When world events impact even one key element of the global supply chain, it can have devastating and far-reaching consequences.
Take ammonia, for example. While most people know it’s found in household cleaning products, they may not realize that around 80% of the world’s ammonia produced each year is used to create fertilizer. Why is this significant? Russia is the second-largest exporter of ammonia globally. As a result of the war in Ukraine and subsequent sanctions, it has banned the export of this and other fertilizer chemicals through August 2022 and recently shelled a warehouse storing ammonium nitrate in Kyiv. Now, experts are warning of a worldwide fertilizer shortage that will threaten the world’s food supply.
But that’s just the latest domino to fall in a line going back to the beginning of the COVID-19 pandemic. Supply chains everywhere have been in an extended crisis, impacting the availability of products from semiconductors to baby formula. Even with China easing its recent lockdowns that caused even more congestion, these supply-chain bottlenecks will likely be around for years to come.
The most successful businesses will prepare their organizations now to deal with continued disruption down the road. But first, it’s necessary to fully understand the domino effect of the supply chain and how it can potentially impact your business.
What Caused the Current Supply Chain Crisis?
The onset of the COVID-19 pandemic in 2020 kicked off a chain reaction that became the full-blown supply chain crisis we’re experiencing today. As businesses and individuals restricted their activity, this immediately impacts three areas, including:
1. Labor - People couldn’t safely go to work, so businesses shuttered and factories ceased production. Workers were laid off suddenly and in large numbers, leaving many without jobs or disposable income. This sparked the first disruption in the supply chain.
2. Raw materials - Not only were fewer products being produced, but companies also believed there would be less demand. However, the pandemic only accelerated online shopping. Those who were still employed or receiving government stimulus aid exchanged dining out and other entertainment with shopping for household goods and furniture. Demand for these items went through the roof—without the supply to fulfill it. Many companies were put on allocation by suppliers, restricting their access to essential materials or products they relied on for their business.
3. Transportation and storage - As demand for goods skyrocketed, ports became overwhelmed and there weren’t enough shipping containers to meet the sudden high demand. On top of that, there were too few truck drivers or rail cars to actually transport goods from the ports to warehouses, often resulting in a pile-up of unclaimed containers full of product. But even if transporting goods to warehouses wasn't a logistical nightmare, companies couldn’t find skilled labor to staff them (and now even warehouse space is running low due to overwhelming demand).
The domino effect has continued. Shortages of one resource have led to another and another, and so on. Economists suggest this could go on for another two years.
Manufacturers are left waiting for crucial materials to make products, and other companies stuck in the lurch without goods their businesses rely on, need to develop a plan of action to stay agile during this crisis. Here are five steps that will help your organization keep your supply resilient.
How to Keep Your Supply Chain Resilient
1. Understand your supply chain
The first step in forming an effective supply chain strategy is truly understanding your supply chain—not just from a cursory level, but all the way to the raw component level.
For example, if your business relies on a product that’s made with a certain material, how would it affect your operations if there were a sudden scarcity? In addition, consider what world events or supply chain disruptions could potentially impact your ability to get it in the future. Is there a chemical you require that might someday have a higher priority elsewhere—like ammonia for fertilizer to grow food? Think it through, all the way down to the tiniest detail.
2. Create redundancies for necessary components
Once you’ve identified the critical components of your supply chain, you’ll need the ability to create redundancies or a backup supply. This will require a combination of strategic forecasting, being willing to take risks, and having the cash flow to buy ahead.
When you notice an impending kink in the supply chain, such as a supplier going into a shortage or the price of material rising significantly, buy as much inventory as possible and store the extra supply for when you’ll need it. That way, you can continue operating as usual until your supplier is back on their feet or the price regulates.
3. Develop contingencies on critical components
Another important step is making a plan to supplement or replace key components with alternatives that still meet your specifications, ideally from vendors in your local area.
My company, S3 Surface Solutions, is a manufacturer that relies on buckets made with HPV plastic pellets. However, when Texas experienced an extended freeze in the winter of 2021, all the monomer plants shut down, causing the production of that particular plastic to come to a screeching halt—and ultimately creating a shortage of buckets. In response, not only did we create redundancy by buying out our bucket supplier’s inventory, but we’re also developing a contingency for the future by relying less on plastic buckets altogether and instead moving to a new, recycled product.
4. Buy domestic or local when possible
Not only is your ability to purchase required materials paramount to overcoming supply chain adversity, so is your ability to transport those goods in an efficient and cost-effective manner. Though buying overseas may have previously made the most financial sense for your business, is it still the best, most reliable choice during the global supply chain crisis?
Strategically planning for transportation and choosing suppliers in your local area will help to avoid many logistical challenges of the global supply chain, from shipping delays and bottlenecks to the high cost of trucking. If all of your suppliers are within a 500-mile radius of your distribution center, you’re less likely to be left spinning your wheels while waiting on a shipment to arrive.
5. Form strategic relationships with suppliers
Having solid relationships with your suppliers is invaluable for staying resilient. As mentioned previously, scarcity can cause suppliers to put clients on allocation, or restrict access to a product in order to serve higher-priority clients. But if you’re a loyal customer with a substantial purchase history over a long period of time, you become the priority in challenging times. And even if they hit you with a price increase, you can simply absorb it (within a reasonable percentage) and pass a portion along to your customers to keep your business moving forward.
Remember: the global supply chain is a domino effect. Knowing where your business fits in and planning ahead is critical for surviving the current disruption and taking action if and when a crisis happens again.