More businesses are focusing on supply chain resilience after recent global disruption, withmany putting pandemic-driven upgrades in place to mitigate future risks. However, currentlevels of supply chain stress and disruption remain far higher than they were before thepandemic. The combination of residual pandemic-related issues and new triggers now includeslabor shortages, transportation bottlenecks, cyberattacks, extreme weather events andinflation. All of these pressures and more are compounded by unpredictable market demand.So, the question is: What fresh disruption will tomorrow bring, and how should your businesshandle the challenge?
What Is a Supply Chain Disruption?
A supply chain includes the network of people andcompanies that create a product and deliver it to a customer. A supply chain disruption isany circ*mstance that interferes with a company’s flow of production, sales anddistribution. Disruptions are the bane of supply chain management and can cause significantharm to a business by slowing shipments, degrading product quality, increasing costs anddamaging brand reputation.
At the height of the pandemic, supply chains captured the media spotlight when they brokedown, leaving grocery shelves empty as many products, from toilet paper to meat, were hardfor consumers to come by. Delivery schedules were fraught with delays, stretching far beyondcustomers’ level of tolerance. As some of the shipping problems, ransomware attacksand other supply chain issues that plagued businesses between 2020 and 2022 have abated— although they have not completely disappeared — other challenges have arisen,such as oil price spikes and computer chip shortages. Supply chain–risk monitoringcompany Resilinc estimates that supply chain disruptions increased nearly 50% in the firsthalf of 2022, compared with the same period in 2021.
Supply chain problems can have a severe impact on businesses, often damaging their overallperformance. To reduce risks and mitigate the impact of disruptions, companies may employ avariety of supply chainstrategies, including preparing backup-supplier arrangements, geographicallyrestructuring supply lines and increasing inventory levels. Digital technologies supportthese strategies by enhancing supplier networking, visibility and analytical capabilities,allowing businesses to closely monitor their supply chains, detect potential problems andmake contingency plans to avoid costly headaches.
Internal vs. External Risks
Some supply chain risks areinitiated within a company, and others come from outside influences that disrupt operationseither directly (via a company’s tier 1 suppliers) or indirectly (due to asupplier’s suppliers at tier 2 or beyond). The current semiconductor shortage presentsa prime example of a breakdown in a multitiered supply chain: An automaker can’t makeenough cars when its (tier 1) supplier of engine management systems is delayed because a(tier 2) maker of fuel injection modules can’t get enough chips from its (tier 3)semiconductor supplier. A midsize company may have anywhere from a handful of suppliers todozens of them at different levels of its supply chain and, therefore, may be susceptible toboth internal and external risks.
- Internal risks. Internal issues may arise in the C-suite when a newbusiness strategy or reorganization fails to consider supply chain implications. Moreoften, the roots of disruption can be traced to a procurement office or other supplychain management function, which may suffer from poor inventory management, neglected supplierrelationship management, lack of contingency planning or insufficient visibilityacross the supply chain.
- External risks. The list of external risks is long: hurricanes,ransomware attacks, blockages at ocean ports, geopolitical conflicts, demandfluctuations and more. Events like these can be more challenging than internaldisruptions, since they often fall outside a company’s control, such as apolitical crisis in a different country that supplies products to a business. The tierednature of supply chains also increases a company’s exposure, particularly when thesupply chain crosses international borders. It takes a concerted effort to keep on topof suppliers feeding into your operations at tier 1, tier 2, tier 3 and beyond. Andthere’s only a 50-50 chance that any of these suppliers have measures in place tomitigate their own disruptions, according to the Business Continuity Institute (BCI),which helps explain why about one in 10 companies experienced more than 10 disruptionsin 2022.
Key Takeaways
- Supply chain disruptions have been accelerating in recent years, creating ongoingchallenges for supply chain managers.
- The causes of disruption vary widely, from labor shortages to extreme weather, and manyissues are increasing in intensity.
- Supply chain disruptions can hurt businesses in a variety of ways from the top line tothe bottom line — for example, by slowing shipments, degrading product quality,increasing costs and damaging brand reputation.
- Lessons learned, improvements made and digital controls implemented during the globalpandemic are now being applied across newly emerging disruptive events.
The Impact of Supply Chain Disruptions
Many C-suites and boards of directors consider supply chain disruptions a major risk tobusiness. One consequence is an inability to manufacture at full capacity. In fact, 23% ofcompanies surveyed by the Federal Reserve indicated that their supply chains represented asignificant manufacturingconstraint in the fourth quarter of 2022.
