By: Maggie M. Barnett, Esq., COO at ShipHero
Shortages and bottlenecks have battered global supply chains throughout 2020 and 2021. The COVID-19 outbreak and other unexpected events caused critical suppliers worldwide to suddenly have short supplies, leaving companies reaching for alternate sources of supply that often had dramatic price increases. It has become more evident than ever that companies, manufacturers, and retailers need to build resilience against the uncertainty of the supply chain and the events that can upend it.
To better prepare for supply chain challenges, company leaders and supply chain managers need to develop a plan for how to avoid supply constraints. Flexibility also needs to be considered so that when emergencies do happen, the company can adapt to unexpected changes, whether short-term or long-term. One of the first steps to creating resilience against shortages and other supply chain issues is understanding what causes these disruptions.
What is supply chain disruption?
Supply chain disruption is when a crisis or unexpected change causes problems with the normal flow of goods between entities all along the supply chain. The coronavirus outbreak is an excellent example of a crisis that caused supply chain disruption, such as when personal protective equipment became inaccessible for many hospitals in North America. Other examples of changes that can cause supply chain disruption include dramatic changes in consumer demand, tariffs, or natural disasters such as earthquakes.
The state of supply chain disruption in 2021
2021 has been a large scale example of how supply chain disruption can upend entire industries. Among a handful of other complexities such as the Suez Canal blockage, COVID-19 caused immense constraints on raw material supplies, semiconductors, and other commodities. Understanding today’s issues and their effects helps us to have better visibility of future supply chain disruptions.
COVID-19 had dramatic effects on global companies. The beginning of the pandemic saw consumers panic-buying in bulk. Inventory levels couldn’t keep up with the sudden increase in demand for essential products such as toilet paper, food, PPE, and water. Large-scale workforce safety measures inevitably increased lead times, and outbreaks of the virus slowed companies even further.
Suez Canal blockage
The Suez Canal sees around 13% of the volume of global trade, as it is a gateway for expedited transportation between the Atlantic Ocean and the Western Pacific and Indian Oceans. The nearest alternative route is navigating around the Cape of Good Hope in South Africa, eight or more days of extra travel. On March 23rd, a huge container ship called The Ever Given got lodged diagonally in the canal due to high-speed winds and was stuck there for six days.
Over 350 ships were stuck finding alternate routes or waiting during the Suez Canal blockage, leading to a ripple effect throughout the supply chain. Inventory shortages, loss of perishable goods, and a domino effect of delays caused a supply management nightmare. The waves from this event continued to be felt months after the event as warehouses and shipping companies got set significantly behind.
Auto dealerships are facing shortages as they try to replenish their inventory from the pandemic. Simultaneously, car sales are up 48% over their lowest point in the pandemic. Retailers’ inventory to sales ratio is only 1.07, and inventories for retailers have shrunk 5% YoY. Due to tight capacity across the global supply chain and high demand, companies have had to extend lead times for inventory planning. Not helping the matter is the shortage of semiconductors that is affecting car production levels.
Longer lead times
Lead retailers such as Walmart have also had to lengthen lead times as the inventory to sales ratio dropped to 1.23 in March 2021, according to the Census Bureau, the lowest ever recorded.
An example of supply chain disruption: COVID-19
The pandemic impacted all supply chain members and their ties simultaneously in a way we have never seen before. Border closures, supply market lockdowns, labor shortages, and shipment interruptions caused problems across all supply tiers. At the beginning of the pandemic in March of 2020, 94% of Fortune 1000 companies already saw supply chain disruptions.
Many factors caused a critical shortage of hospital PPE, including the fact that at the time, more than 70% of respiratory protection supplies used in the United States were made in China. Manufacturers pivoted to help production, but demand worldwide was extreme. The US government stepped in to help, though federal policy like tariffs also added further disruption. Simultaneously, the general public was panic-buying resources such as PPE, grocery items, sanitizing agents, and household items like toilet paper. The reliance on just-in-time ordering and instant warehousing meant that average consumers could not reliably purchase essential items.
How are supply chains disrupted?
There are dozens of reasons why a supply chain can be disrupted. Here are some of the most common reasons.
COVID-19 is a prime example of pandemic-related supply chain disruption. These large-scale events can cause a ripple effect in the global supply chain that is extremely hard to recover from due to the worldwide impact.
Hurricanes, fires, and floods all can cause supply chain disruption. Hurricane Katrina is a great case study, where large-scale power outages and the inability to use transportation routes caused significant supply issues.
Transportation failures and delays
Around the same time as the Suez Canal incident, a COVID-19 outbreak shut down one of China’s busiest ports, the Yantian Port. Incidents like the canal blockage and the temporary shutdown at Yantian can disrupt entire supply chains for months.
