Supply chain management is a massive challenge for any organization. It is an incredibly costly affair, and it is not easy to keep track of all the vendors, suppliers, and products a company uses. It’s also probably the most crucial component of any business operation, and any reputable company would definitely want to make sure that it continues to be as efficient and productive as possible.
It just so happens that supply chain management is also one of the most volatile and unpredictable areas of any business.
This, we are about to see...
Changes in market demand and supply chain disruptions—such as pandemics, extreme weather or war—can happen at any time. Any company looking to manage its supply chain during disruptive times will be challenged. However, now we are in a panic situation and most companies are trying to create a Plan B because they have been too dependent on and comfortable with China and Russia—and never did the big-picture planning to truly diversify their supply chains and build the relationships that required.
To manage their supply chains, businesses have to clearly understand the risks. They have to have an action plan to address these risks and minimize the impact of any disruptions, such as the ones currently being experienced.
The best way to do this is by having a supply chain management strategy.
This article will highlight some of the critical lessons that can be learned from recent supply-chain events.
First, There Was a Rush to China
China didn’t become an economic powerhouse overnight, and it didn’t do it all on its own. Western politicians and industrial conglomerates basically funded China's success by investing blindly in that country. That is, without a plan B.
China's economic rise is a direct consequence of an influx of foreign capital and know-how into the country, and China was a quick learner.
And here we are now, waiting for goods from China to be delivered to Europe, goods that could have actually been produced in some parts of Europe or the U.S. Not to mention that we also must endure China's export restrictions for some electronic components.
We didn't think years ago of a Plan B. Western supply chains paid a high price during the pandemic due to these earlier decisions regarding sourcing raw materials, and manufacturing and sourcing products from countries that were inevitably affected by the pandemic. Still, China also had the power to potentially restrict supply while making sure that their own domestic production ran smoothly.
Supply chains need to be extremely agile and flexible in order to respond to any change in demand or supply conditions. That should be a given, you'd think.
Then Came the Investment in Russia
Looking for another source of cheap labor and raw materials, companies started to invest in Russia in the early 2000s, and President Vladimir Putin quickly realized that Russia’s economy was not going to be the same as it was in the 1990s.
He started to work with a new generation of Russian entrepreneurs who were willing to find common ground and work with the government. It has now come to light that some of these business people certainly enjoyed "special benefits" from Putin while serving his ideology.
There were seemingly so many benefits to working with Russia for Western companies, such as a cheap and skilled labor force, a large market and its proximity to the European Union. These are factors that made Russia a very attractive country for Western investors.
For instance, Germany pays roughly 116 million euros to Russia each day for oil and gas.This is more than before the war! Turning the tide now will cost German taxpayers dearly in time and money. Germany has made itself dependent on Russia by having no Plan B in play when it comes to energy supplies... Now they have an ugly wake-up call.
The Semiconductor Example….
The European Union imports more than 90% of its semiconductors, which means that it is highly dependent on others for its supply of critical components. As we’ve all seen, a global shortage of computer chips due to labor shortages and lockdowns, coupled with an increase in demand for smart devices during the pandemic, shows how we’re at the mercy of foreign producers.
The chip shortage has wide-ranging consequences, hitting 169 industries in its wake; according to a recent Goldman Sachs study. Car manufacturers have been particularly affected, with an estimated 90 billion euros of revenue loss ... so far!
The Supply Chain Upshot
Material prices have increased significantly, especially commodities like steel and copper, which are essential inputs for many manufacturing activities. As the demand for these products increases, the prices rise and make the inputs costlier. We see the same thing happening within the agricultural sector, too.
European and U.S. companies have cornered themselves during a challenging situation in terms of supply chain strategy—and things are only getting worse, given the escalation of the war in Ukraine.
One way to deal with this situation is by diversifying the sources of supply. Europe and the U.S. need to bring some manufacturing back home and also strike new deals with other large economies to do that. It may not be easy, but the sooner they start, the better.
Final Lessons, from Conflict to Resolution
Here are a few final supply-chain lessons taken from my latest book, Lead Now, Manage Later: The Straight Shooter's Guide to Business Success:
1. Regardless of how attractive it looks, never put your eggs in one basket; have a plan B, always.
2. Low first cost is not always a low total cost. What looks cheap on the offer or price list can turn out to be expensive, due to various known or unknown factors in the supply chain or due to quality challenges.
3. Get out of your comfort zone. Resting on laurels has never improved businesses
4. Do not become the chain smoker who drinks and eats too much and never exercises… and in the intensive care unit…thinks, "I guess I should have paid more attention."
5. CEOs, your supply chain management organization is a not a burden unless you do not lead it.
6. Make sure your supply chain organization shares information with leaders outside its own department. These signals can convey a vital message in terms of opportunities, alternatives, Plan B, agility and resilience
7. CEO, do not accept the status quo from supply chain management leaders. Challenge them to aim higher in terms of agility and resilience
8. Do not use gatekeeper companies to reduce the number of signals. You'd do better coping yourself with the sheer amount of signals from the market.
9. Ensure that employees and managers truly understand the external market signals.
10. Work on costs constantly because commodity prices can be very volatile
And truly empower everyone to act on these lessons.
R. Paul Vuolle, CEO of Bellevue SME Advisors GmbH in Switzerland and Germany, works actively with small and medium (SME) size manufacturing companies in Europe in SCM/Outsourcing, logistics, turnaround and restructuring, market expansion, as well as succession planning and financing. He also frequently supports technology start- ups in building up their business.