Supply shortages and procurement do not usually make global headlines. However, as the world economy gradually rebounds from the COVID-19-induced stressors, the global supply shortage is magnifying. Not only countries but industries from semiconductors to foodservice are grappling with the supply shortages due to a perfect storm of factors.
When the coronavirus contagious began spreading apace in 2020, several hard-hit economies witnessed panic buying among people. Now, businesses are going on a stockpiling spree, purchasing more raw materials than required to keep pace with the rapid demand revival. The panic buying is pushing more supply shortages of raw materials, such as steel, plastics, and semiconductors. As such, warehouses of apparently every raw material across continents are drying up, leading to escalated prices.
Beroe is a prominent name in the procurement intelligence and supplier compliance realm. The company provides a holistic analysis that helps businesses make smart sourcing decisions and, in turn, mint more revenue at reduced costs and inflation risks. Beroe is a trusted intelligence source for over 17,000 companies worldwide, including 400 of the Fortune 500 companies.
Check out Beroe LiVE.Ai, oversee your category risk exposure, and look for the “no-risk” alternate suppliers and sourcing destinations.
The Ripple Effects of Supply Shortages on Businesses
The world is striving to co-exist with the coronavirus, panic-buying is long gone, store shelves are yet again abundant with essentials – and still, supply chain shortages are itching businesses across the board.
In 2020 alone, 9 out of 10 Fortune 1000 companies endured supply chain disturbances due to the public-health crisis, while about ¾ of the businesses suffered adversely. Moreover, disruptions due to supply shortages rose over 600% during H1 2021, according to Resilinc.
Furthermore, the hoarding fever is pushing the global supply chains to the edge of collapse. Transportation pitfalls, warehouse deficits, and price hikes are nearing acute levels, heightening supply-side inflation concerns. The earlier supply disruptions are incomparable to the critical inventory crunch of 2021. Industry experts anticipated that businesses – of all shapes and sizes - will face massive blows of supply shortages.
6 Ways to Mitigate the Supply Chain Risks
Effective and resilient supply chains are vital to any organization. While the stability and health of supply chains are beyond control, there are measures things businesses can implement to safeguard themselves from the repercussions of supply chain shortages:
- Supplier Data Analysis
Risks are anytime, anywhere. While it is impossible to spot every possible risk, businesses can do the honors with what they know and work from there. Gather, centralize, and organize all the supplier performance, compliance, and relationship management data.
With this data, businesses can implement critical risk analyses, identify supply chain frailties, and devise risk mitigation strategies that best serve the organizational goals while sustaining business continuity. Moreover, they can establish and monitor the key performance indicators (KPIs) of suppliers to decide which relationships need to be fostered, terminated, or maintained as it is.
Furthermore, a complete picture of supplier data helps businesses identify new avenues for strategic collaborations with key vendors, create alternative sources and contingency plans, and secure better terms and pricing during negotiations to save costs and build value.
- Diversify the Supplier Base
Once businesses have analyzed the risk of their supply chain partners, the best way to build resilience is to diversify the supplier base. That implies looking for multiple suppliers for critical materials and components located in various corners of the globe. For instance, an earthquake in a particular territory does not pause all shipments of necessary raw material. Instead, you can search for partners nearer to you – if not in the same country but within the same continent.
Onboarding a supplier takes anywhere from weeks to a year or even more. While a new supplier for a commodity, such as a ball bearing, can be live in a week, one that delivers a specialty component for highly regulated products, including medical equipment, can take at least a year due to stringent norms and testing.
- Revisit Inventory Planning and Management Strategy
Several manufacturers, distributors, and retailers strive to decide how much inventory to carry in the wake of the recent supply-chain bottlenecks. Over the last quarter-century, several product-centric organizations have embraced a just-in-time (JIT) inventory model to stock only goods and materials they expect to sell, alongside a tiny buffer of safety stock, in order to cut down costs.
Procurement professionals will and must continue using reorder point (ROP) to figure out when to place orders, economic order quantity (EOQ) to determine the ideal order sizes, and safety stock to calculate the appropriate amount of buffer stock. While there are far more sophisticated strategies, these are the starters for identifying the ideal inventory levels - or inventory forecasting.
- Leverage the Potential of Scenario Planning
The interest in scenario planning surged after several organizations were caught off guard in 2020. Businesses want to be well-prepared for future disruptions, and scenario planning solutions come in handy by foreseeing the financial repercussions of, for instance, a sudden demand spike, a key client leaving, or no orders from specific vendors for two months.
