The COVID-19 pandemic ushered in a new era of turbulence in global logistics. And while the fallout from that event appears to be easing up, rampant supply chain disruptions continue. They’re up 32% year-over-year, according to Resilinc. Even large companies like Apple are struggling to get products onto shelves.
At the same time, consumer demand is on the rise, which means supplier lead times will likely become more erratic and unpredictable. One might assume that contract penalties will motivate suppliers to consistently deliver on time, but when that becomes physically impossible due to unpredictable events, no incentive can overcome them.
Despite all of this trouble, the market value of the global supply chain market is on the rise, from $15.85 billion in 2019 to a projected $37.41 billion by 2027. If COVID-19 has taught us anything about supply chain management, it is that we need supply chain contingency plans. This includes many kinds of buffers.
Buffer inventory consists of extra stocks of raw materials or finished goods that a company maintains as a shield against unforeseen circumstances. The establishment of buffers is especially important at a time of unforeseen spikes in demand and shaky supplier lead times. Companies need to think about how to balance the need for buffers with the danger of tying up revenue in excess inventory.
Inventory buffers hedge against lead time and supplier disruptions. Without them, companies are at the mercy of demand upturns and downturns. The automotive sector experienced this problem when it tried to cope with pandemic uncertainty by canceling orders of component parts. Later, it found its supply lacking when demand for electric vehicles began to rise again.
Other types of buffers can take the form of raw materials, works in progress and products to be released. While an ideal supply chain would generate zero waste and maintain 100% sell-through, this can only be achieved when a company's raw materials, manufacturers, and customers are all local. A company with a global supply chain will always need to buffer against international capacities and barriers.
Following are some tips for keeping a safety net around your supply chain without diluting your sales strategies, or fattening your company with too much static inventory.
Maintain a list of vetted backup suppliers. Because the environment for supply chains is so turbulent, many suppliers will have trouble fulfilling demand. Having backup suppliers ready to step in will help to alleviate disruptions. You won't have to scramble to find a new supplier and potentially make a costly error.
The key is finding these backup suppliers before you need them, so you can have the chance to vet them properly. This entails ensuring that they’re regulation-compliant in the locations you work in, evaluating the quality of their products and communication, and checking their financial status and risk levels.
Buffer your logistics. Keep a backup plan of transportation modes. Technology can help, by digitizing the supply chain and improving transparency so you can see in advance where you might need to initiate the plan. For instance, if you spot a disruption in media shipping, you can invoke a backup printing plan that’s closer to home.
Place inventory buffers strategically. When demand is prone to dip and spike, an inventory buffer can help you ride that wave and meet consumers' needs by offering the fastest delivery. This buffer can be valuable at all stages of the supply chain. Keeping a buffer of raw materials, for example, can help you maintain production at a regular pace even while competitors are floundering for parts.
Use marketing to buffer demand. If you have products with high margins that can be marked down, you can use marketing to drive sales and traffic to your website to clear out other buffers when needed. If keeping a buffer of high-margin inventory helps you maintain cash flow and production in a supply chain downturn, you can afford to lower those margins when you need to get inventory moving again.
Buffers are a necessity for today's supply chains, especially in the event of economic or political uncertainty. Forging a great backup plan can ensure your production never grinds to a halt.
Ali Hasan R. is co-founder and chief executive officer of ThroughPut Inc.
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