Mark Jackley | Content Strategist | July 13, 2023
Before the pandemic, consumers hardly knew what supply chains were, much less complained about how disruptions were causing product shortages and higher prices. But more than three years after the onset of COVID-19, supply chains are part of the everyday lexicon—and while disruptions have eased, their effects remain a top concern. They affect everyone in the chain of global goods and services—manufacturers, raw materials and parts suppliers, shippers, carriers, wholesalers, retailers, and consumers.
While there are signs that supply chains are starting to return to a more normal state—for example, prices to ship freight and containers have steadily declined—businesses are still nervous. In a recent survey, more than 80% of supply chain leaders said they expect the challenges they face will worsen or stay the same for most of 2023. Most survey respondents reported having experienced at least one supply chain disruption in 2022.
Fortunately, there are proven ways to anticipate such disruptions and soften their impact. The first step is to understand their many different causes and have a plan for minimizing the effects.
A supply chain disruption is any major snag in the global chain of manufacturers, suppliers, shippers, carriers (railroads and trucking companies), wholesalers, and retailers that keeps goods and materials from flowing as usual. For manufacturers, these problems result in shipping delays, slower delivery times, too much or too little inventory in warehouses and on store shelves, higher costs, and higher prices passed on to customers. Some disruptions are predictable, such as when holiday demand depletes stocks of hot-selling items. Other causes—such as the global pandemic, a major weather event, an information security breach, or a sudden labor strike—can come out of nowhere.
Disruptions affect everyone in the chain of global goods and services, including material suppliers, manufacturers, distributors, wholesalers, retailers, and consumers.
Supply chains should be efficient, with minimal disruptions due to the risk reduction strategies of their participants. Sounds good, but what do efficiency and risk reduction mean?
Supply chain efficiency generally entails operating with the lowest costs and inventory levels while limiting duplicative routes, facilities, and backup inventory, also called safety stock. Risk reduction involves identifying supply chain risks, taking steps to reduce them, and making plans to respond should a risk trigger a disruption.
Manufacturers must balance efficiency and risk reduction, finding ways to operate at low cost while ensuring that their businesses can withstand supply chain shocks.
There are two broad types of supply chain risk.
Internal risks include a variety of factors, including inefficient supply chain management (SCM) processes, outdated SCM technology, and human error (such as entering incorrect information on a purchase order). By improving SCM efficiency, a manufacturer can more skillfully match supply and demand, getting products to the right places at the right time and lowest cost. For example, supply chain automation can increase efficiency—faster, more accurate data will sharpen demand planning and save money over time.
External risks beyond a manufacturer’s control include major weather events (such as when a hurricane shuts down a key supplier), a truck driver strike, or a major geopolitical event, such as a war and related trade embargo. While manufacturers can’t stop the weather and have little control over other external factors, they can take measures to reduce those risks, including diversifying suppliers and shipping routes. Such risk mitigation steps, however, can add to costs. Stability is the goal here, not necessarily efficiency. For example, augmenting overseas suppliers with a domestic source might lower risk, but domestic manufacturing could come at higher price. It’s a tradeoff, aimed to stabilize the supply chain over the long run.
Supply chains are complex. They span the globe, connecting partners in every region and country. Like any chain, a supply chain is only as strong as its weakest links.
For example, when COVID-19 started to spread, trucking companies had trouble hiring drivers, who already were in short supply. Goods piled up at ports; store shelves went bare. Prices soared for the scarce items that became available. One disruption led to another, with no quick fixes. In 2023, truck drivers are still in short supply, causing carriers to start hiring drivers as young as 18. Carriers are also offering lucrative signing bonuses.
Intelligent applications for supply chain management, manufacturing, and procurement can help supply chain partners prepare for and adjust to shifting market conditions and disruptions. Such applications include planning tools that model scenarios and determine the probability of certain events unfolding, such as a weather-related disruption. They may also include predefined use cases that shed light on various disruptions and recommend actions to take.
