Editor’s Note: Igor Estraykh, Pepperdine Graziadio Business School, MBA, MS, Doctor of Business Administration candidate, and Vice President of Procurement at Olde Thompson LLC
Empty grocery shelves, lack of toilet paper, mask and PPE shortages, vaccine distribution delays—these events came to define the year 2020.
In reaction, the news media brought focus to global supply chain disruptions and questioned if supply chains were to blame for the shortages. While it is easy to blame global supply chains and insufficient supplier inventories, this is a flawed argument.
Global supply chains are a fundamental enabler of the modern global economy but require technological innovation and process changes from companies at all levels in the supply chain to function efficiently and respond to system shocks like COVID-19.
Instead of building up more inventory, retailers at the top of global supply chains need to improve their supply chain resilience and flexibility.
These changes include integrating artificial intelligence and machine learning for forecasting and material planning, transparent and real-time communication throughout the entire supply chain, and decision-making autonomy for managers across the supply chain to quickly react without layers of approvals.
In very simple terms, a supply chain is the combination of all the manufacturing and distribution steps required to convert raw materials into usable products and services for end-users. Each step in a global supply chain from harvesting raw materials to manufacturing and global distribution is a critical part of ensuring the right product ends up in the hands of the right end-user at the right place and time.
However, this requires exceptional planning, forecasting, and communication across the supply chain to minimize inventory sitting idle and tying up physical space, assets, and cashflow. The 40 cargo ships backlogging the Port of Los Angeles indicate a very different reality.
The current supply chain crisis is a combination of several events happening at the worst possible time including an inventory buildup as an overreaction to short-term demand and inflexible supply chains.
The global economy runs on a lean supply chain ecosystem to minimize waste, optimize inventory turnover, and maximize returns on assets. Every step in the supply chain runs at nearly full capacity without the ability to immediately increase short-term manufacturing or distribution capacity, yet retailers expected their supply chains to nimbly shift capacity without increasing costs.
When COVID-19 stay-at home orders closed office buildings, the factories making industrial toilet paper lost orders while the factories making home-use toilet paper got overwhelmed with new orders. The former started bleeding cash and laid off employees, while the latter needed months to invest in new machines, buildings, and staff to increase capacity without a guarantee of business post-pandemic. This happened at every step in the supply chain.
Moreover, the List 301 tariffs on China in 2018-2019 resulted in US companies shifting supply chains to other parts of the world reducing ocean shipping demand, which forced employee layoffs and idling of ship, truck, and rail capacity to minimize financial losses. When bare grocery shelves drove panicked corporate buyers to restock products, it exposed which supply chains were flexible and resilient enough to respond.
This leads us back to the original question if the modern supply chain system is fundamentally broken. Although some companies with extended inventory positions were able to benefit during the pandemic, it was partly by chance that they had inventory of in-demand products.
Those with inventory of items like rental cars, crude oil, and retail clothing were forced into bankruptcy filings. It is not economically viable for each retailer, manufacturer, ocean and trucking carrier, and raw commodity producer to invest in extra capacity and inventory without compensation. Moreover, this approach prevents quick reactions to supply chain disruptions like a pandemic. Even companies that had extra inventory of products like staple groceries would not have been successful without a flexible supply chain and distribution partners to get goods from their warehouses to where consumers needed them the most.
Instead of building up inventory in the hopes that someone will need those products in the future, firms should focus on increasing flexibility and resilience of their supply chains. In traditional supply chains, every change in customer demand requires a massive shift and delay at each step in the supply chain. This causes a simple change in demand from industrial to personal toilet paper rolls to become a six-month transition that costs millions of dollars. Conversely, resilient and flexible supply chains can shorten reaction time and reduce the cost of changes. Ford and General Motors retooled manufacturing plants to produce medical equipment.
Bacardi and L’Oréal switched production to hand sanitizer, and FedEx rerouted its global shipping network to transport PPE and medical supplies.
However, this model requires full transparency across the entire supply chain to integrate forecasting, supplier redundancy, and localized conversion of finished goods closer to the end of the supply chain for flexibility. It also requires real-time information sharing so each step in the supply chain becomes a fluid extension of one process rather than a combination of disconnected steps. Companies apprehensive of the costs and process changes required to make this transition need re-evaluate if they can afford not to invest in resilient and flexible supply chains to survive the 21st century.
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