Five Critical Questions About Supply Chain
Supply chain disruptions are not new, but the current disruptions have not only been persistent but have also impacted several industries – and consumers – at the same time. The result has ranged from empty shelves at retail stores to prolonged lead times for consumer products and automobiles.
We sat down with three Georgia Tech Scheller College of Business faculty experts in operations management: Vinod Singhal, Charles W. Brady Chair; Manpreet Hora, associate professor; and Ravi Subramanian, professor. The discussion centered around overarching causes, financial ramifications, and multi-pronged approaches to mitigate the impact of supply chain disruptions in the coming months and year.
1. What caused the supply chain and logistical issues to arise? What effect did Covid-19 play in all of this? Did the influx of stimulus checks and the extension of additional aid to U.S. citizens (rent deferment, etc.) affect the purchase of goods enough to cause the current situation?
All three experts agree there are several factors on both the supply side and the demand side of the supply chain, and logistical challenges that companies and customers are currently facing.
On the supply side, there are issues in global supply chains that are beyond the control of individual companies. A significant one is the congestion at the ports of Los Angeles and Long Beach in the U.S. Nearly 40 percent of imports into the U.S. flow through these two ports. There are stranded containers that have not been unloaded due to labor shortages, limited unloading capacity, and warehouse space constraints.
For example, a CBS news report on November 11, 2021, indicated that at the ports of Los Angeles and Long Beach, about 80 ships carrying more than half a million containers were waiting to unload. Clearing this backlog will take some time. Another related issue that has added to the congestion is the growing number of empty containers that are sitting on ports to be returned back to exporters.
The congestion at ports is being further exacerbated by trucker shortages that could pose a more persistent and long-term challenge for supply chains.
“Moving products from ports to distribution centers, manufacturing plants, and further downstream to retailers was already a concern for many companies even before the pandemic. Now the combination of port congestion and trucker shortage is further delaying the process of bringing products to the right place at the right time,” said Hora.
Shortages of critical components, such as semiconductor chips, have created additional delays for a range of industries. Shutdowns in chip production during the early stages of the pandemic, coupled with increased demand for products such as computers, smartphones, and automobiles has resulted in fierce competition for acquiring chips across industries. For example, the professors noted that during the initial period of the Covid-19 pandemic, semiconductor companies prioritized chip manufacturing to meet the increasing demand for consumer electronics. This, in turn, diverted supply away from automotive production, resulting in substantial delays in cars rolling off assembly lines
The pandemic either amplified the above-mentioned supply chain and logistical issues or brought in unexpected new ones. It necessitated the closure of borders at the national level, and of plants and warehouses at the company level. These closures, in the initial months of the pandemic, followed by new requirements such as social distancing during the opening of facilities affected and slowed down production, warehousing, distribution, and transportation of products.
On the demand side, explained Subramanian, two phenomena occurred that have led to a surge in demand for goods that were already in short supply.
First, during the pandemic, many people were working from home. This curtailed spending on travel, vacations, and demand for experiential goods and services. People had more disposable income, which they diverted to consumer products that were already in short supply.
Second, the global economy and the US, in particular have been turbocharged by trillions of dollars in stimulus during the pandemic. This stimulus, while necessary to deal with the hardships during the pandemic, enhanced the surge in demand for products.
2. Why are some retailers able to deliver goods without an issue?
“Many large retailers, including Walmart Inc., Home Depot Inc., and Target Corp., do not seem to have supply chain and product shortage issues like their counterparts, because they ordered and took delivery of goods earlier than usual this year. They have not only built-up inventories but have enhanced their inventory management practices. Some retailers have also chartered their own ships to counteract delays in transportation,” said Singhal.
They have also moved the unloading of their goods from the ports on the west coast to other ports in the U.S. that are less congested. These retailers have used their clout and deep pockets to get suppliers and logistics companies to prioritize their orders. Their far-flung supply chain networks can identify and work with several suppliers to find options to source items that are out of stock.
3. What are the financial ramifications to the U.S. and to the world for this supply chain issue?
The professors note that large companies have used their clout to deal with the current supply chain issues. Although their costs of procuring supplies have increased, they may be able to pass on some of the cost increase to customers. Some of these companies may see an increase in total sales and total profits in nominal terms although they may experience thinner profit margins. The stock market seems to have incorporated these factors in the valuations and the rising stock market suggests that large companies are expected to do fine financially. For example, the Dow Jones Index has jumped 18 percent this year, S&P 500 is up 25 percent, and Nasdaq has risen 24 percent.
The financial ramifications to smaller retailers and manufacturing firms may be quite negative. As Subramanian explained, these firms do not have the clout and financial resources to work around the supply issues. Often their sales during the holiday season are critically dependent on receiving a container or two of goods from overseas suppliers. Given the long and uncertain transportation and delivery times, and the high cost of transportation, many small firms may not be able to receive supplies in time for the holiday season and may be left holding unsold inventory or unfinished products. Overall, small firms may take a big hit from the current supply chain issues.
4. Are there any additional issues that consumers may face that they may not be aware of? How will the shortage of goods to retailers affect consumers shopping during the holidays? Is there anything individual consumers can do to help solve the problem?
Consumers can do certain things so that they are not disappointed, said the panel. They should start shopping earlier, expect to pay closer to full price on many products, and not wait for promotions or discounts to make their purchases. They will need to be flexible in their shopping habits and look for substitute products if their desired products are not available. Consumers may also want to prioritize their shopping decisions – for example, ensuring they have the gifts for young children who expect Santa to deliver irrespective of supply chain issues! Likewise, for older parents and relatives, for whom the holiday season is a very special time. For others, they may want to consider giving gift cards.
5. When do you think this issue will be resolved and how?
“Supply chains getting back to normal will be contingent upon the nature of the underlying supply chain issues. Shipping and retail executives indicate that they expect the West Coast port backlogs to clear in early 2022, when the Lunar New Year shuts many factories for a week in February, thus slowing output and shipments from Asia,” said Singhal. However, chip shortages may last until 2022 or even extend into 2023. Many chip manufacturers have announced plans to significantly increase their level of capital expenditure but bringing new capacity online can take several years.
This storm of collective issues has brought the importance of supply chain resilience to the forefront. Companies emerging from the pandemic are revisiting or will have to revisit their past approaches to managing supply chains.
Having flexibility and slack in supply chains has been a persistent strategy for several companies but this strategy will now need to be more holistic. For example, companies will need to re-think where to source their critical and irreplaceable components. Companies are already deliberating to not only near-shore suppliers of their critical components but also expand this supply base. This may also entail carrying more inventory of such components to meet demand variability and hedge against supply chain disruptions. Another development is manufacturers vertically integrating to design and produce critical components in-house.
Even before the pandemic, companies were investing in technology to digitize their supply chains. This long-term imperative will be prioritized even more as companies aspire for more transparency and traceability of products in their supply chains. Moreover, advanced automation in manufacturing plants and warehousing could ease some of the pain of labor shortages.
“Despite the current supply chain issues, we believe that supply chains will remain global and complex, but there will be renewed thinking in companies to recognize that Black Swan events such as the Covid-19 pandemic can create a multitude of interrelated and cascading supply chain issues that have serious financial implications. And companies will need to blend flexibility, adaptability, and efficiency to develop capabilities to mitigate impacts and remain resilient during such supply chain disruptions,” stated Hora.