What's the issue with Supply chains?

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4 min read

Numerous supply chains collapsed almost overnight at the beginning of the pandemic in Spring 2020. The reasons were manifold: closed borders and factories, restricted air traffic and distancing rules at workplaces. What needs to be done in the aftermath?

Content: 

  1. Production costs converge
    1. More transparency between suppliers
    2. The supply chain problem exemplified by toilet paper
  2. Production and shipping must become more flexible
  3. Identify and strengthen weak points

McKinsey predicts that the export of global products could be subject to major changes by 2025. After 2020, according to the analyst, companies will look more closely at their own supply chains and seek ways to minimize failures.

How long do supply chains need to be? 

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McKinsey cites various reasons why companies should and must examine their supply chains. For example, technological advances in manufacturing would reduce cost differences between production facilities. Automation, predictive analytics, 3D printing and other innovations will reduce the cost gap between local and outsourced production locations.

More transparency between suppliers

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It is crucial to focus on "end-to-end" optimization, which requires, above all, more transparency and flexibility for companies which must be able to fall back on alternatives more quickly should a provider fail. Additionally, McKinsey says that it is increasingly important to keep an eye on contract details with subcontractors. For example, according to a McKinsey survey, two-thirds of all companies say they do not have confirmed "business continuity" plans with subcontractors of their service providers.

In other words, there are no agreements with these providers on what needs to be done in the event of a crisis, where responsibilities lie and how, for example, supply bottlenecks can be avoided. In the McKinsey podcast, Susan Lund talks about the need to audit the "value chain", i.e. the entire supply chain up to the supplier of the raw materials.

Toilet Paper Panic

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A perfect example how a disruptive event can have unforseeable consequences affected a lot of countries during the pandemic. From one day to the next, supermarkets and drugstores suddenly ran out of toilet paper. What was initially attributed to excessive hoarding turned out to be more of a flexibility problem. As Will Oremus explains on Medium, many suppliers were ill-prepared for the rising demand for domestic products and falling numbers for commercial products. Since the toilet paper market has two customer groups (commercial = B2B; and domestic = B2C), the different needs were not so easy to balance out.

With the move from office to home office, declining hotel stays and reduced store and restaurant visits, the need for B2C toilet paper grew because people were mostly (stuck) at home.

The obvious solution would have been to shift production from B2B to B2C toilet paper. But that's where the problem lies: B2B toilet paper doesn't come packaged in 2-12 hand-sized rolls, but is often already larger in shape, is not individually packaged, and is sometimes even produced in completely different factories and therefore has different supply chains. Switching from B2B to B2C products therefore involves a significant amount of work that was not manageable in that short amount of time.

"Shifting to retail channels would require new relationships and contracts between suppliers, distributors, and stores; different formats for packaging and shipping; new trucking routes — all for a bulky product with lean profit margins." (Will Oremus, "What Everyone's Getting Wrong About the Toilet Paper Shortage")

 

Production and shipping must become more flexible

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Of course, something like a global pandemic is a disruptive event that is neither predictable nor regular. But abrupt market changes happen all the time. With the globalization of markets and information channels, single news items can already cause shifts in supply and demand. Food trends, but also reports about poor working conditions can result in increased or reduced interest in products. Companies must become more flexible in the long-term in order to be able to react to the market short-term.

This can only be achieved with connecting all stakeholders in a supply chain that is transparent and automated. With the right business intelligence strategy, market changes can be predicted more quickly and important change measurements can be identified. In addition, connected systems can facilitate collaboration and communication with stakeholders. This can be done, for example, by providing a transparent overview of all contract documents, contacts and responsibilities.

Identify and strengthen weak points

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Ed Barriball also explains in the McKinsey podcast that companies can better prepare for crises by looking specifically for their weak points, such as bottlenecks in processes, lack of transparency, etc. "If you try to predict what the next shock is going to be, you’re probably going to be wrong 99 percent of the time. But you can certainly see where your vulnerabilities are."

Additionally, supply chains need to leave a little more room for redundancy, explains Professor Marianne Jahre in an interview with businessbecause.com.

"In the past few years, supply chains have become increasingly lean, says Marianne. Although these systems cut costs, they leave little room for error when disaster strikes."

This is also underscored by Barriball, who argues that bottlenecks often occur where single sources are responsible for crucial elements of the supply chain. Once that vendor fails, components in the process are missing which can't be easily replaced. Transparency, "dual sourcing", and resource reserves can help alleviate the risks.

It might be quite daunting for many companies because in the age of optimization it seems counter-intuitive but redundancies can reduce risks and costs in the long run.


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by Juliane Waack

Juliane Waack is Editor in Chief at DIGITALL and writes about the digital transformation, megatrends and why a healthy culture is essential for a successful business.

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