But when a perfect storm such as COVID hits, the disruptions are so powerful that interconnected supply chains become overwhelmed. Even in more placid times, global events can ripple. For instance, a drought in California might prompt US grocery retailers to import avocados, passing on the costs of overseas shipping to lovers of guacamole.
Supply chain disruptions stem from two types of risk: internal risks, which companies can reduce and thus control, and external risks they can’t control. In today’s vast supply chains, companies contend with both, though in different ways.
Internal risks—mainly supply chain inefficiencies and data errors—can lead to delays in the flow of goods.
External risks—wars and natural disasters, for example—can result in serious supply chain disruptions. Other external risks include
To prepare for and manage supply chain disruptions, prudent manufacturers take measures that address both internal and external risks—controlling what they can control and mitigating the risks of factors and events they can’t control. Consider the following nine best practices.
One popular planning model for reducing supply chain risks is PPRR: prevention, preparedness, response, and recovery. Using this model, manufacturers take steps to avoid supply chain risks they can control, prepare a contingency plan to deal with disruptions they can’t control or hit suddenly, respond by executing preset plans to reduce a disruption’s impact, and then return their supply chains to their normal capacity as soon as possible.
A risk management plan for supply chains might focus more on external risks, such as the potential for a geopolitical conflict, major weather event, or labor shortage. But such plans should also identify internal risks—for instance, procedural disruptions should manufacturing teams get restructured—and recommend actions to eliminate or reduce those risks.
Manufacturers that rely on a single supplier for certain components, ingredients, or other materials risk major disruptions should something prevent the supplier from meeting orders. It pays to diversify suppliers, but it’s not always easy. For example, a manufacturer that decides to use three suppliers instead of one runs the risk of damaging an important relationship. Perhaps the initial supplier will raise prices to offset lower order volumes. Or the new suppliers may want assurances—in the form of more business—that they’re seen as true partners, not merely a stopgap.
In another scenario, a US manufacturer might augment an overseas supplier with a domestic one. This practice helps mitigate risks involving trade, shipping, and more, but it can add to the manufacturer’s costs. Sometimes a single supplier is the only option, with a unique ability to provide something crucial. To achieve what some experts call “continuous sourcing,” manufacturers must exercise creativity and diplomacy. It’s a cost of doing business.
Manufacturers can reduce disruptions by communicating with suppliers and managing them better. Most manufacturers name a person or team to manage supplier relations. Depending on the circumstances, a quarterly, monthly, or more frequent call is a chance to discuss problems and brainstorm solutions.
Automated systems can improve relations with suppliers. For example, a system that lets suppliers send automatic notifications when orders are delayed gives manufacturing customers more time to adjust their schedules.
It’s important for manufacturers to clearly set their expectations of suppliers in their contracts and regularly review them. Many manufacturers invest in systems to improve how they track supplies and inventory so that discussions with trading partners are based on current, accurate data.
New technologies are making supply chains more resilient to disruption. One example: Manufacturers set up 3D printing capabilities, which are often less costly than conventional manufacturing, in factories closer to home, reducing their reliance on foreign sources. Another example: New logistics applications help manufacturers match freight loads to transportation capacity faster and more accurately than when done manually.
Golf equipment maker TaylorMade relies on software integrating data across supply chain systems to enhance planning and order management. When demand for its clubs, balls, and other gear soared in the summer of 2020—when playing golf was one of the few safe social activities amid COVID-19—the company was prepared. “Having more robust systems helped us flow our inventory,” says Dave Brownie, TaylorMade senior vice president of global operations. “After golf reopened, we were immediately shipping record demand with much less inventory.”
Lack of access to key information throughout their supply chains leaves manufacturers vulnerable to disruptions. Supply chain visibility lets them track components, subassemblies, and finished products as they move from suppliers and shippers. Integrated systems improve visibility by collecting and sharing data across key points in the supply chain, making it easier to view procurement, production, shipping, and other activities.
