When Systemic Risks Collide: Why Supply Chain Issues Are The New Normal

Before March of 2020, “supply chain issues” was a term we’d hear after a natural disaster or labor strike – that all ended the moment we ran out of toilet paper. Unquestionably, the supply chain crisis has been a secondary theme of the pandemic, one that continues to escalate.

Source: When Systemic Risks Collide: Why Supply Chain Issues Are The New Normal

For the 15 months since the world went into first wave lockdown, shortages of cleaning supplies and home office technologies quickly turned into delays and ultimately scarcity for appliancesautomobilesfuelfood,  and many other items. With each fresh news cycle, more companies reveal that disruptions in their Tier 1 or downstream supply chains are leading to new shortages. And it’s not likely to get better for a while. Why? Systemic risk.

Supply chain isn’t a single process but rather, a complex system of interconnected and interdependent relationships. As such, disruptive events (e.g. droughts, trade wars, bankruptcies, and cyberattacks) resulting from systemic risks can trigger a domino effect up and down the supply chain, even causing adjacent industry failures. Systemic risks don’t take turns; they often trigger one another and can materialize all at once. To “fix the problem,” businesses must understand The Top Systemic Risks, 2021, shaping global supply networks, and create strategies and processes to bolster business resilience, even when systemic risks collide.

Here’s a look at some of the systemic risks events shaping global supply chains and what business, security, risk, and supply chain leaders can do about it:

1. Firms vying for coveted semiconductor chips prepare to wait

What’s going on: Semiconductor chips are a basic ingredient in many products from automobiles, home appliances, consumer electronics, medical devices, farm equipment, and even toys.  While the demand for “smart” products has skyrocketed, the supply for chips is stuck at a hard limit and further exacerbated by chipmakers’ own supply constraints – if you can’t get aluminum, you can’t make chips; if you can’t get sand (raw silicon), you can’t make chips. Naturally, chip prices have increased – if you can even find them. Also, the impact of the chip shortage is hitting corporate IT hard, as data center equipment, cloud services, PC, and even Apple struggle to get these essential parts. The chip crisis is so bad for some smaller manufacturers that they are struggling for sheer survival. Larger companies are hurting too, but they are better able to absorb the disruptions.

What to do about it: Although chipmakers are increasing capacity substantially, this supply repair process will take a minimum of two years to materialize, and an ample supply of chips will not come until well into 2023.  Manufacturers will need to plan to pay more for chips (if they can even get them) and raise their own prices or redesign their products to use alternative chips – which adds even more delay and cost.  In the meantime, technology buyers will need to be flexible, patient, and improvisational. Firms that don’t build chip-based products of their own will have little power to modify the silicon supply chain and should plan for long delays and consider alternatives (e.g., PC model A versus PC model B).

For more information on the semiconductor chip shortage, contact Glenn O’Donnell, Vice President, Research Director.

2. Bots – automated software programs – exploit supply / demand imbalance

What’s going on:  Online retailers already contend with bots snagging up popular, hard-to-find products like gaming consoles and limited-edition sneakers, frustrating legitimate customers who can’t buy the products that they want and end up paying a premium on resale sites. In the spring of 2020, it was toilet paper and hand sanitizer. Last holiday season, it was the PS5. This year, anything that doesn’t make it onto shelves could be a beacon for the bots – which means that people already paying higher prices for food and gas may be forced to pay markups for hard-to-find hot gifts or everyday essentials. As supply chain disruptions continue, be prepared for bot operators to take advantage of any shortages.

What to do about it: The good news is that retailers can mitigate this risk to their customers with effective bot management tooling – as you anticipate upcoming shortages, expect bot activity to expand. The eCommerce, marketing, supply chain, and security teams must collaborate closely to understand what inventory may be at risk and implement appropriate bot protections.

For more information on Bot management, contact Sandy Carielli, Principal Analyst.

3. Global containers are still recovering from chaos in the Suez Canal

What’s going on: Managing container inventory is a growing challenge. Since the pandemic, changes in consumption and shopping patterns, including a surge in e-commerce, had already increased import demand for container shipments of consumer goods to North America and Europe.  In addition, new markets for Asian manufactured goods require more ships for a weekly service, which in turn means yet more containers on the high seas. Compounding the problem, the global container circulation had still not recovered from the recent Suez Canal blockage. Ports also blamed the container shortage on delays in returning containers, ‘ship bunching’ (this is a function of stopping the world economy then restarting, like the bunching of city buses after a traffic accident), slow turnaround of vessels, and containers from the US and Europe.

What to do about it: To maintain service to your customers, you can either pay a premium for flexibility or to secure priority access to space and equipment (think Amazon Prime), or you can plan ahead (at least four weeks in advance) and minimize changes. Also invest in forecasting and leverage carriers’ and freight forwarders’ APIs or portals, to streamline communications. Finally, consider rethinking your business model from variable to fixed transportation costs to minimize uncertainty.

For more information on supply chain transportation and logistics, contact George Lawrie, Vice President, Principal Analyst.

4. Manufacturing hiccups trigger global concern

What’s going on: A quick glance at the news headlines might give the impression that the manufacturing sector – and its supply chain – is totally broken. And yet, the system keeps working. The challenges facing manufacturers are individually serious and collectively painful, and must be addressed, but many manufacturers are doing an excellent job of responding in ways that minimize the short-term impact while positioning themselves to emerge strongly as the situation stabilizes. Toyota made headlines with news that the car maker planned to cut global production by 40%. Rather less widely reported was the follow-through: The BBC, for example, buried “The aim for Toyota as a whole is to make up for any lost volume by the end of 2021” quite deep in their article.

What to do about it: In the short term, manufacturers can reduce variation and complexity in their products, direct supply-constrained components into the highest-margin products or adjust marketing (and pricing) to nudge customers towards existing stock. Longer-term, investment in augmenting the human workforce continues. Although specific tasks like stock movement are automated easily, broader automation requires reimagining workflow, retooling factories, and careful consideration of the human, organizational, and business implications of the change.

For more information on manufacturing, contact Paul Miller,  Principal Analyst

5. Gaps in employee experience exacerbate labor shortages

What’s going on: The Great Resignation and retirement-related talent gaps are creating chokepoints in the supply chain, as with the shortage of truck drivers. Employee power plays a role, too, as frontline workers demand higher wages and put the kibosh on increased automation at ports, as longshore unions did in Los Angeles. Overseas labor continues to reel from COVID-19, as in Vietnam, where lockdowns have hurt production.

What to do about it: Solving these labor problems won’t be easy, in part because it’s a complex chain of many types of labor in diverse locales. But using the downpour of employee data that’s now commonly available can allow you to start predicting shortages and creating more adaptive strategies for how to deploy labor. And improving employee experience can increase retention for key talent, boost better recruitment rates, and drive higher rates of productivity.

For more information on supply chain and future of work, contact, J. P. Gownder, Vice President, Principal Analyst.

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