Knowing the financial impact of the best, worst, and average-case outcomes helps companies make informed decisions about how much inventory to carry. Moreover, such decisions run on data instead of wild guesses.
- Treat Suppliers as True Business Partners
A business’s success depends on its suppliers, shipping carriers, and everybody else contributing to the supply chain. So you might need to change your perspective about suppliers, from simply “the person from whom we purchase something” to a true strategic ally.
All this is tied to the time-honored art of relationship building. Whenever and wherever possible, take the time to understand the suppliers' businesses and where you can improve to be a valuable customer. Such genuine engagements with these contributors create a win-win, and will pay dividends down the lane.
- Bet on the Digital Tools
Before worrying about refining their strategies to potential risks in their supply chain, companies concerned about competing in the era of Big Data need the right technology and tools to do so.
Within their secure and up-to-the-minute digital environment, organizations require integrated data from sales, customers, and vendors to keep tabs on all the suppliers and manage the entire flow of products.
For starters, businesses should invest in cutting-edge inventory management and procurement solutions, especially if they want to keep more goods on hand. These supply chain management (SCM) tools provide a global view of businesses, including finance, operations HR, and marketing.
Further, businesses can see how issues or changes in their supply chains impact other organizational aspects, such as cash flow and cost of goods sold (COGS). That information scale is vital for companies looking to build a more robust supply chain without straining their bottom lines.
How Procurement Teams Can Work Around the Persisting Supply Shortages?
Owing to the COVID-19-induced supply chain disruptions, the need to benchmark procurement performance against broad market metrics is imperative. Cost of goods sold (COGS), inventory, accounts payable, gross margin return on investment (GMROI), and administrative expenses are some of the key financial metrics that are influenced by procurement.
According to Beroe Report, the revenue for S&P 1200 constituent companies fell about 3.5 percent in 2020-21; their COGS fell 4.4 percent. Both these metrics rose in the previous three years. This trend underlines that companies managed to take costs out in the face of falling revenue with the objective to preserve the bottom-line. Similarly, in the same report, Beroe highlights several other key charts and data points to help Chief Procurement Officers navigate in the right direction even as the supply shortages expect to upend budget sheets and cost estimates for companies.
Check out and download this report by Beroe – CPO Handbook – and learn how procurement teams can work around the persisting supply shortages and set effective future agendas. Go here CPO Handbook: Market Snapshot in the Age of Inflation and Supply Shortages
Regain Control of your Supply Shortages with Beroe
Beroe arms businesses with the necessary tools to help succeed with these six strategies. Its cost inflation solution offers an accurate picture of the inflationary headwinds to your business over the next 6-12 months by simulation of ten critical parameters impacting a category.
Beroe's simulation model collects the data on logistics impact, category costs, leading inflation indicators, and sourcing country to calculate the Category Cost Index (CCI) for impact analysis. Based on these metrics, Beroe recommends alternate sourcing destinations and top suppliers to mitigate money supply and inflation.
Our supply chain pros will help you outline your supply networks, spot risks, analyze possible effects, and devise contingencies well in advance to mitigate supply shortage risks and ensure business continuity.
From shortage dashboards to supplier portals, Beroe’s capabilities drive continuous improvement and innovation without exhausting your time, resources, or money.
Streamline and automate your processes to free up your workforce to dedicate their time and talent to forging strong supplier relationships.
Supply Shortages 2021 Updates
The global supply chain shortages are occurring due to many reasons, including heightened demand from the post-COVID-19 economic rebound, collective hoarding by businesses, distortions in global supply chains, and geopolitical tensions.
To that end, let’s delve into some of the recent updates regarding supply shortages.
China’s Growing Power Crunch Threatens Global Supply Chains
Rising power shortages in northeast China have triggered blackouts across households and compelled factories to scale down production. The country’s power squeeze, due to toughening emissions norms and tight coal supplies, has disrupted the production in regional sectors and poses a risk to an already disturbed global supply chain.
Industrials have paused their operations in a bid to reduce their energy usage, which has further raised concerns over the potential shortfall of goods, including electronic gadgets, before Christmas. Moreover, China’s power squeeze is upsetting the regional bourses at a point when the world’s second-biggest economy is hinting of a slowdown.