Another way to understand the impact of supply chain disruptions is to look at what happensin a worst-case scenario. When a giant cargo ship blocked the Suez Canal in March 2021, itshut down a trade route that typically carried $9.6 billion worth of shipments every day.Delayed and rerouted cargo included everything from wine to car parts, affecting a widearray of industries from the restaurant business to auto repair shops. Once unblocked, theship and its thousands of tons of merchandise were then impounded for three months due tolegal issues, which experts say caused global supply chain repercussions for companies morethan a year later.
Supply chain disruptions have wide-ranging impacts, from increased costs and canceled ordersto reduced business profitability and diminished company valuation. For example, the shareprice of a major auto manufacturer plunged after it warned that chip shortages would forcethe business to miss production targets. Here’s a look at some specific disruptionsand their effect on various markets.
Types of Supply Chain Disruptions
Stress on the global supply chain remains high, according to the Association of Supply ChainManagement’s (ASCM’s) Supply Chain Stability Index. Here are six reasons themarket continues to experience disturbances: the COVID-19 pandemic, natural disasters andextreme weather, labor shortages, transportation delays, price volatility and cyberattacks.
Global Pandemics
Global pandemics, such as the COVID-19 pandemic, can disrupt the entire supply chain due toeverything from shortages of raw materials to changes in consumer behavior.
The memories of severe COVID-related shortages remain fresh as businesses work to preventsupply chain disruptions: “Companies saw what was happening and tried to front-loadtheir orders to get ahead of delays,” said Matt Mendez, supply chain manager,Physicians Choice, a dietary supplements brand. “Increased demand, paired with adecrease in supply from the virus, resulted in massive lead times and stockouts for certainraw materials.”
Some of the pandemic’s negative effects on supply chains, such as creatingtransportation bottlenecks, have been receding — but not entirely. Many companies thatsurvived this complex turn of events have shifted from prioritizing lean, “just-in-time”operations to adopting more agile approaches to attain greater supply chainresilience.
Some companies have “reshored” offshore sourcing arrangements, bringing supplierscloser to their home bases. To increase agility, many companies are leaning more heavily ondigital controls, for example, and are beefing up inventory to better withstand shortfalls.However, experts warn against complacency, saying that company officials need to rememberlessons learned during the pandemic if they hope to face the growing severity of challenges.
Natural Disasters and Extreme Weather
Over 40% of companies include natural disasters and adverse weather events among their topfive supply chain risks for the coming five years, according to BCI. Extreme weather events,such as heat waves and large storms, are likely to grow more frequent and intense, accordingto the U.S. Environmental Protection Agency. And too many supply chain managers have alreadyexperienced factory floors flooded by hurricanes, ocean ports closed by freak winter storms,highways blocked by wildfires or food supplies decimated by drought.
Companies that take precautions stand in better stead. A Harvard Business Review case study,for example, describes how a major coffee producer used satellite imagery to locate its NewOrleans production facilities well above sea level, enabling it to restore operations morequickly than other businesses after Hurricane Katrina in 2005. Advance planning andpreventive measures like these need to be supplemented by early-detection systems. Somecompanies use artificial intelligence(AI) to scan climate news and predict events, while others purchase feeds from riskanalytics services. For many supply chain managers, weather data provides the impetus forcreating detailed contingency plans.
Labor Shortages
Both the BCI report and ASCM’s Supply Chain Stability Index list labor shortages as atop issue that is hindering supply chains today. Truckers are in short supply, leading totransportation delays. Unfilled jobs on factory floors have contributed to rising accidentrates. Within the supply chain function itself, Gartner has reported that only 27% of chiefsupply chain officers (CSCOs) believe they have the employee talent needed to keep supplychains performing well.
Automating supply chain processes can help by freeing the current workforce frompreoccupation with many tedious manual tasks related to monitoring the supply chain andgiving them time to take on more complex and satisfying work that allows businesses toretain employees.
Transportation Delays
While labor issues rank as the No. 2 stress in the Supply Chain Stability Index,transportation and logistics problems are No. 1. Labor and transportation issues arerelated, of course. Plus, driver shortages are compounded by higher energy prices forshipping products and more delays due to weather or customs holdups at border crossings.
“Effective inventory management has never played a more critical role,” accordingto the index’s authors. Ensuring uninterrupted deliveries requires inventorymanagement that is integrated across sales, operations, procurement and other relevantdepartments, they advise.