For example, with visibility into a supplier’s process, a manufacturer knows which orders are in production and which are in transit, helping manage expectations and avoid unpleasant surprises. With clear views of a supplier’s sustainability practices, a manufacturer can determine whether using the supplier would pose a legal, reputational, or financial risk. It’s important to have visibility into internal processes as well. For instance, real-time inventory visibility makes it easier for manufacturers to replenish stock and meet projected demands.
Backup inventory, also called buffer or safety stock, is a reserve of products that manufacturers and other supply chain participants keep on hand in case of supply delays or spikes in demand. Of course, extra inventory takes up warehouse space and adds to costs, but it lets companies meet demand without raising or cutting prices sharply. Back-up inventory also helps prevent food shortages, medical supplies, and other crucial items. In calculating the amount of backup inventory needed, manufacturers consider how long it takes to order products, inventory trends, and annual demand cycles.
Manufacturers use predictive data analytics software to run simulations that identify likely future scenarios and conduct scenario modeling that can point to needed revisions to supply chain practices. These analytics depend on thorough, accurate data collection. For example, a manufacturer might use data on historical demand and inventory trends as well as social media data on labor strikes, fires, floods, and company bankruptcies to predict supply chain disruptions and monitor their effects as they unfold.
Efficient global supply chains depend on long-range forecasts and planning. For instance, factories often schedule production months in advance. While such methodical planning is important, manufacturers must be ready to pivot in the face of disruptions due to limited supply, quality issues, or machinery shutdowns. Many manufacturers adjust their plans more often, sometimes daily or weekly. They rely on cloud-based applications that collect data in real time and analyze it quickly, simplifying the process of creating plans and schedules. Such process improvements are key, but so are people improvements—for example, empowering supply chain managers to make decisions on the spot. If a logistics manager learns that a shipper expects a labor strike to begin, a quick decision to use another supplier could avert delays.
An unreliable supplier is a disruption waiting to happen. By monitoring supplier performance, manufacturers can pinpoint problems when and where they occur, assess their seriousness, give suppliers informed feedback, collaborate on solutions, and decide if the performance issues are a reason to end the partnership.
Manufacturers measure supplier performance in many ways, including contract compliance; operational performance (work quality, lead times, on-time delivery, delivery in full); business processes (defect prevention, inspections, regulatory compliance); and financial health (bankruptcy risk, liquidity, profitability). Many manufacturers use a scorecard of key performance indicators—for example, percentage on-time delivery rate. Standard measures let companies do apples-to-apples supplier comparisons. Performance monitoring works best when it’s ongoing, with regular analysis and supplier check-ins, just as companies routinely monitor the performance of employees.
Preparing for supply chain disruption includes managing risk, increasing visibility, predicting disruptions, and reducing impact.
With Oracle Fusion Cloud Supply Chain Management (SCM), companies can respond quickly to supply chain changes. Planning solutions anticipate demand and manage supply while boosting collaboration with partners. Inventory management solutions control the flow of goods across the organization and supply networks. The continually updated platform connects to manufacturing (and smart manufacturing) systems and HR systems, strengthening what is often the weakest link in supply chains—employee skills and knowledge. The platform supports supply chain command centers, offering predefined use cases and recommended actions that accelerate decision-making when supply chain disruptions occur.
Why is it important to manage risk in supply chains and avoid disruption?
Managing supply chain risk and avoiding disruption saves money, maximizes revenues, protects reputations, and keeps customers satisfied.
How can supply chain disruptions be prevented?
Supply chain disruptions can be prevented by reducing internal risks, such as limited visibility due to siloed information, and by mitigating external risks, such as climate events, transportation bottlenecks, and reduced supplier capacity.
What is the solution to the supply chain crisis?
There is no single solution. Experts recommend a mix of strategies to reduce risk and prepare for potential disruptions, including increased supplier diversification and a reshoring of at least some manufacturing capabilities.