The world’s biggest polluter has pledged to slash energy intensity by about 3% in 2021 to fulfill its climate goals. Also, local jurisdictions have stepped up the enforcement of emissions curbs in recent months after only a third of the mainland territories could meet their energy goals during H1 2021.
At least 15 Chinese firms have pushed back production due to power curbs in exchange filings. Additionally, over 30 Taiwan-listed companies operating in China have suspended work to remain within the energy restrictions.
Considering the power shortage, some analysts have reduced their expectations regarding China's 2021 economic growth and signaled potential global supply shortages to toys, textiles, and machine components.
Supply Chain Disturbances in the UK: Factories Touch Seven-month Low
The existing supply chain snags and labor scarcity has crippled the UK manufacturing industry. The IHS Markit manufacturing purchasing managers' index (PMI) reveals that last month's expansion rate dropped to its weakest since February, hitting a seven-month low.
While the PMI fell to 57.1 in September, compared to 60.3 of the last month, it surpassed flash estimates of 56.3. Manufacturing operations stepped up for the sixteenth consecutive month in September.
But, besides the supply chain ruptures, rising material costs and reduced new orders have triggered the slowdown.
Moreover, while the new export business slipped for the first time in one and a half years, employment hit the weakest since January, especially in medium- and large-sized organizations.
On the flip side, some companies showed higher job growth to meet manufacturing requirements, tackle rising work backlogs, and gear up for future growth. The pending business grew at one of the fastest speeds, with 1 in 3 companies focusing on expansions.
“The September PMI highlights the risk of the UK descending towards a bout of 'stagflation,' as the growth of manufacturing output and new orders eased sharply while input costs and selling prices continued to surge higher. Companies are facing a growing list of headwinds, which includes declining new export orders, component shortages, delays to air, land, and sea freight, staff shortages exacerbated by COVID-19 illnesses, Brexit disruptions, sharply rising costs, and now fuel shortages,” says Rob Dobson, IHS Markit director.
“The sector is feeling the strain of an ongoing onslaught of snags and hitches at every stage of the supply chain from sourcing raw materials through to component shortages and delivery disruptions.
"Like a whack a mole game where once one difficulty is resolved, another appears soon after, the sector may be challenged but remains stoically convinced that things can only get better in 2022 once the next few grueling months are at an end,” says Duncan Brock, group director at the Chartered Institute of Procurement & Supply.
US Automobile Sales Dip as Chip Deficits Hamper Supply Chains
The US new vehicle sales declined over the past three months despite staggering demand as computer chip shortages and other supply chain problems forced auto companies to shut down their operations.
Sales of General Motors (GM) dipped by 30% from Q1 2020, and the automaker was down 40% within the same timeframe in 2019 before the COVID-19 pandemic disrupted the automobile industry. Likewise, Stellantis reported a 19% year-on-year sales drop, and a 27% dip from the pre-crisis levels.
Toyota Motor’s third-quarter sales grew 1.4% than a year ago, including a 22% drop in September sales. While the Japanese automaker has witnessed lesser supply chain snags than its counterparts, it also had to scale down its operations at some factories more lately.
All the car makers blamed chip supply shortages and record-low inventories for diminished sales. While they hoped to boost their chip supply by H1 2021, the shutdowns of chip plants in other regions due to rising COVID-19 caseloads crushed their expectations. Besides, general labor shortages, instability of freight containers, and congestion at US ports hindered the supplies of other necessary raw materials and components.
"While the various supply chain issues facing our industry continue to impact available inventory, we know the demand for our vehicles is still there," said Jeff Kommor, US head of sales for Stellantis.
"The semiconductor supply disruptions that impacted our third-quarter wholesale and customer deliveries are improving," said a GM official. "As we look to the fourth quarter, a steady flow of vehicles held at plants will continue to be released to dealers, we are restarting production at key crossover and car plants, and we look forward to a more stable operating environment through the fall."
Semiconductor Shortfall to further Hinder PV Sales
Semiconductor supply shortage will further affect passenger vehicle (PV) sales in September, reveals India Ratings and Research (Ind-Ra). These shortages have compelled many OEMs to delay operations, stretching the wait times of prevalent, feature-set, and premium models.
While '2W' volumes might remain steady in September, the subsequent rebound will continue in 2HFY22 as offices and educational institutes reopen.
