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The past two years proved to be an eye-opener for businesses worldwide regarding the supply networks’ vulnerabilities. Before time could eliminate the pandemic-induced bottlenecks in global supply chains, the Russia-Ukraine conflict, followed by the sanctions on Russia, and China’s Zero-Covid Policy, cumulatively exacerbated the supply chain crisis.
The New York Federal Reserve’s Global Supply Chain Pressure Index (GSCPI) reported that the global supply chain pressures started worsening with the onset of Covid, from hovering around zero in December 2019 to peaking over three in April 2021. Although the pressures continue to ease in 2022, GSCPI in July 2022 remains historically high.
The impact, however, has been much worse for SMBs, as accentuated by the US Chamber and MetLife Small Business Index, which reached an all-time low of 39.5 when Covid hit in Q2 2020. Moreover, research suggests that 88% SMBs are concerned about the inflation impact on their businesses, followed by supply chain issues and decreasing revenue.
Shifting Focus: From Cost-Optimality to Resiliency
Every node of the inter-connected supply chain has witnessed its share of disruptions over the past two years. Mitigating supply chain risks is challenging, especially for SMBs with relatively limited resources and smaller turnover.
Listed below is the node-wise analysis of the supply chain issues with recommendations to US SMBs to help establish resilient operations in the medium to long term.
1. Raw Materials:
The supply chain bottlenecks led to delays in raw materials’ delivery. Even the US Census Bureau’s Small Business Pulse Survey revealed that 45% of the companies faced domestic supplier delays in April 2022, resulting in extended production lead times affecting the operating capacity of businesses.
Workarounds:
Analyze and Diversify Supplier Base: Identifying suppliers with the most significant problems can be done by comparing their on-time delivery and leading indicators of the issues to note associated risks and find solutions to mitigate them.
Inventory Management: The suppliers can provide data on the current status of stocks and market trends, enabling SMBs to assess the supplier risk. SMBs can also share their business strategy and order forecast to help suppliers better manage inventories.
2. Manufacturing:
To reduce transit times, the Council of Supply Chain Management Professionals (CSCMP), in their Q1 2022 report, highlighted that US businesses are actively considering nearshoring/onshoring of manufacturing.
Workarounds:
Incorporate Technology: Multi-tier visibility into the entire supply chain, including inventory, supplier production schedules, and supplier shipment/purchase order fulfillment status, can help identify the most optimal supply chain design.
Priority Lists of SKUs: To avoid over-ordering that might lead to hoarding unnecessary stocks and inefficiencies, businesses can create a priority list of Stock-Keeping Units (SKUs) with their suppliers to ascertain what goods they would be ordering in times of sudden demand increase.
3. Inbound Logistics:
Ocean freight- the most common and economical way of shipping goods from overseas, saw waves of disruptions recently, causing longer shipping transit times, unpredictable delivery schedules, and late inbound deliveries.
Workarounds:
Using ETA Tracking of Vessels: SMBs can use the Estimated Time of Arrival (ETA) tracking of vessels to update and forecast their intake plan rather than relying on benchmark lead times.
Diversify into Higher Value-Added Products: UNCTAD suggests that SMBs should diversify by graduating to higher-value-added products to remain resilient to external shocks, including freight rate surges and maritime transport disruptions.
4. Warehousing:
Interestingly, vacancies at the US warehouses were at historic lows as businesses moved to online fulfillment models and higher inventories. The Prologis report shows that in Q1 2022, the US saw record rent growth as rents increased 8.5% Q-o-Q.
Workarounds:
Efficiently Manage Inventory: SMBs should invest in understanding and implementing best inventory management practices like utilizing the right warehouse management system to automate and improve warehouse management.
Backup Plan for Overflows: Businesses should also have a backup plan for the overflow volumes by comparing the forecast of deliveries to the warehouse capacity to give additional delivery slots and storage options for extra goods.
5. Outbound Logistics:
The American Trucking Association highlighted that accelerated retirement, an aging workforce, decades-long declining birthrate, low unemployment rates, and reluctance to take the low-paying truck drivers' jobs continue to cause challenges for the trucking industry.
Workarounds:
Retain Existing Workers: To prevent labor shortages, SMBs must re-evaluate their workers' hiring and retention practices, compensation packages, and work-life balance.
Partnerships with 3PLs: Businesses can partner with third-party logistics (3PL) providers, which have the resources and strategies to facilitate stabilization of the transportation capacity and staffing, even in tight labor markets.
6. Retailers & Consumers:
The US Census Bureau’s Small Business Pulse Survey highlighted that about one-fourth of the SMBs witnessed massive delays in delivering products to consumers in FY22. This has corroded their long-standing customer relationships and risked the loss of their market share.
Workarounds:
Index-based Price Escalation Provisions: Businesses can revisit and use provisions in the existing agreements, such as the index-based price escalation provisions.
Shorten the Term of Deals: While drafting new agreements, businesses should look at ways to shorten the term of their deals.
