The Assumptions Underlying The Global Supply Chain Are Faltering In The Face Of Pandemic Headwinds

The question in my press interviews as a subject-matter expert on supply chain is the same. "When will the impact of the pandemic on the supply chain be over?" My answer? “No one knows, but it will not be soon.”

I expect the resolution of the pandemic's impact—with the multiplicity of issues and disruption—to take eighteen months to two years to correct. The reason? In the world today, there are more headwinds than tailwinds.

Reflection

The building of the global supply chain over the last seven decades evolved based on three assumptions:

Number 1. Logistics is available. With transportation availability assumed, the supply chain practices focused on negotiating the lowest price. In the process, shippers pushed cost and waste backward in the supply chain.

Number 2. Variability is low and controllable. The lengthening of cycle times of the supply chain is less impactful than the increase in variability to supply chain performance. Increasing variability is a performance killer. (The variability of the essential cycles of the supply chain— lead times, conversion rates, and cycle times—grew and were not manageable during the pandemic.)

Number 3. Government policies are rational. The increasing issues with tax and tariff shifts and the policies of China make the response more complicated.

These three assumptions are no longer valid. The post-pandemic world shattered this reality. As a result, the supply chain leader is moving through unchartered territory. As a result, expect wild swings in future corporate earnings statements.

Headwinds and Tailwinds

For the supply chain leader navigating change, I count ten headwinds and four tailwinds. Not all are equal, but each is continually shifting daily. The gaps in current technology approaches built based on historical assumptions of the global supply chain are inadequate.

Headwinds

There are ten powerful headwinds.

1. Inflation. Current supply chain systems either optimize volume or currency. No solution optimizes both together. An ongoing opportunity is bi-directional orchestration of currency and volume impacts with shifts in mix (types of products sold). Most installed optimization technologies are blind to the trade-offs of volume and cost.
2. Ocean Port Snarl. Record demand and port terminal issues increase supply chain variability by 5-7X and costs by 7-10X. The confluence of issues—terminal operations, chassis shortages, container availability, and truck driver availability—are ongoing with no central leadership.
3. Airfreight Shortages. Labor shortages and shifts in routes reduce the availability of air freight. With increased variability in demand and supply, supply chain leaders have less opportunity to for rush shipments.
4. Widespread Labor Shortages. The issues with education and child care cause many workers to stay home. As The United States infrastructure programs rollout, truck drivers facing difficult road conditions will switch to construction increasing the shortage of drivers and truck availability.
5. Demand Uncertainty. The world is experiencing rising demand with dramatic shifts in consumption. Demand continues to shift as consumers focus on the purchase of products and fewer services. Current processes and practices are "supply-centric."
6. Increase in COVID-19 Variants. The Delta and Omicron variants are today's news. With only 5.8% of the populations of emerging countries receiving their first dose, the risk of variant proliferation is high.
7. Full Warehouses. Inventories are out of balance with market demand. Seven industry sectors have increasing inventories increasing the need for write-offs.
8. Rolling Global Electrical Outages. The Chinese government is refusing Australian coal on inbound shipments. China is dependent on coal for electricity for 65% of electrical supply. In addition, Europe’s shift from hydrocarbon fuels to solar and wind makes the European grid unreliable. In the United States, the Texas power grid continues to be an issue. Expect this to grow worse in the winter.
9. Chemical Sector Inventory Availability.  The chemical inventory levels continue to decline. The port and labor issues exacerbate the issues. All value chains are dependent on chemical value chain reliability.
10. Shifts in Chinese Policy for Data Sharing. Changes in Chinese policies for data sharing change the availability of ocean shipping data. This month, AIS data is no longer available for China ports.

Tailwinds

There are more headwinds than tailwinds.

1. Education of Executive Teams. One of the major issues for supply chain performance is the lack of understanding of the supply chain as a complex non-linear system in the boardroom. Companies are learning quickly that their current processes and technologies are not adequate. Most companies invested heavily in transactional infrastructure and underinvested in systems of insights.
2. Changing Analytic Capabilities. There is a dramatic improvement in capabilities to drive insights through the use of analytics. The world of NoSQL enables the use of disparate data to drive learning and competitive advantage through new forms of insights. The issue is that the technologies are new and not very well understood. A company mandating technology standardization will miss this opportunity.
3. Vaccine effectiveness. Current vaccine effectiveness is the hallmark of recovery, but issues remain as more and more variants evolve.
4. Corporate Social Responsibility Pressure. The continued pressure on supply chain leaders to rethink "cost" and move to "sustainable value" drives companies to rethink the global footprint and move to a more regional model.

What To Do?

Companies facing strong headwinds should invest in five strategies:

1. Invest in Digital Twin Deployments. Only 9% of companies actively design their supply chain flows. The visualization of design alternatives in what-if analysis improves reliability. Inventory optimization and a focus on form and function of inventory buffers variability.
2. Reduce Bad Complexity. Supply chains complexity is like cholesterol. In the supply chain, there is good and bad complexity. Good complexity improves growth while bad complexity drags down margin with no margin contribution. For years, companies have added bad complexity with little consequence. As the headwinds rise, companies need to actively embark on complexity reduction. Examples include, product rationalization, platform consolidation and demand shaping rationalization. (This includes rebates, trade promotion, and special offers.)
3. Build Robust Supplier Development Practices. Only 33% of manufacturers operate supplier development programs focusing on how to improve the value chain to drive win/win relationships with suppliers. This includes improving data sharing, specifications, and streamlining payment processes. Over the decade, the focus on efficient procurement and elongation of payables puts suppliers at risk.
4. Be a Good Shipper. As demand spiked and variability increased, the world of the truck driver worsened. To abate the issues, shippers need to invest in improvements in on-site parking, clear signage, and flexible rebooking of appointments.
5. Invest in Value Network Capabilities. The average manufacturer outsources 27% of manufacturing and 49% of distribution. For most companies, these operate as blackholes.

These strong headwinds will drive balance sheet gaps and shortfalls for the foreseeable future. Top performers will rethink supply chain practices quickly.