Price Volatility
As interest rates have continued to rise, inflation is a question mark hovering over everythingfrom customer demand and labor costs to purchasing power and inventory financing. Energyshortages and their related price spikes are also listed as one of the top five supply chainissues in the BCI report.
To keep close tabs on costs, experts suggest leaning more heavily on digital technologiesthat will increase visibility, accelerate planning exercises and provide predictiveanalytics to prepare for impending price hikes.
Cyber Attacks
Supply chains have increasingly become exposed to more and more sophisticated cyberattacks.Supply chain breaches increased dramatically in 2022, as cyberattacks accelerated as well.Cyberattackers often break into smaller companies in a supply chain in an effort toultimately reach a big buyer as their main target.
In the BCI report, cyberattacks and data breaches were ranked as the top threat to supplychains in the coming months, as well as over the next five years. In addition to protectingemployees, customers, platforms and data from cyberattacks by boosting cybersecuritytactics, companies need to collaborate more with supply chain partners and implementthird-party risk management procedures to ward off attacks.
How to Handle Supply Chain Disruptions
Experts today acknowledge the rough terrain that supply chain managers find themselvestraversing. For example, ASCM refers to “the Great Supply Chain Disruption” inits outlook for 2023, while Accenture notes that the supply chain is undergoing “aperpetual storm of disruption,” and Gartner calls disruptions both“omnipresent” and “unpredictable.”
Having a plan to handle disruptions is essential. KPMG management consultancy advises that“when disruption is constant, an organization’s preparation for key supply chaintrends can be a significant competitive advantage.” So, what are best practices forestablishing and running resilient supplychains that can overcome disruptions?
1. Identify potential risk factors.
Supply chain managers need to create a structure for tackling supply chain disruptions, andthey can start getting organized by cataloging and addressing known risks. Classic supplychain risks, such as supplier bankruptcies, can be more easily measured and managed thanless familiar sources of disruption. To assess exposure, a supplier’s financialhistory can be combined with knowledge of the product lines in a company that rely on thatsupplier’s solvency. Certain unknown risks, on the other hand, can be moving targets.Today, for example, unpredictably rising interest rates can have an insidious impact on thecash a company has tied up in inventory. At the same time, companies can help lift thecurtain on the unknowns by taking advantage of a variety of tactics, such as employingpredictive analytics, what-if scenarios and estimations of value-at-risk.
Identifying risks in advance is one thing, but supply chain managers also need to put digitalsystems in place to detect disruptions that are unfolding in real time.
2. Develop a contingency plan.
A world of risks requires agile supply chain operations that are based on alternative supplierrelationships and other short- and long-term strategies to avert problems andremediate any that do occur. A basic contingency plan would map out a series of steps, fromidentifying the cause of a disruption to prioritizing critical operations, rebalancinginventory, shifting orders to alternative vendors and communicating plans to stakeholders. Akey proviso is that contingency plans need to be routinely reviewed and updated, or they maynot be useful enough when they’re needed most.
3. Monitor and analyze your supply chain data.
Visibility clears the path touninterrupted supply chain operations. Company executives surveyed by PwC cited cloudcomputing and the Internet of Things (IoT) as the top two technologies improving visibilitytoday.
To gain visibility, companies use digital tools, such as scanners, to derive tracking andmaintenance data from myriad IoT devices on trucks, in warehouses and on the factory floor— then enable analysis of that data via cloud-based networks. Layering on software,such as demand planning and inventory managementapplications, helps to complete this picture for Beekman 1802, a skin care company. “We knowwhen we’re going to be out of stock, and we have mechanisms to reach out to suppliersand expedite things,” said COO Tomei Thomas.
4. Implement automation solutions to help manage disruptions.
With the ability to monitor every stage of the supply chain process, companies can increase efficiencyand avoid unnecessary costs. In a warehouse, for example, sensors can track inventory levelsand automatically reorder supplies when they reach a set threshold to avoid stockouts. Whilein transit, sensors can report the location and condition of goods, allowing companies toreroute orders, if problems arise, to avoid delays.
In the back office, robotic process automation can help prevent ordering mistakes by reducingthe errors associated with manual data entry. Many companies have begun to deploy AI toenhance the predictive capabilities of automated functions, like reordering and reroutingproducts. Amid labor shortages, some companies are using robots that can pick products offshelves and pack shipments in the warehouse. Delivery drones are also being tested in somecities.
Over three-quarters of economists see businesses optimizing their supply chains in these andother ways, according to a World Economic Forum outlook for 2023.
