The supply chain is in a constant state of disruption. As we discussed on Supply Chain Chats, simple backup plans are no longer enough. In fact, you can look at recent events and determine if a backup is sufficient. Starting with the pandemic, of course, most if not all companies didn’t have a sufficient enough backup plan. On the other hand, those that consistently used their backup source of supply had a more successful conversation than those that just wanted the backup supplier to be there “in case”.

A Series of Supply Chain Disruptions Since the Pandemic

Since the pandemic, there has been a series of events in the global supply chain that demonstrate that a backup plan is no longer sufficient. A ship got stuck in the Suez Canal, creating a chokepoint in the global supply chain. The Russia-Ukraine war created supply chain disruptions and inflationary pressures in the energy, food, and commodities sectors. China’s zero-COVID policies created further supply chain disruptions as manufacturers shut down and logistics systems were disrupted.

There have been a series of supply chain issues, creating the obvious need to reevaluate sourcing strategies. Let’s assume you are a company in the East Coast of the United States. If you produce product in northeast Asia, it is likely you brought your goods through the Panama Canal (40% used this approach). The Panama Canal’s capacity has been reduced by around 50% as Panama started experiencing a drought, creating issues with the locks systems. This situation created a supply chain chokepoint and further exacerbated inflationary pressures. Some ships paid a million dollars to get to the front of the line. Bloomberg reported that one ship paid almost $4 million!

Companies found new routes to avoid these supply chain issues. One of the alternate routes was to go from northeast Asia through the Red Sea and the Suez Canal to the East Coast of the United States. As companies pursued this route, they ran into new challenges. Iran-backed Houthi rebels started attacking ships in the Suez Canal. In fact, they sunk a container ship. This high level of risk caused container shipping companies to divert around the southern tip of Africa which added two weeks to the trip and created inflationary pressures in the global supply chain.

Most recently, the Francis Scott Key bridge collapse caused the Baltimore port to shut down and impacted the region’s supply chain. As more and more disruptions arise, companies are searching for alternatives. Thus, the companies are rerouting from northeast Asia to the West Coast ports, and then transport the product across the U.S. via train or truck. Supply chains continue to evolve.

Current Tensions in the Global Supply Chain

The Israel-Iran war creates additional risk in the Middle East. Iran seized a container ship in the Strait of Hormuz. The Strait of Hormuz connects the Persian Gulf to the Arabian Sea. Over 20 million barrels per day of crude oil pass through this area which is around 20% of the world’s oil consumption. The Middle East accounts for 40% of global oil exports. Thus, a chokepoint in the Strait of Hormuz would create havoc in the energy supply chain.

Simultaneously, China is being aggressive in the South China Seas, potentially creating a chokepoint in the global supply chain. China has been doing military drills and being aggressive towards Taiwan. Taiwan produces 90% of the world’s advanced computer chips, and so they are of strategic importance. Recently, China has also been threatening the Philippines, causing additional tension in the South China Seas. It has been estimated that up to one third of the global supply shipping passes through the South China Seas. Not a small potential chokepoint!

Mitigating Risk

Companies are starting to catch on to the extreme risk in the global supply chain. If a backup to a backup is no longer sufficient, what will be enough? Additionally, if global conflict is at every corner, is that something we should rely upon in servicing our most important customers? Executives are rethinking the seriousness and likelihood of these risks occurring and are taking preventative actions to mitigate risk.

Perform a supply chain assessment of your situation. Are you too reliant on China? Do you travel through the South China Seas? Are you dependent on a potential chokepoint in the supply chain? Do you have a backup to your backup? At a minimum, a global dashboard of risks, disruptions, and options has become a necessity to monitor and mitigate risk in the supply chain.

SIOP: A Proactive Approach to Your Supply Chain

By seeing your demand and supply picture in advance with SIOP, you can get in front of your supply chain. Our best, proactive clients are using SIOP to forecast demand (by region, by product line, by market) and evaluate the best supply options for fulfilling that demand. Proactive clients are pivoting to a regional supply chain by expanding capacity, reshoring, nearshoring, and friendly-shoring techniques.

In addition, clients are evaluating a reallocation of capacity within their supply chain. For example, they could reallocate what they produce in their internal facilities and/or contract manufacturing facilities. A building products manufacturer continually evaluates what to produce in each facility to meet changing customer conditions while minimizing material and freight costs. They also evaluate whether to insource, outsource, change suppliers, or reallocate production among their options. The bottom line is to review the best way to fulfill their demand while maximizing their customer experience to support growth, increase profitability and accelerate working capital. 

Depending on these options, the global logistics infrastructure will evolve. For example, as a key client changed from internal operations for a key material to outsourcing to a supplier in India, their logistics needs changed dramatically and their expected inventory levels adjusted for the 13 week increase in lead time. These factors were included in the SIOP process and related metrics. 

SIOP: A Look Forward

In our book, “SIOP (Sales Inventory Operations Planning): Creating Predictable Revenue and EBITDA Growth“, we discuss how SIOP can support these types of improved results. The key will be aligning your end-to-end supply chain with your changing demand patterns and proactively addressing changing conditions and risks within your supply chain.

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