Why is the Supply Chain Broken?

Written By: Eric Kimberling
Date: December 3, 2021

Supply chains throughout the world are broken, but why?...

What are the things that are causing these constraints and bottlenecks that we're seeing right now? In some of our most recent blog posts about this hot topic, we have gone over The Top 10 Supply Chain Management Trends For 2022 and Top 10 Supply Chain Systems where we provide an overview of trends for the future and the supply chain systems that work best for your company.

But now, let’s dive a little deeper.

One of the key challenges that organizations face today is the fact that supply chains are broken and unreliable. It's a topic that is top-of-mind for business leaders, politicians, news media, and academics who are studying and, honestly, obsessing over the fact that supply chains are fragmented.

This disruption affects our day-to-day lives as consumers. We're seeing shortages of products, delays on orders, and businesses are struggling with these same challenges as well.

Now for this blog, we want to answer the burning question on everyone’s mind, why exactly are the supply chains broken? A good place to start is the root cause analysis of why the supply chain is so broken, globally. And more importantly, what can we do to fix it?

Labor Shortages

One of the source causes of why the supply chains are broken today is because of labor shortages. Labor markets throughout the world are very uneven at best and in some countries, there are labor shortages, in terms of not having enough labor to fill key roles and positions within suppliers and other aspects of the supply chain.

In other cases, however, there's not the right skill set or the right education levels for resources.

Less often, but still happening, is that there are also government incentives to keep people from working, unintentionally so. For example, in some countries such as the United States, the governments are offering incentives or paychecks basically to people not to work as part of the pandemic recovery. That has an inadvertent consequence of disincentivizing people from working, and that's certainly affecting supply chains throughout the world.

One of the key things that supply chains need to get back on track is to have the right staffing levels throughout the entire supply chain. As you can imagine, when one domino falls in one part of the supply chain via a labor shortage that affects the rest of the supply chain, that has a big domino effect of challenges.

Human Capital Management is something that is going to be very important to supply chains in the 2020s to get the supply chains back on track. Why? Human capital management Is a technology that helps HR departments automate their business

processes and it also supports employees in taking control of their personnel files. Once automated, things can get back to normal.

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Focusing on the Wrong Objectives

One of the underlying key challenges of supply chains is that they are focused on the wrong objectives. Supply chains were built prior to 2020, when the pandemic hit and when the supply chains realized a major disruption to the way they operated. With that, in the past, supply chain management, and the whole discipline of supply chain management tended to focus 4 key things:

  1. How do we optimize cost?
  2. How do we reduce cost?
  3. How do we increase efficiency?
  4. How do we create a just-in-time inventory system to support the supply chain?

It is important for it to be focused on efficiency and throughput, but now in the 2020s, with the way customer demands, regulations, and disruptions to the world has changed the way supply chains need to operate. Cost suddenly isn't quite as important as it used to be and, in the end, we've got to think about other objectives in addition to the cost.

We have to balance out the need to optimize cost with the need for flexibility, for example. How can we respond quickly to macroeconomic or pandemic-related issues, or just general issues that might disrupt the supply chain? We need to build that sort of flexibility into supply chains in a way that hasn't been done in the past.

Another consideration is the fact that a lot of organizations now are thinking about sustainability, and the impact that supply chains have on the climate. It's not enough just to say we found a low-cost supplier to fulfill our supply chain needs, now it's a matter of looking at costs, but also looking at things like the ability to support flexibility and sustainability.

Many organizations that place a premium on the focus on climate change, or in some cases government regulations, which ultimately affect the types of suppliers we work with. It is important to make sure that we have the right objectives as a supply chain management function. In the past, that historically has not been a consideration.

Now in the end, supply chains need to make sure that we have the right products to the right customers at the right time. In the past, that may have sounded like a no-brainer, or sort of been a given, but that's exactly what supply chains are struggling to do right now; getting the products to the customers at the right time and manufacturing the products in time to get those products to the customers.

That's some of the objectives that now need to be incorporated into your overall supply chain management strategy. These tactics were certainly not nearly as important in the past as they are now in a post-pandemic world.

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Diversification

If we learned one thing in the 2020s so far, it's that supply chains have a very concentrated level of risk. What I mean by that is we've depended on the same suppliers to provide key resources, raw material inputs, and sub-assemblies into our products. We've also relied heavily on single 3PL providers to provide logistics for our organization or perhaps, we've relied on a single port for overseas products coming into your given country.
In the past, that may have worked perfectly fine, in a very predictable stable world but now we're living in an unpredictable, less-stable world that requires a lot more flexibility, and decentralization of risk.

