It’s undeniable that the disruption caused by the COVID-19 coronavirus is still having a massive impact on supply chains. Despite mass vaccination programs in 2021, supply chains have been affected by fresh outbreaks and renewed lockdowns.
The pandemic has caused big fluctuations in consumer demand over relatively short periods of time, supply chains are still adjusting to this now and working out what it means for the future too. In the disruption of the past two years, supply chain vulnerabilities have become painfully clear. But it’s important that we don’t return to the pre-pandemic status quo, and that we do use the last two years as an opportunity to learn.
One of the most visible supply chain issues was the running aground of cargo ship Ever Given in the Suez Canal, blocking a crucial East-West trade route. Although it was stuck for just under one week, it was estimated to have cost around $400 million for every hour it was blocked, according to shipping data company and publisher Lloyd’s List. This blockage exacerbated shortages of key materials and goods. Last fall, there were gaps on the supermarket shelves and queues at petrol station forecourts in the U.K., resulting in the British Army being summoned to deal with a shortage of truck drivers. Brexit exacerbated a backlog of truck license applications caused by the pandemic, with fewer drivers coming from the EU. Another global challenge was the severe shortage of microchips. While COVID-19 impacted production, U.S.-China trade tensions have also taken a toll on supply. This made 2021 tough for industries reliant on microchips, such as auto manufacturers and computer hardware companies.
A ‘Vicious Circle’
Expectations of growth have been rising over the past year. The International Monetary Fund’s October edition of the World Economic Outlook forecast that global GDP was to grow by 5.9% in 2021 and 4.9% in 2022. And now COVID-19 is better understood, and precautions are being taken to limit its spread, customer demand is growing again and it is expected that manufacturers will ramp up production and supply chains will spring back into action.
But many businesses are struggling to keep up with the consumer demand that exists and is skyrocketing across all industries. It is estimated that this demand will take around a year to stabilize — even longer in some sectors. This puts greater pressure on suppliers — many of whom can’t fulfill orders, with purchase orders staying open. This is something more people need to be talking about, planning for and tackling.
Morten Engelstoft, chief executive of Maersk-owned APM Terminals, believes this increased demand has led to a “vicious circle” emerging, created by surging demand putting strain on container groups, suppliers and logistics companies as they struggle to deliver goods. “We need lower [consumer demand] growth to give the supply chain time to catch up, or differently spread-out growth,” he told the Financial Times. “Over a long period of time, we will need to recover efficiency.”
A lot of this demand has come from the U.S. Consumer confidence is high after President Joe Biden announced a $1.9 trillion stimulus package earlier in the year. This has seen demand for imported goods surge, leading to cargo ships queueing outside California’s Los Angeles and Long Beach ports.
Three years after Harvard Business Review announced "the death of supply chain management" due to the growing influence of data and automation in day-to-day life, supply chain managers are in fact as critical as ever. As the pandemic upended supply networks, it highlighted the critical role played by supply chain managers and the need for greater flexibility.
The growing adoption of supply chain Centers of Excellence is one such development. These physical or virtual knowledge centers concentrate expertise and resources for the supply chain function. They operate adjacent to groups that execute core business functions and find, design and implement changes to business processes, people or technologies. As a result of recent challenges, managers have become more introspective to find out how they can improve. On top of building greater visibility into supply chains, they will also be working hard to reskill their workforce and increase efficiency in the coming years.
While the pandemic has highlighted the value of supply chain managers, humans were still responsible for 83% of supply chain disruptions in 2020. Technology will continue to play a much more significant role in supply chain dynamics in the years to come.
Technology has already introduced a greater element of choice in today’s environment, giving buyers more purchasing power and allowing them to pick and choose their suppliers. It’s also helping supply chains become more agile, making it simpler for buyers to onboard new suppliers wherever in the world they are based.
Artificial intelligence could also transform supply chain dynamics, particularly as more processes become digitalized and data-driven. Companies such as tech giant NVIDIA are already bringing AI to supply chain management, tackling issues such as route optimization, warehouse picking, and fleet mix optimization.
Buyers now have vast sums of information about supply chain networks at their fingertips, with instantaneous insights readily available. For example, growing awareness of environmental, social and governance (ESG) risk in supply chains is prompting more buyers to demand data on issues such as environmental impact, diversity and inclusion in supply chains.
The data revolution is also giving buyers a better understanding of the health and balance sheets of suppliers. Unhealthy suppliers can be a key source of risk, as a supplier failure could mean you cannot meet your goals.
The Next Shock
Supply chain shocks may be something that we have to live with for years to come; insurance group QBE estimates that there could be a supply chain shock every four years. It recommends several ways to minimize exposure to shocks by balancing just in time with just in case, managing cyber risks, understanding supplier alternatives, implementing more regional solutions, becoming nimbler, building resilience, and preparing for the worst.
According to QBE, the average firm loses over half a year’s profit during a significant supply chain shock, making financial precautions crucial.
Late payments in 2020 jumped from 34% to 43% — levels not seen since 2017, according to a survey by fintech company Taulia. More than 60% of survey respondents said they desired early payment options. While those figures had returned to pre-pandemic levels by the end of the year, the jump demonstrated a need for corporations to have liquidity and technology solutions to ensure business continuity should another crisis take hold.
To meet today’s challenging environment, companies should look closely at key metrics such as Days Sales Outstanding (DSO), Days Inventory Outstanding (DIO) and Days Payable Outstanding (DPO). By setting goals based on these indicators as part of a broader plan, management and their organizations can work together to reduce their cash conversion cycle and maximize access to working capital.
Furthermore, while the stock market is still booming, it is prudent for companies to take action on optimizing working capital at the same time as optimizing their supply chains. Those that will do it will benefit when the market assesses companies on core financial and balance sheet metrics.
Forecasting cash flows is also essential but challenging during times of crisis as customer behavior changes. Companies should take advantage of real-time cash flow forecasting solutions that combine live and historical data and predictive models to help highlight upcoming cash gaps and effectively manage their excess cash.
With the countdown to the next supply chain shock having already begun, supply chain managers will play a key role in reshaping the industry. The pandemic provided us with a unique opportunity to challenge old ways of thinking about supply chains. Let’s not waste it.
Cedric Bru is president and CEO of Taulia.
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