In early 2020, the C-19 pandemic created a supply chain crisis that sent disruptive shockwaves throughout the global system. The crisis was exacerbated by the scarcity of inputs, low inventories, manufacturing breakdowns, and delivery delays. All these disruptions exposed vulnerabilities in the supply chains of firms everywhere.
In the coming years, business leaders must find ways to mitigate these disruptions and minimize their impact. Only then will global supply chains be able to absorb demand shocks, remove supply bottlenecks, and minimize shipping “traffic jams”. In addition, organizations should effectively handle supply chain disruptions to maintain business continuity and boost profitability. And this starts with understanding the causes of supply chain disruptions and designing strategies to mitigate their potentially damaging impact.
What is a Supply Chain Disruption?
A supply chain disruption refers to a breakdown in the flow of goods from the producer to the end customer or user. Modern supply chains are interconnected with multiple elements meshed into a complex system, so any kind of disruption can leave the entire system in chaos. That’s why it’s critical to identify the sources of these disruptions and address them quickly before they can cause too much material damage.
Common Causes of Supply Chain Disruptions
In recent years, COVID-19 has been the leading cause of global supply chain disruptions, although such disruptions can also come from:
- Trade disputes
- Inventory or labor shortages
- Regulatory changes
- Geopolitical uncertainties (e.g. Brexit)
- Natural disasters (e.g. earthquakes)
- Terror attacks
- Man-made crises (e.g. fires)
- Environmental concerns (e.g. extreme weather conditions)
Pricing shocks, transportation failures, issues related to sustainable procurement, and conflicts of interest can also disrupt supply chains. Regardless of the source, a supply chain disruption can cause a breakdown in manufacturing, increase production costs and delays, result in product shortages, and affect the profitability of businesses throughout the supply chain.
3 Strategies to Manage Supply Chain Disruptions
Fortunately, organizations can manage disruptions in the supply chain, and to quote Accenture, transform supply chain disruption into “meaningful change”. For this, they must leverage three key strategies:
Improve Visibility into the Supply Chain
Maintaining continuity and resilience requires supply chain visibility. Conversely, a lack of visibility can cause bottlenecks that affect both upstream and downstream stakeholders and tie up companies’ cash flows for long periods.
Organizations should have end-to-end and point-by-point supply chain visibility to:
- Identify possible disruption sources
- Get a clear picture of how a product moves through the supply chain
- Understand how global disruptions could affect the supply chain
- Identify supply chain weaknesses that may cause or exacerbate disruptions
- Build upon the supply chain’s strengths to avoid – or at least mitigate – disruptions
- Proactively find problems, quickly adapt to change, and make the right decisions to minimize damage
By leveraging data and technology, companies can maximize visibility into every aspect of the supply chain ecosystem, including demand, supply, capacity, inventory, and finances.
Implement Robust Risk Management
As mentioned earlier, there are many sources of supply chain disruptions. Not all these “risk factors” are created equal. Some may occur more frequently than others, while some will have a larger impact if they materialize.
To effectively manage disruptions, organizations must incorporate risk management into supply chain planning. They should develop a robust risk management framework to identify relevant risks, assess them by probability and possible impact, and implement appropriate response strategies to minimize damage.
To strengthen the risk management program, they should leverage technology platforms that support applied analytics, artificial intelligence, and machine learning capabilities.
Re-evaluate Sourcing Strategies
Depending on a single supplier or a bunch of suppliers in a single region or country leaves companies vulnerable to the damaging effects of supply chain disruptions. This is what happened to many global companies when a tsunami hit Japan in 2011, and when researchers first discovered COVID-19 in China in early 2020.
To avoid such situations, companies must avoid an “all eggs in one basket” approach. Hence, they should not rely on a single supplier, but identify reliable secondary and tertiary sourcing and supply options in case the primary supplier is compromised or unavailable. They should also ensure that these third parties don’t all rely on the same fourth parties, i.e. their suppliers, sub-contractors and the likes.
Thus, to reduce or minimize supply chain disruptions, it’s crucial to maintain geographically diverse supply chain partners, choose “backup” suppliers, and also create contingency plans to ensure that operations are not disrupted if one or more partners are compromised.
Other Key Strategies to Manage Supply Chain Disruptions
In addition to the above strategies, organizations should implement the following strategies to improve their ability to handle supply chain disruptions:
- Categorize suppliers as low, medium, and high-risk, and identify alternate suppliers to replace high-risk suppliers in case of a disruption
- Hold intermediate inventory or safety stock to reduce the costs of disruption, e.g., higher purchase prices and lost revenues
- Evaluate existing processes and identify opportunities for innovation and improvements
- Replace manual operations with automation to reduce dependence on human inputs, and improve output quality
- Define and focus on priority customer micro-segments
- Compare the merits/demerits of producing multiple product variations
- Create supply chain scenarios, run simulations to predict where, when, and how disruptions may occur, and get actionable insights to optimize decision-making
Following COVID-19, production slowdowns, labor and component shortages, layoffs, and other issues strained global supply chains to the max. Worse, these problems are not expected to ease anytime soon. But there is a silver lining to this dark cloud. With the strategies described here, companies can implement action plans to optimize their supply chains and position the organization for sustained growth.
Ergode’s solutions and offerings enable companies to improve the resilience and robustness of their supply chains with smart solutions, cutting-edge technology, and a cost-efficient execution model. With Ergode, companies successfully thrive even in an age of constant supply chain disruptions. To know more, contact us.