Recent supply chain disruptions have highlighted a need for businesses to better understand — and streamline — their supply chains.
“Managers everywhere should use this crisis to take a fresh look at their supply networks, take steps to understand their vulnerabilities, and then take actions to improve robustness,” Harvard business professor William C. Shih advised in the Harvard Business Review.
This article explains how supply chains work, the common causes of supply chain disruptions, and how businesses can navigate supply chain ups and downs.
A supply chain refers to the network of companies involved in the production and delivery of a product from start to finish. This network includes:
Companies that manufacture the materials used to make an item
Companies that create packaging
Supply chains are crucial for modern business because one misstep can result in weeks or months of delays — as many consumers have recently seen.
There are six common types of supply chain models, including:
Fast chain: Businesses with a shorter market lifecycle, such as fast fashion, often use this model. It relies on a heavy investment in advertising and fast-moving products.
Continuous flow: Established companies use this type to keep a steady supply of products on store shelves.
Efficient chain: Companies in highly competitive markets leverage this model to reduce waste and inefficiencies.
Agile: Niche organizations often use this type to ensure safe delivery, but it can result in higher costs.
Flexible: This supply chain model is easy to scale up and down based on seasonal changes.
Custom configured: This custom-designed model borrows features from other types of supply chain management, especially continuous flow and agile. It’s often used for prototype manufacturing or small runs of specialty products.
A supply chain is an interconnected series of organizations and people that turn supplies into products or services and deliver them to the end user. For example, the stages of a toy company's supply chain may include sourcing wood from a tree farm, turning it into lumber, carving and painting toys, creating boxes, packaging them, and delivering them to big-box retailers or e-commerce warehouses.
While the exact steps vary by company and product, the key steps include:
Sourcing Material: Finding the materials needed to create a product.
Refining/Manufacturing: Turning materials into items; may include several manufacturing plants.
Assembling: Putting the pieces (sometimes from different factories) together. This step may include logistics to deliver parts and packaging from various locations.
Selling: Marketing and selling of products to end users, which may include stores, consumers, or warehouses.
Delivering to End Users: This step may include organizing trucks, boats, planes, or other forms of transportation to deliver items to the end users.
In each step of the process, things can go wrong. For example, a global computer chip shortage stemming from a failure in the sourcing material stage has recently impacted the supply chains for tech gadgets, including cars, phones, and computers. Shipping issues and labour shortages have further exacerbated the issue.
A supply chain functions like a metal chain holding up a wrecking ball — if one link is broken, the entire process falls apart — and the consequences can be disastrous. And, like a rusted chain, the modern supply chain can have hundreds of weak links.
Let's consider the most common causes of supply chain disruption, then review strategies to prevent supply chain breakdowns.
Digital shifts and technological trends can have a strong impact on supply chains — even in areas less related to technology. For example, a shift to cloud computing may eliminate the need for physical servers managed by companies but could result in other problems such as labour disruptions.
COVID-19 highlighted the vulnerability of supply chains unlike any event in recent memory. Lack of labour, shifting consumer needs, and increased online shopping caused ripple effects that impacted supply chains worldwide. As our world becomes more connected, more global health crises may impact supply chains.
When companies can’t resource raw materials to make physical products, the consequences can be far-reaching. Shortages of natural resources, such as water, dramatically impact the supply chain. Natural disasters, war, and diseases in crops or animals can cause these shortages.
Many people think lack of supplies like wood, metal, or computer chips is the greatest danger to a healthy supply chain. In fact, labour supply can be just as devastating — if not more so. When companies don't have people to work in their factories, drive trucks, or stock shelves, the entire global supply chain can come to a grinding halt. Illness, economic factors, or a lack of knowledgeable hires can cause labour shortages.
An increase in inflation can reduce spending and raise interest rates. These trends can increase material costs and change consumer trends — which can have far-reaching consequences for global supply chains.
Natural disasters and political conflicts can destroy materials (including food) grown in limited areas. For example, Ukraine exports a lot of grain. With the country under turmoil, grain supply has been disrupted for many countries. Natural disasters can also disrupt oil production, which results in economic and supply chain issues.
To thrive on the ever-changing global stage, modern companies must prepare for supply chain issues before they occur. While predicting every global crisis or natural disaster isn't possible, these tips can help you create a more resilient supply chain.
The more links in your supply chain, the more vulnerable it is. Reducing inefficiencies and streamlining processes can reduce your exposure and reduce costs. For example, streamlining transport logistics means you’ll have fewer shipping companies to deal with, which can result in higher revenue.
A major cause of supply chain disruption is the inability to adjust to surges in demand. Imagine that a trucking company needs additional storage during the holiday season. Increasing the fixed storage capacity by signing a year-long lease for a warehouse may leave those buildings empty during the slower season.
However, if they rent portable storage units on a three-month basis, they can quickly (and affordably) scale storage up and down as business needs change.
Relying on a limited pool of suppliers can devastate your supply chain. Take, for example, the impact on the formula industry in the United States after one plant was shut down. While the shortage was the result of several issues, access to more suppliers could have alleviated the pressure. Protect your supply chain by sourcing additional suppliers now, so you know where to turn. Consider brainstorming supply alternatives, like the businesses that moved to selling chicken thighs when wings were more expensive and harder to find.
A flexible workforce allows businesses to easily adjust to changing business needs. Consider methods for making your workforce more flexible by sourcing freelancers or contingent workers and cross-training current employees. When things change — for example, if your entire warehouse crew catches COVID-19 — your organization will be able to quickly adjust to maintain operations.
Digital transformation is helping businesses automate rote tasks, which has supply chain benefits as well. When employees spend less time on manual tasks, they have more time for cross-training, researching suppliers, and spotting other inefficiencies in the supply chain. Digital solutions also provide access to more data, which you can leverage to spot business opportunities.
Despite your best efforts, some supply chain issues may be inevitable. When they occur, communicate with customers promptly and explain the issues. Outline the events that resulted in delays, what you're doing to prevent the issue from occurring again, and how your organization will make it right. Customers know some challenges are unavoidable and are more likely to be understanding when you notify them promptly.
With recent disruptions in global commerce, it’s more important than ever for business owners to effectively manage their supply chains. The tips in this article can help companies understand their supply chains better and learn to be resilient in the face of inevitable disruptions.