The Ind-Ra report revealed that sales volumes reduced by 11% YoY, primarily driven by a dip in '2W'. Moreover, domestic '3W' saw a 60% YoY sales hike owing to the lower base, though volumes slipped by 40% than August 2019’s numbers.
Besides, PVs continue to benefit from solid demand. But on a subsequent basis, productions and sales declined 21% and 12%, respectively, in August 2021 due to the semi-conductor chip dearth.
Nevertheless, numbers were greater than the equivalent period in FY20 for the third successive month, hinting toward a rebound to pre-pandemic scales.
Furthermore, PV sales declined by 13% YoY due to a 19% dip in compact vehicle sales, whose share is likely to reduce further in September, as Maruti Suzuki India Limited has decided to trim its normal production by 3/5 for the month.
Despite supply shortages, Just-in-Time is here to stay
The pandemic brought structural change to how manufacturing firms function. It made, and continues to make, a critical impact in the global supply chain, leading to supply shortages. This has brought a lot of attention to the Just-in-Time manufacturing workflow, putting a question mark on its effectiveness and its dynamism to sustain and stay relevant in the changing world of today. However, in an interview with Beroe, ManMohan S. Sodhi mentioned JIT is here to stay, reaffirming its prevalence in the present and future.
ManMohan S. Sodhi is a professor in Operations and Supply Chain Management at Bayes Business School at City, University of London. He is among one of the most prominent voices on the supply chain theme who has written several papers and has had his work published in many publications. Discussing Just-in-Time and Lean Manufacturing with Beroe, including how the pandemic has shaped the supply chain and how suppliers can stay prepared for future events with optimal inventory and capacity, Mr. Sodhi provided some very interesting insights.
Answering if it is time to rethink JIT, he said "The COVID-19 pandemic has rattled companies worldwide. However, my opinion has not changed, and let me be upfront about it. We should revisit why Just-in-Time was developed. JIT was conceptualized so that a company’s internal processes and those of the suppliers at tier 1, 2, 3, and so on, could all be coordinated like clockwork, and thus, minimize inventory holding requirements. Such synchronizing entailed improving internal processes, removing internal disruptions at the outset, and extending this upstream into the supply chain."
When asked, in addition to cutting down inventory and optimizing cost, what are other reasons for JIT's relevance today, Mr. Sodhi had an insightful answer. He said "The JIT concept gained prominence in the 70s and 80s because the mass production of consumer goods became quite prominent. This was the era when the standard of living of many people across the world began to improve." He added, "Mass production is closely linked to Just-in-Time: you could even say that they are two sides of the same coin. Mass production is not going away anytime soon, and thus, Just-in-Time (JIT) is here to stay."
You can read his full interview with Beroe here: Interview: Despite supply shortages, Just-in-Time is here to stay
Frequently Asked Questions
How have the global supply shortages affected businesses?
Supply shortages have shot prices up considerably, especially of various industrial raw materials, including plastics, crude oil, and chemicals. In addition, consumer goods have already begun to reflect some of the impacts of increased raw material costs. Furthermore, changes in factory orders due to the COVID-19 effects have squeezed the supply in some markets and driven up raw material prices.
What steps should businesses follow to address supply shortage risks?
Companies should implement the following measures to mitigate supply shortage risks:
- Supplier data management and assessment
- Approaching multiple suppliers
- Fine-tune inventory planning and management strategy
- Improve relationships with existing suppliers
- Embrace digital tools and solutions
What aspects must businesses look upon while gauging a supplier’s performance?
While assessing a supplier’s data, companies must ask themselves the following questions:
- How easily and swiftly do they settle disputes?
- Are the suppliers meeting their SLAs and other contractual commitments?
- Do they consistently tick the boxes of on-time delivery, quality, worker safety, and eco-friendly methods?
- Do they carry a positive corporate reputation?
- Are their invoices accurate?
How does Beroe help in mitigating supply shortage risks and impacts?
Beroe’s inflation analysis solution offers a 360-degree view of the category-centric supply-demand forecast for the coming 6-12 months based on logistics, market, and macroeconomic conditions. Moreover, it delivers real-time, in-depth visibility into supply chain management and inventory control, including stock on order, inventory levels, and supplier performance.
Proactively analyze, prioritize, alleviate, and manage supply shortages and cost inflations for better business outcomes. Check out Beroe LiVE.Ai™