vendors and governments around the world is whether supply chains will be rebuilt for the future, with unknown crises in mind, or if the industry reverts back to “normal” once the current backups in the system ease.
To name just a few things that went wrong in 2021: A ship became lodged in Egypt’s Suez Canal, China closed one of the busiest ports because of an outbreak, manufacturing was disrupted in Bangladesh, India and other major producing countries, and a demand surge in the U.S. led to shortages in cargo space, shipping containers and other equipment that led to skyrocketing ocean freight prices.
While tied together by the pandemic and its consequences, the problems were different and exposed different vulnerabilities in the system. Consider the impact COVID-19 outbreaks had on ports and factories in China. On the surface, it seems like a pandemic-induced problem. But a supply chain system less reliant on Chinese production could absorb those shocks with less pain and for fewer players.
Supply chains aren’t just concentrated by geography alone. In many cases, production of a good can be centred on just a few factories. Garphil Julien, research associate with Open Markets Institute, points to the market for semiconductors as a prime example. Along with the potential for price gouging, supply concentration also poses an obvious supply risk. It’s the old saw about too many eggs in one basket.
It’s not just supply itself that is concentrated. The top eight carriers control more than 80% of the market for ocean freight capacity, and carriers further form alliances with each other to expand their scale and reach. And while shippers saw freight prices blow up by many multiples, carriers had a phenomenal year.
Craig Philip, professor and director of Vanderbilt’s Center for Transportation and Operational Resiliency, thinks the capacity crunch is short-term. “The market has reacted very quickly. The order book for new vessels has exploded,” Philip said. “If we’d been having this conversation pre-COVID, we would be asking questions about whether the companies that own and operate those ships were financially vulnerable because there’s too much capacity in the system.”
One major source of that capacity is the colossal size of freight ships. When those huge ships connect to infrastructure and supply chain links that don’t match their scale, that can be the source of bottlenecks, according to Philip. When gargantuan ships traveling interminable distances meet with modes of the supply chain not up to the same scale, problems can arise.
‘Anything but agile’
Even for those companies that have worked on their supply chain over the years, many gaps exist. “One thing we’ve seen is that supply chains are anything but agile,” said Matt Garfield, managing director with FTI. Retailers have long been counting on the just-in-time inventory model and companies “are at least beginning to partially rethink that whole inventory position and whether there should be more reserve or safety stock, as well as a move toward nearshoring and onshoring,” FTI’s Scalzo said.
When crisis hit the global supply chain, firms reversed long-standing practices, which only made bottlenecks worse. “It’s no longer a just-in-time world. It’s a just-in-case world — just in case we don’t get it,” said Craig Austin, assistant teaching professor in at Florida International University. The warehousing, freight and other expenses to stockpiling raises overall costs for retailers, who are passing the costs on to consumers and in turn helping to push inflation, according to Austin.
As RapidRatings Chairman and CEO James Gellert explained, larger retailers have demonstrated “a high level of resiliency” during the pandemic, with pricing power and the scale to compete for product. Smaller players, on the other hand, may have struggled to sell product as fast or have been stockpiling for the many uncertainties of the pandemic era.
Shining a light on supply chains
Inventory is one piece of the puzzle, but setting inventory levels is ultimately the easy part. Harder is managing an extensive, global network of firms that form what is called the “supply chain.”
By its very nature, the supply chain eludes the control of retailers and brands, compared to a world where companies owned their own factories. Not only do companies lack control over the external pieces of their supply chain, often they lack information and knowledge about their partners and their operations.
With less control, and all the risk that brings, agility has become the byword. But how do companies actually get that?
Jess Dankert, vice president for supply chain at the Retail Industry Leaders Association, said large retailers are working toward building more “close collaborative relationships” with suppliers and other supply chain service providers, with open lines of communication and fluid information exchange.
Visibility is so important Dankert calls it the “holy grail” of supply chain and an area where retailers are investing. It takes talent, technology, data analytics, system interoperability among partners, and technological and strategic “control towers” to manage it all.
Many expect the bottlenecks, backups and freight price spikes to continue through 2022, if not further out.
Hedging against future crises is going to take a kitchen sink full of tools for companies, along with infrastructure investments in ports, transportation, warehouses and other areas bottlenecks occurred. All of which will take years to build out. It could also take a broad rethink of supply chains and their importance inside retail organizations, which historically have prioritized marketing and merchandising.
Source: Supply Chain Drive