Recalls of incorrectly made or unsafe products can sometimes be isolated incidents but also can cause much larger ripples. For example, if a large supplier recalls a part used by many manufacturers, it could cause a delay across many parts of the sector.
In May, a cyberattack caused the Colonial Pipeline to shut down its network. The pipeline sources close to half of the East Coast’s fuel, about 2.5 million barrels per day of gas. Cyberattacks are growing more common, and many crucial parts of the supply chain are incredibly vulnerable to these threats.
Tariffs and trade wars can cause significant issues for manufacturers and suppliers. We have seen this with the US trade with China throughout 2021 and continuing shortages because of these policies.
How to prepare for supply chain disruption
Create a supply chain emergency plan
If necessary materials are affected by supply chain disruption, you need to have an alternate action plan. Whether having backup suppliers, an emergency budget, or a stockpile of these essential items, you will already be more resilient by coming up with a strategy.
Build up inventory
Stockpiling essential items for your company can help you prepare for any situation. Order ahead a handful of months so that you
r business will have plenty of time to enact its supply chain emergency plan before running out.
Conduct a supply chain vulnerability audit
By looking at where your risk is within your supply chain, you can help your supply chain leaders know where they need to create more flexibility. By predicting potential pain points before they become problems, you can encourage trade agility and find alternatives.
Identify backup suppliers
If your leading suppliers suddenly lost the capability to get you your goods, what would you do? Identifying backup suppliers for all of your goods and services categories can help provide resilience against issues in the future.
Diversify the supply base
When picking suppliers, try to pick those in different locations that ship to you through various avenues. When you diversify your supply base, you ensure that while one supplier may be unable to get to you, the others should still be functional.
Partner with a logistics expert or 3PL
Collaborating with a supply chain logistics expert can help you find alternatives in case of an emergency. Professional logistics leaders also can help you find ways to make your supply chain more robust and resilient. 3PL can also help you grow your company’s ability to have flexibility in times when some areas or resources may be unavailable.
Adopt risk evaluation tools
Technology is adapting to help try to prevent these widespread supply chain issues in the future. Implementing some of these AI-driven risk evaluation tools can provide ways to predict and combat cyber threats. Automation and AI often have a better ability to find potential shortages before most suppliers even know they exist.
What to do when supply chain disruption occurs
Communicate with customers
Clearly explain to your customer base what is happening within the industry and what steps you are taking to resolve the issue. By keeping an open line of honest communication, they will be more accepting and understanding of your predicament.
Evaluate all critical components of the supply chain
Decide which parts of the supply chain are the most vital to getting your product out. Once you have identified the most critical components of your supply chain, find alternative suppliers for those items as soon as possible.
Estimate available inventory
Calculate how much inventory you have left and how long it will last you. Evaluating where you are at with your stock will help you figure out the urgency with which you need a new supply line.
Assess buyer behaviors
If customer behavior is causing part of your disruption, start assessing buyer behavior. By seeing how your customer base is purchasing, you can better react to their needs and shift in needed areas.
Optimize production and distribution capacity for safety
In the case of an event like COVID-19 or a natural disaster, consider the safety of your suppliers and employees. Ensuring the safety of all involved people and parties should be paramount. Consider staggered shifts, remote work, and alternative schedules to guarantee a safe working environment as much as possible.
Identify logistics flexibilities
Not every item you are receiving during a supply chain disruption is as crucial as the others. Just as you identified things that are the most essential to your company’s function, also provide slowdown and flexibilities with those that are not. Communicating this information to your suppliers can help you get what you need more readily and not clog them up with less important items.
Evaluate cash flow impact
Adjust your overhead so you can cover and financial impact or issues with your cash flow. Determine what areas will suffer the most, and find ways to cover these losses in a way that is as financially healthy as possible.
Supply chain disruption is inevitable to some degree. The best thing your company can do is encourage visibility and resilience to ensure that if something does happen, you can combat it in a way that is healthy financially and for your workforce. Preparation and plans in case of emergency go a long way in protecting your company from disruption and can buy you precious time to implement alternatives and backup plans.
Examine your supply chain, and consider ways that it may be affected in the future, and how you can create robust practices that will help soften the blow of any issues.
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Maggie M. Barnett, Esq., COO
About the author: Maggie M. Barnett, Esq., is the COO of ShipHero. She is responsible for planning and executing the overall operational, legal, managerial and administrative procedures, reporting structures and operational controls of the organization. Barnett’s greatest strengths are leadership, risk mitigation, change management and a passion for business transformation. She is known for her expertise in delivering operational excellence and an ability to provide guidance and mitigating risk. Her leadership of ShipHero is grounded in a servant mentality, always doing the right thing for our stakeholders. Her passion for ShipHero comes from the ability to drive operational excellence throughout the organization impacting the lives of our employees, customers, and partners.