Rather than being overly dependent on one raw material or 3PL provider, we now need to look at what are our backup plans? How do we diversify our risk? How do we hedge our risk to make sure that anyone disruption in the supply chain isn't going to completely throw off the rest of the supply chain?

For example, in the United States where Third Stage Consulting is based, some of the ports in California have realized extreme bottlenecks, and a lot of organizations have always depended on those ports in California for the products to come through. However, now to get products in a timely manner, organizations need to be thinking outside of the California ports.

Even if you are a west coast organization, you might need to look at the east coast, and looking at some of the ports that are available to you there. You can then start shipping the product via land to get them where they need to be.

That's just one of many examples of how that concentration of risk has created a lot of problems and caught a lot of supply chains flat-footed and unable to cope with the current environment. Going forward, organizations need to focus on how to ensure flexibility, and with that, neutralize some of those risks that we see in certain dependencies on sole suppliers.

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Supply Chain Data

Another challenge with supply chains is a lack of visibility into what's happening throughout the supply chain. That begins with the raw materials that go into the production of your product. That also continues into the sub-assemblies or the major components that you might be procuring for your product. It goes into things like your manufacturing, warehouse, shipping, logistics, all the procurement processes that support those processes, and ultimately distribution to your end customer. This visibility is very important. It sounds simple and basic, but a lot of organizations don't have the insight into their full supply chain operations.

Even if we look at just our own supply chain, we also must look outside of our supply chain as well. We need to look at our end customers and understand demand forecast, purchasing patterns, and anticipated demand.
On the supplier side, we aren't just looking at the immediate suppliers. In some cases, we need to look beyond our immediate supplier and look to the suppliers’ suppliers. If there's raw materials that are being provided to a vendor or supplier that's a component that's semi-finished, we need to understand what availability we have on the raw material side which might be two tiers removed in the supply chain.

This not only pertains to understanding and having visibility into our immediate supply chain, but even layers outside of that supply chain as well. The better visibility we can get into that, the more effective we're going to be in planning and executing our supply chain management strategies for the 2020s.

Technology Limitations

Now, so far, I've talked about four limitations and problems with supply chains, and those four things all tie back to a fifth one, which is technology limitations. A lot of organizations don't have the right technologies, software, applications, automation, predictive analytics, and tools to be able to have all the things that I just mentioned. That needs to change to fight this supply chain crisis.

For example, a lot of organizations now are finding that by deploying supply chain management automation, and by supplying artificial intelligence technologies, is one of the best ways to mitigate the other four risks mentioned above. Now is a great time to leverage technologies to help support any risks and vulnerabilities within your ability to produce products.

This pertains to not only supply chain management technologies, but also to enterprise resource planning. It also relates to CRM systems in ensuring that your sales force has automated processes and that we're centralizing that capturing of data so that it can feed into our supply chain planning processes on the CRM side.

Similarly, on how we talked about labor shortages, human capital management technologies can be a great way to ensure that we mitigate some of those labor shortages. Attract and retain the right talent to ensure that we don't continue to experience resourcing issues.

These are just a few examples of how technology can help mitigate some of the challenges that we've talked about so far here today. Now, I hope this has provided you with a good overview of how supply chain management and supply chains, in general, are struggling in the 2020s. I hope it's also provided some insights as to how you can improve those supply chains in the future.

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Resources

Now, for more information on how you might transform your organization via digital transformation, I encourage you to download our annual 2021 Digital Transformation Report, which contains top-10 rankings of supply chain management systems, as well as other types of enterprise technologies. It also provides some best practices to help you ensure that you're going through your digital transformation in a way that's going to be successful for your organization. I encourage you to download that report.

I hope you found this information useful and if you have questions regarding more about the supply chain crisis or anything related to your digital transformation initiatives, please don’t hesitate to reach out to me directly. I am happy to be an informal sounding board as you move through your digital transformation journey.

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Author:
Eric Kimberling
Eric is known globally as a thought leader in the ERP consulting space. He has helped hundreds of high-profile enterprises worldwide with their technology initiatives, including Nucor Steel, Fisher and Paykel Healthcare, Kodak, Coors, Boeing, and Duke Energy. He has helped manage ERP implementations and reengineer global supply chains across the world.
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