What is Driving Supply Chain Vulnerability?

What is Driving Supply Chain Vulnerability?

Supply chains have been remarkably resilient throughout the pandemic – far more than most of us could have imagined. But just as we come out of lockdown supply chains seem to be breaking down.

We examine the reasons why and what can be done about it.

What is Driving Supply Chain Vulnerability?

The root cause is easy to see in hindsight. We have allowed lean supply chains to become anorexic when demand was low, and cash was critical. However, when demand steps up sharply, as it is now doing, the latency in global supply chains is creating widespread and lengthy shortages. In the past week we have had conversations with clients about lead times going from 12 to 52 weeks overnight and a business that has 1600 SKUs that are within 2 weeks of stopping production. This is quite apart from the automotive OEMs closed because of a lack of electronics.

The responses of manufacturing organisations are also quite predictable: stocking up when they can and imposing allocations and increasing prices. On a slightly longer timeline, redesigning critically short components out of product BoMs. When coupled with increases in the costs of shipping goods from the far east it is increasingly difficult to maintain service and hold prices.

There is clear evidence that businesses are moving away from lean operations that have dominated our thinking for the past 25 years. You only have to look at scarcity and cost of warehouse space to realise that more stocks are being held locally. All these actions are making shortages worse and creating repeating cycles of feast and famine.

The months ahead as we start to emerge from the pandemic are likely to be at least as challenging, bumpy and more dangerous than the last year.

Understanding Why and Where Your Supply Chains are Vulnerable

Should we have seen this coming, and what we can do to navigate the next few months?

Our conclusion is that we should have understood that demand was likely to recover quickly and that this would put strain on supply chains. That conclusion is relatively simple, but far more challenging is identifying where the real risks are for a business and what could be done about it. The solution lay (and still lies) in really understanding your supply chains and where the critical issues are.

These are the questions businesses should be asking themselves:

How Effective is Our S&OP Process?

The supply side review tends to focus on internal capacity much more than the external elements of supply. Do you really understand what is critical and likely to be vulnerable? The less important you are to your supplier and/or the less easy to substitute a part, the more vulnerable you are and the more critical stock becomes.

Do We Really Understand Our Supply Chain?

Sounds like a daft question, but the critical supply items might be embedded 2 or 3 levels down in the supply chain. If you don’t understand this then you are at risk.

Are Our Supply Chains Lean or Anorexic?

The key principle of lean is the elimination of waste and we would argue that this is valid with anyone. However, inventory waste is only that which is above what you need. The world has changed so you need more, or you need to simplify the offering, reduce customer commitments to operate with a level of inventory you can afford and sustain.

Do We Have the Planning and Analytic Tools to Make Good Quality Decisions at Speed?

A lot of emphasis is placed on having agile supply chains, but too often this only focuses on the physical supply chain whereas it is at least as important to be agile in our decision making. The current generation of Integrated Supply Chain Planning Systems and blockchain technology supports this quest.
I am sure that there are other questions that apply to your specific circumstances, but unless you can confidently answer these questions your supply chain is at risk.

A First Step To Overcoming Supply Chain Vulnerability

If you are challenged by the issues raised in this article, we would love to talk to you about we could help you navigate the choppy waters of the next few months.

If you’d like an informal conversation about our work, please contact me here.

Tim Richardson
Development Director
Iter Consulting