5. Strengthen supplier relationships.
Suppliers shouldn’t be viewed only as potential sources of risk but should also betreated as allies in avoiding disruptions. “Make sure you’re developing thoserelationships constantly,” said Tiffany Krumins, founder of Ava the Elephant,a maker of interactive medication dispensers for children that is now part of Better Family.
A recent Gartner survey showed 77% of chief supply chain officers were working to improvecollaborative relationships with key customers and suppliers. For example, some companiesare developing shared inventory-hedging strategies to secure supplies, decrease lead timeand reduce risk. Others have found strength in building relationships with a diverse group ofsuppliers, such as minority- and women-owned businesses, that are introducing newapproaches to agility and resiliency against disruptions.
While many companies are making strides toward managing supply chain disruptions, more workremains to be done. For instance, only about half of companies actually check and validatetheir suppliers’ business continuity plans, according to BCI. And only about a thirdof companies in the PwC survey are using digital collaboration tools with suppliers, puttingthem on the road to the ultimate digital supply chain ecosystem that is envisioned as a bestpractice.
Manage Your Supply Chain Regardless of Disruptions With NetSuite
NetSuite’s supply chain managementsoftware aims to keep operations running smoothly, ensuring that all workers andmaterials are available at the right time and place. NetSuite procurement capabilities driveaccuracy throughout the purchasing process while supporting collaboration with suppliers. Inaddition, integrated demand planning, inventory managementand predictive analytics optimize supply chain strategies and streamline tasks to ensurethat supply plans are executed without disruption and products are delivered as promised.
The bottom line? As Michael Card, vice president of finance for Crumbl Cookies, put it: “We’ve beenable to increase profitability by improving visibility into inventory value, days on handand other critical information with NetSuite.”
Supply chain disruptions have become a permanent fixture of supply chain management.Disruptions can be caused by a range of factors, from labor shortages to extreme weather,and these challenges are only increasing in frequency and intensity. Their impact can befar-reaching and damaging, affecting everything from shipping time to product quality, costand brand reputation. The global pandemic has provided businesses with important lessonsabout the need for agile operations, catalyzing improvements in strategies, tactics anddigital controls. As companies apply these mechanisms to prepare for and mitigate the impactof new and different disruptive events, businesses are building the resilience they need toremain competitive in today’s volatile marketplace.
#1 Cloud ERP
Software
Free ProductTour(opens in a new tab)
Supply Chain Disruption FAQs
What are some of the consequences of supply chain disruption?
Supply chain disruptions can do plenty of harm in a lot of ways. For example, disruptions canlead to increased costs, canceled orders, damage to a company’s reputation, reducedprofits and a lower share price on the stock market.
What are some tips for reducing supply chain disruptions?
Best practices in supply chain management call for a five-step approach to avoidingdisruptions and their worst impacts:
- Know your potential risks.
- Have an up-to-date contingency plan in place.
- Deploy monitoring tools and run analytics on your supply chain data.
- Automate to mitigate disruptions.
- Strengthen your supplier relationship management system.
What are some predictions for the future of the supply chain?
Experts predict that the risk of supply chain disruptions will increase, since pressures dueto extreme weather, price volatility, labor shortages and cyberattacks may continue to growin frequency and severity in the years ahead. Experts say companies working to optimizetheir supply chains now will handle future risks more effectively.
How do you handle supply chain problems?
It’s best to handle supply chain problems in close collaboration with suppliers, usingshared, real-time tracking and visibility tools to identify the root causes of anydisruption, find alternative transportation or warehousing options and take other necessarysteps.
How do you address a supply chain disruption?
A basic contingency plan for a disruption would outline a sequence of actions: identifyingthe root cause of the problem, prioritizing crucial operations, readjusting inventory,transferring orders to alternative suppliers and informing stakeholders of the situation.
How can you reduce the risk of supply chain disruptions?
Visibility is a key factor in reducing the risk of supply chain disruptions. To gainvisibility, companies can collect and analyze data from across their supply chains viacloud-based networks. For example, tracking data from Internet of Things devices on trucks,in warehouses and on factory floors feeds into inventory management software to moreaccurately predict potential disturbances in the supply chain.
What are the five operational strategies for managing supply chaindisruptions?
Here are five operational strategies for avoiding supply chain disruptions and mitigatingtheir adverse effects:
- Identify long-term, short-term and immediate risks.
- Develop a contingency plan.
- Leverage digital monitoring and data analytics tools.
- Automate operations to reduce errors and speed response.
- Collaborate closely with suppliers.
