While life seems to have returned to normal three years after the pandemic, the global supply chain remains clogged and disjointed. Port closures, border restrictions, factory shutdowns and delayed transportation disrupted the entire supply network, leading to various shortages of materials and services. On the demand side, lockdowns and social distancing shifted consumer demand from services (e.g., travel or restaurants) to durable goods (e.g., electronics or household items). Fiscal stimulus paid out in 2020 and 2021 also fueled rising consumer spending. These interconnected factors—government reactions to the pandemic, supply disruptions and rising consumer demand—continue to impact the world’s supply chain.

Though markets will eventually adjust, they can be slow, and the impact on producers and consumers can be costly. According to the Federal Reserve’s Global Supply Chain Pressure Index, which includes factors such as delivery times, backlogs and shipping costs, the global supply chain remains precarious with continued escalations for delivery times and costs.

Chief Procurement Officers (CPOs) are adjusting their supply chain strategies to address the most significant risks created by this unique supply chain disruption, which include: (1) availability of supply, (2) rising inflation and cost headwinds, (3) visibility into the value chain, (4) tight labor markets and (5) congested logistics networks. Here are strategies and mitigation tactics that CPOs are using now to mitigate these risks and ensure their organizations remain flexible and resilient through the recovery.

Risk #1: Availability of Supply

Ensuring the availability of supply, whether it is a widget or a service, is the most significant risk facing CPOs. The most basic function of a supply chain department is to have the right materials and/or services, at the right time, for the business they serve. While this is a common risk for CPOs, the pandemic has injected more supply-side risk than at any other time during the thirty-year history of the global supply chain. Indices of current delivery times are at record highs according to surveys of manufacturers by three regional Federal Reserve Banks. Daily, headlines announce new shortages for lumber, semiconductor chips, baby formula, chlorine and peanut butter, to name just a few. The situation has been especially difficult for businesses with complex supply chains, as their production is vulnerable to disruption at various points of input along the value chain. In addition to the availability of supply, the quality of those supplies (whether material or services) is also of utmost importance. Poor quality inputs, while available, can wreak havoc on a company’s supply chain, as CPOs deal with the wrong specifications, unacceptable tolerances or non-conforming parts.

To mitigate the risk to supply availability, CPOs are leveraging traditional sourcing strategies to secure goods and services, including dual-source manufacturing or nearshoring, shifting production, forward contracting, redesigning products and service offerings, fast-tracking plant expansions, building new manufacturing hubs or using contract manufacturers and over-ordering to prevent stock-outs. CPOs are also strengthening relationships with critical suppliers to gain preferential treatment in case of disruption and auditing suppliers to ensure they have adequate capacity and redundancy. In some industries, supply risks have led to new alliance relationships or co-development ventures between original equipment manufacturers (OEMs) and suppliers. Concerning the quality of supply, CPOs are monitoring supplier performance for late deliveries or poor communication as these are often bell-weathers for quality issues.

Risk #2: Rising Inflation and Cost Headwinds

The supply chain disruption and inflation have fueled rising commodity prices as businesses react to the near-term rally in economic activity and shifting consumer demand. Between May 2020 and May 2021, prices of commodities tracked within the Producer Price Index (PPI) rose by 19 percent, the largest year-over-year increase since 1974. Some input prices have hit historic highs. For example, the price of steel (HRC) has risen 150 percent and lumber prices have nearly doubled. These cost headwinds for raw materials intensify supply scarcity, further escalating prices. CPOs must mitigate these higher raw material costs and inflation-related price increases while minimizing exposure and improving bottom-line performance.

For supply categories that must raise prices to cover costs, the most common approach is a blanket increase. But CPOs are deploying additional tactics to combat rising prices and inflation, such as directing purchases to suppliers with more favorable pricing or commercial terms in relation to the market. Or working within the business, i.e., with Operations, Engineering or Product Management, to redesign specifications that increase competition or reduce complexity, thereby lowering costs. Even changes in production schedules or raw material formulas can improve profit margins. Revenue-generating strategies such as requesting credits or price discrepancies due from suppliers can also help to mitigate cost headwinds. To improve future resilience, supplier collaboration can drive joint efficiencies and improve the total cost of ownership.

