Bound in one chain - Neil Petrauskas, Khomutova & Partners

Chained by one chain

We all remember very well how, in the first months of the pandemic, manufacturers were at a loss to find those who could provide them with the necessary components, and retailers “suddenly” had empty shelves. Time has passed, and many manufacturers are still in prostration, and retailers still have empty shelves. The problem, in our opinion, is that the supply chains of the vast majority of companies are not being effectively adjusted.

If the problems at the very beginning of the pandemic were somewhat understandable - after all, the spread of Covid-19 became the most extensive pandemic in a century - then the latest problems are caused by a seemingly good development of events - the demand for almost everything is growing. But companies continue to tell customers that they should expect longer delivery times, higher prices, or even product replacements. The fact is that the chains were built for maximum efficiency, and for the most part they failed to rebuild. Supply chains can no longer function linearly, focusing solely on costs.

Due to the surge in cases of Covid-19 in various countries, it has prevented many companies from obtaining some of the main components. For example, the shortage of microchips has pushed manufacturers of various technology, entertainment and industrial products to their limits. Third-party logistics firms could potentially help companies experiencing supply shortages themselves have begun to experience similar difficulties. If people get sick at work, they can't produce the products they need, and if an outbreak occurs in a port or distribution center, no one can ship from there.

Another feature of the pandemic is that it has taken a large number of people out of the workforce: older workers who do not want to put themselves at risk, men and women who have been unable to provide child care and have been forced to stay at home. When there is not enough manpower, there are not enough people to unload containers. There is not enough manpower in the form of truck drivers to deliver goods. There are not enough people to store and distribute goods.

At the same time, there were structural changes in demand. Many people have moved from eating out to cooking at home, so the demand for grocery stores has increased significantly, while the demand for restaurant suppliers has declined significantly. Now the situation is beginning to change, but we do not know what will happen next.

The problems that the pandemic has exposed are too complex to solve here and now. Successful demand forecasting has always been a difficult task, and few people are good at it. Many companies that planned for a recession during the pandemic experienced a surge in the market, and some never experienced or even imagined such a surge in demand. In addition, those companies that survived the pandemic are showing strong resilience in 2022.

The problem is that supply chains for many companies are not flexible. While companies are still operating on a Just-In-Time basis to reduce excess inventory and save costs when demand is stable, they have learned a hard lesson when demand has fallen and surged over the past years. Some companies are now reverting to decade-old supply chain models, believing that the cost of adding more inventory to the system is better than facing a debilitating crisis. The lack of any component always leads to the failure of the just-in-time delivery.

In this sense, companies need to better plan for likely scenarios and accurately imagine what the supply chain will need to function well under different circumstances, and adapt their processes accordingly. At the same time, company leaders need to make sure that supply chain managers not only have a wealth of experience, but also the ability to change business models and other aspects of corporate strategy. End-to-end reorganization of deliveries is necessary.

So, for example, a tactical decision at the company level could be to reduce the assortment diversity, even to the detriment of marketing goals. And one of the global solutions could be the consolidation of these ports and logistics centers, which allows real-time tracking of the location of goods throughout the supply chain - from production to delivery of goods to the client.

Overall, the logistical crisis provided valuable lessons on how to strengthen this system in the future.

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