ALOM is a global leader in supply chain management serving as a strategic partner to our customers by expertly and seamlessly conducting their key business functions from manufacturing to marketing.
Near Term Strategies to Balance Supply Chain Risk
July 28, 2022
By Hannah Kain, ALOM President and CEO
Supply chains are causing so much disruption that only the brave among us dare confess to being a supply chain professional in social connections, lest you get “the look”. Clearly, you are singlehandedly responsible for all the disruption, the late products, and the increased prices.
Reality is that each of us have limited powers to prevent disruption, except in our own supply chains where we are pulling out every trick in the book. We can de-risk the supply chain, do meticulous planning including mitigation plans, contingency suppliers, buffer stock. Yet with all of the above, we cannot accurately foresee wars, embargoes, sanctions, and other disruption factors. With supply chains on edge, it does not take much to cause additional upheaval.
Right now, two countermeasures are proving very popular and effective: Increased buffer stock and near-sourcing.
Let’s face it: Many companies overdid lean. It frankly became anorexic. Without risk mitigation, this was always a tenuous proposition. As that lesson got absorbed in all parts of companies, from the C-suite corridors to the janitor’s closet, everyone became intent on buying up so much inventory to be on the “safe” side. In a previous blog I wrote about this phenomenon, called the Whiplash or the Bullwhip Effect. Companies run the risk of over-ordering. U.S. companies, in particular, must worry about whether they are overstocking in an environment where consumer spending may slow, and economic recession is a growing concern.
Building up inventories carries a high risk of obsolescence. It ties up valuable cash. It also requires space, which is why warehouses today are overflowing, especially around our ports, with over 99% of warehouse space occupied in most markets, before the holiday season has even begun.
Just a couple of months ago, these problems may have seemed far out, while the risk of shortages seemed very immediate. However, as many companies realize now, getting the balance between overstocking or running out exactly right may be the biggest tactical challenge facing supply chain professionals.
Often, we can mitigate this risk with nearsourcing. Having our Tier 1 suppliers close to our markets or consumption of products will eliminate some of the risk related to transportation, border crossings, and time delays. It is also more sustainable, cutting down on transportation cost and pollution. For U.S. markets where local suppliers are subject to environmental regulations, it may also increase sustainability in the production of goods. In fact, right now over 60% of U.S. corporations are considering nearsourcing/reshoring as one of their most important strategies to overcome supply chain disruption.
The risk of nearsourcing is not zero; on the contrary. Our Tier 1 supplier still needs to buy components and raw materials, and much of that will no doubt be imported from overseas. We now need to perform good governance to ensure that our local Tier 1 suppliers manage their supply chain risk. For instance, in the ongoing paper crisis – where packaging materials and paper are expected to be in short supply until at least the end of 2023 – we have seen components not ship because of a shortage of master cartons or other packaging materials – all the way down to labels. When raw materials are affected, all you can do is to increase inventory and follow the market closely. That’s why we – in spite of using local suppliers – bought packaging materials to last as a six month buffer to ensure that our clients’ products can ship uninterrupted. We must identify and mitigate the tier 2-4 risk.
Most corporations are more concerned about whether they can find a local ecosystem of suppliers with capabilities and capacity to take on the orders. In fact, 63% of corporations identified these issues as their main nearshoring concern in a recent BCI survey.
For those of us running production equipment, we are also affected by spare parts and supplies to keep the equipment running. The same governance must be applied to our local suppliers. We may be willing to pay more to eliminate risk or shorten lead times; however, if after paying more, the risk and long lead times are still there, then we may justifiably feel cheated.
Some of the world’s most sophisticated supply chain organizations are now working on quantifying risk, such that a better decision can be made as to total landed cost of a distance-sourced vs. a nearsourced component.
With corporations reporting supply chain issues as one of the main drivers of their financial performance, there is intense scrutiny on both immediate mitigation and long-term planning. There are some real opportunities for strategic improvements. For most corporations, nearsourcing becomes a long-term strategic prospect as they attempt to grow a supplier ecosystem in proximity to their facilities. For now, we are seeing inventory buildup with generous safety stock. It feels like it is about to take up every single pallet location in the U.S. Each supply chain professional must decide what is worse: too much or too little.