Risk #3: Visibility into the Value Chain

Before the pandemic, supply chain departments were primarily driven by cost reduction and productivity enhancements, but the unprecedented disruption caused by COVID highlighted how few companies had visibility into their supplier networks beyond Tier 1 suppliers (referred to as a company’s Value Chain). As a result, visibility—observing the complete end-to-end supply chain from the point of demand, through design, supply, and manufacturing, all the way to sales, consumption, and/or obsolescence—becomes more essential. And it’s not just visibility; it’s timely visibility—as close to real-time as possible. A lack of supply chain transparency prevents companies from adequately tracking second and third-tier suppliers. Companies on the receiving end of the supply chain need to know when suppliers in the value chain, meaning those they don’t deal with directly, may not be able to fulfill their commitments.

To address this, CPOs are integrating their data sets, giving them a more comprehensive view of availability and performance across the supply chain. This transparency helps companies see where products and components come from, and that helps them live up to the environmental and social commitments that have gained traction due to the pandemic. Increasingly, CPOs are adopting and developing next-generation digital tools that provide transparency, accountability and optimization opportunities. Of all the data areas, the most challenging is supplier-related data because it’s not just ERP details but also supplier data that informs risk, compliance and performance. Suppliers are the gateways to the supply markets and n-tier supply chains, so getting this right with core procurement processes tangibly supports enterprise and supply chain risk alike.

Risk #4: Tight Labor Markets

The pandemic shrank whole industries, such as the hotel and restaurant sectors. According to the White House, businesses have been unable to hire quickly enough to keep pace with the rising need for workers, leading to a record 8.3 million job openings in April 2021. Shifts that have taken place in the labor market are becoming more pronounced, with many people voluntarily quitting roles just as demand for workers rises as economies reopen. Economists say changing demographics like aging and retiring workers are a factor behind the shortages, as well as border controls and immigration limits and demands for better pay and flexible working arrangements. In the temporary labor and contract staffing market, varying lockdown measures caused severe loss of employment opportunities in metro areas across the globe.

CPOs are mitigating the labor risk by doing more with less. Mitigation strategies include hiring from within and upskilling current employees to adapt their workforces based on desired skill sets for increased efficiency. CPOs are also improving efficiency by smartly applying technology, such as marketplace platforms, which help companies source and qualify the best contractors and manage ongoing performance.

Risk #5: Clogged Logistics Networks

CPOs are inundated with news of choked ports, out-of-place shipping containers, record freight rates and other problems that cause disruption and defy easy answers. With port congestion starting to ease in 2023, there won’t be a return to pre-Covid levels because the infrastructure developments required won’t happen overnight. Delivery of new container vessels, cooling post-Covid demand and new US shipping legislation will provide long-term improvement. But other issues are expected to keep this a short-term risk to address. Small disruptions that previously would be minor, such as the trucker strikes in South Korea, or congestion at European ports like Hamburg and Rotterdam last year, ensure that any minor disruption creates global consequences for the entire logistics industry.

CPOs are not waiting for supply lines to untangle themselves—retailers short on storage space are buying warehouses, shippers that can’t find containers are making their own, companies unable to book with ocean carriers are chartering vessels and those unhappy with their online sales are buying e-commerce fulfillment operators. They are developing in-house logistics capabilities, shifting from ocean to air freight, using alternative points of entry, reformulating products to be manufactured onshore, taking advantage of port services or simply diverting resources from low-margin products to moneymakers.

Nimble CPOs know to keep adjusting their strategies and mitigation tactics to ensure their organizations remain flexible and resilient through the lasting impacts of the pandemic and to prepare for recessionary times.

 

Author Bio: Patrick Higgins is the Principal of PSCM Advisory for Avetta, a supply chain risk management software provider.