The current crisis was years in the making.
One of the biggest current concerns for the economy, in virtually every country in the world, is the state of the global supply chain. Whether discussing the shortage of chip’s impact on the auto industry or the shortage of paper goods (think toilet paper), all fingers point to a supply chain that is showing signs of fatigue.
To fully appreciate the situation we face, one needs to first look at how the supply chain got to this point.
Historically companies strived for a fully integrated manufacturing capability, so materials, parts, subassemblies, etc., were designed and controlled by the company that produced the end-product they were to be used in. As an example, an automaker would own the steel mill, glass-making facility, radio manufacturer, paint factory, etc., so virtually all parts that went into their automobiles were manufactured – controlled – by one company. Shortages, if and when they occasionally might occur, could be quickly rectified by moving resources around within the parent company to increase supply of needed items.
Beginning in the 1960s and ’70s, this business model began to change. Many reasons include increased complexity of the components and subsystems needed to make an end-product, as well as the value-add management philosophy of focusing on being great at one thing, such as creating and marketing an automobile, while offloading the “distracting” details of making all the “commodity” parts needed to produce an automobile to others who in turn would focus on being great at making those parts. This growing trend was in many ways the birth of the supply chain as we now think of it: companies offloading aspects of manufacturing they were no longer interested in committing resources for to companies that could find economies-of-scale by selling to multiple companies and the increasing volume and margin. As most of the component and subassembly companies had been owned by one of their customers, most were located close to their major customers and, therefore, “local” businesses.
Globalization entered the picture during the 1980s and ’90s, however. A combination of aging facilities requiring reinvestment and dramatically improved expertise and quality in new places, particularly Asia, where costs were relatively lower as well, led companies to invest where quality and volume could be produced far less expensively. Concurrently, major improvements were taking place in the shipping world. Container ships and air-shipping made long-distance global transportation almost as cheap as in-country trucking. Suppliers could now be as efficient delivering product, when needed, across the globe as they once were shipping across town. The supply chain became global. And during most of the past two decades, the global supply chain has been on a tear.
This evolving supply chain has benefited most of us. Economic growth was seen throughout the world, especially in lower-cost countries. Consumer satisfaction ramped as technology-rich product, as well as basic staples of life, became much cheaper and affordable. Time-to-market decreased as teams working together across the globe worked virtually 24/7 to develop, validate, produce and then deliver new products. With all these positives, why is the global supply chain showing such signs of fatigue?
Call it a perfect storm of politics and pandemic.
The political winds started four or five years ago when tariffs, a tool that seldom works, were implemented as a tough stance against those viewed as economic threats. The track record of taxing trade has in the past resulted in some historic events, most notably the Great Depression of the 1930s. The current round of tariffs has incentivized manufacturing to migrate to countries that are not charging tariffs at the expense of those that do. It seems naïve of politicians to think they can quickly undo a supply chain decades in the making without serious and significant repercussions. In a global supply chain, this disruption creates regional spot shortages, which, combined with the tariff itself, raise prices for some while making those not subject to the tariff that much more competitive.
While the global supply chain was adapting to tariffs, the world fell victim to a global pandemic. Covid-19 spread like wildfire across the globe. The initial moves made by many were to close facilities to contain spread, either because employees had contracted the disease or to prevent employees from contracting it. With capacity reduced, inventories started to shrink as available items were consumed. When supply decreases, especially with the potential of further spot plant closures, customers begin hoarding inventory, putting even more tension on supplies, leading to price inflation.
Put it all together and the global supply chain starts getting stretched. Any chain is only as strong as its weakest link, and some links across the globe are beginning to snap. But what to do?
Any time dynamic events wreak havoc on the status quo, the key response is to stay focused on what is important to you and your business. Tune out the pundits and talking heads and focus on communicating with your suppliers and customers. Is customer demand for product stable, or increasing or decreasing? How confident are customers in their projections and forecasts? Being on top of this critical information is more important now when the supply chain is in flux than during normal times.
Being in sync with suppliers is equally critical. As unpleasant as the news may be regarding specific product availability and the price that must be paid for that product, it is better to be in the communication loop than be forgotten by silence. More than ever, work your supply chain actively and intelligently. A fatigued supply chain requires diligence and proactive communication to minimize business disruption.