Supply Chain

Supply Chain Turmoil: Applying the Lessons

Five supply chain issues CFOs need to address in the wake of historic disruption.
Supply Chain Turmoil: Applying the Lessons
Photo: Getty Images

Will all suppliers learn from the disarray and turmoil of the COVID-19 pandemic? Unfortunately, no, according to Kevin Linderman, chair of the supply chain and information systems department at Penn State University. After such an event, firms can engage in “antilearning” behavior, wrote Linderman in a 2021 blog post. Antilearning is the opposite of learning: workers perform a procedure improperly, no one takes corrective action, and the improper process becomes part of normal operations.

Customers, too, have a responsibility to apply learnings from the pandemic. After all, some of the problems are owed to a lack of depth in supply chain planning and a stubborn attachment to dated operating principles.

Whether CFOs and their business partners are still chest-deep in supply snarls or dealing with the aftermath, they must be better prepared for the next crisis. When they are ready to apply what they learned, the following five areas should be on the to-do list.

Adjusting supply chain and procurement functions. CFOs may have to add staff to these functions or engage expert partners. Why? Existing supply chain teams have spent or are spending a lot of time on securing reliable, stable sources of supply. “They don’t have the time or opportunity to strategically review the supply base and think through innovations that could constrain costs going forward,” said Kent Mahoney, executive vice president of North America for Proxima, a supply chain and procurement consultancy. Companies are kicking off dedicated initiatives and building “tiger teams” to identify and then execute on the next wave of optimization opportunities, said Mahoney.

Performance-based compensation for supply chain managers may also require a rethink. According to Chuck Franzetta, CEO of supply chain management consultancy Franzetta & Associates, supply chain managers’ pay is too often based on managing the costs of goods sourced. That has led to “a near-religious adherence to a lean management philosophy and insufficient inventory availability,” he said.

Material for immediate production is often late and inventory to support a surge in increased demand is unavailable, mostly due to lean practices, said Franzetta. Managers’ performance-based pay instead should be tied to contribution to revenue derived from efficient and effective production. “Revenue trumps costs every day,” said Franzetta.

Companies are kicking off dedicated initiatives and building “tiger teams” to identify and then execute on the next wave of optimization opportunities. — Kent Mahoney, Proxima

Considering vertical investments. Some modified version of vertical integration may be worth investigating if you can’t pass on costs to customers or customers begin to balk at price increases. Downstream companies should consider investing in or buying key suppliers small enough to acquire but still large enough to make a difference. Or invest in those suppliers so they can build additional capacity. “Three or four years ago, firms weren’t looking to do this,” Mahoney said. But now, “the buyer can get a return on the deal because the supplier is going to convert the investment into a lower price for the buyer long-term.” One caveat: Investigate whether regulators would consider the combination a violation of antitrust laws.

Building supply chain resiliency. Amid supply chain chaos, organizations have scrambled for redundant suppliers and secondary markets to source items from. If something goes seriously wrong again, the organization needs a fallback plan. Making supply chains agile is key. “If all the port workers in California go on strike for 16 weeks you need a pathway to switch quickly to alternate networks,” Mahoney said. Several years ago, companies “didn’t have robust [fallback] plans in place. That’s starting to change,” he said.

At the same time, companies need to enhance relationships with primary suppliers, said Franzetta. “Start developing genuine, win-win partnerships with vendors, including inviting them into your production planning,” said Franzetta. “The more inclusive those relationships, the more likely production won’t be interrupted.”

Avoiding locked-in costs. Higher shipping and transportation costs get embedded into product costs “unless you’re completely sourcing your own raw materials out of the earth and then manufacturing it in that exact same spot,” said Mahoney. Higher shipping and logistics costs may tempt some CFOs to renegotiate logistics agreements. But it’s not a good time to do so because ”there’s a great deal of uncertainty about the market’s future,” said Mahoney. In the months ahead, prices will not return to pre-pandemic levels, but they could drop from their current range — 30% to 50% higher than they were pre-pandemic. 

Preparing for supply chain normalcy. ‘Shocks in the supply chain will subside, firefighting will end, backorders will disappear,” wrote supply chain consultant Rich Weissman in Supply Chain Dive in February. Improved planning and forecasting, if an organization undertakes the effort, will come in handy as lead times return to normal levels and suppliers return to realistic production schedules. It will also help if consumer and business-to-business demand wither due to persistent price inflation.

“Avoid double-ordering from different suppliers, just-in-case ordering, building extraordinary hedge inventories, and any other unrealistic procurement tactics that helped you through the pandemic,” advised Weissman, who is past president of the Institute for Supply Management. In addition, as with shipping and transportation costs, “be careful not to lock in temporary inflationary pricing on long-term supplier agreements,” he wrote.