Supply chains that rely on international sourcing of raw materials are always susceptible to global politics, economics, climate change, and cultural shifts. These are macroeconomic issues, which are factors considered out of the control of industry as opposed to microeconomic issues which are within the day-to-day scope of supply chain management. These “big picture” macro-level issues currently include the pandemic, Brexit, international trade relationships with China, sustainability and the climate crisis, inequality and exploitative work practices.
Conversely, supply chain issues can then have a knock-on effect on the GDP of a country as industries like construction are primarily hit. This swinging back and forth has been a signature of the pandemic as countries go in and out of lockdowns and the markets reflect the increases and decreases in consumer spending.
Supply and demand
Supply and demand is usually considered a micro issue because it is always present. But the intensity of supply and demand can vary wildly depending on what is happening in the country of origin and in the country of the end user. It could be extreme weather affecting the production of natural resources and disrupting transport networks in one country or political demonstrations and closed borders in another.
Global supply chains have been under extraordinary pressure in the last couple of years and supply chain managers can no longer rely on the tried and tested methodology of how things have always been done. Every day offers different challenges that demand an agile and flexible response. It can feel like customer demand is currently consistently dictated either by panic-buying or through changes in consumer behaviour. For example, working from home and limitations on travel saw an increase in demand for garden furniture as people enjoyed both being in their own gardens more and taking up gardening. This demand was compounded by shipping delays due to Brexit, which then caused pricing to go up due to scarcity.
Such heavy demands feel more extreme because fluctuations have been happening regularly and rapidly, but not always predictably for retailers, and so have created supply chain disruptions across the supply network. Supplier consolidation has become increasingly popular as it reduces the number of suppliers or service providers within a specific supply market focusing only on those that are the most successful.
Just-in-Case vs. Just-in-Time
Just-in-Time (JIT) manufacturing (or lean manufacturing) has been around since the 1950s when Eiji Toyoda, CEO of Toyota decided that to compete with the American car industry by stripping back inventory. Components and spares were only ordered when absolutely needed and low stock was kept in the factories. This led to more efficiency and greater savings on outlay for Toyota, which was key for the Japanese brand in reaching international customers and getting ahead of the American car industry. Because JIT was so effective, it was adopted by other industries like electronics and fashion. However, this methodology puts pressure on suppliers further up the chain to be reactive when it comes to raw materials, and that can’t always be accommodated, especially when world events mean that planning becomes near impossible.
The opposite of Just-in-Time is Just-in-Case (JIC), a supply chain strategy which supports having large inventories to hand so as not to sell out. Of course, this means more overheads as more stock is ordered “just in case” and more warehouse storage is needed. This impacts profitability and these costs must be weighed up against the loss of business if customers can’t get what they want, potential loss of suppliers, and supply-chain collapse. Companies which keep large inventories tend to be ones which have issues forecasting demand. As we’ve seen in recent years, this can affect any company, even if they have tools like automation and artificial intelligence to support predictions, macro trends can override any forecasting that’s based on historic sales.
The Days Inventory Outstanding (DIO) ratio is directly related to JIT. DIO measures the average number of days that inventory is held before turning into sales. The aim is for a lower figure as this means a shorter time in which cash is tied up in inventory and stock risks becoming obsolete.
Companies which produce a unique product that customers can’t get elsewhere, not only have a competitive advantage, but are strong enough to use JIT. However, if they rely on components or resources affected by the global economy and world events, they too will experience disruption. Customers may be willing to wait for a unique product, but continuous disruptions to lead times can cause havoc with supply chain risk management and allocation for even the most successful global companies.
Adapting to a complex supply chain environment
As business across the world tries to adapt to impacts felt all along the supply chain, it can be informative to look to countries which already had complex supply chains before the pandemic and how supply chain processes are managed.
The BRICS (Brazil, Russia, India, China, South Africa) countries have been hit particularly hard not just by the pandemic, but political turmoil, climate change, and civil unrest.
The arrival of Amazon in Brazil in 2020 was seen as a sign that supply chain operations were about to see significant improvements that could provide a case study for managing supply chain complexity. Brazil is the world’s fifth largest country both geographically and by population size. This presents huge challenges in transportation and logistics, managing inventory levels, and operations management.
A study from 2017 called Six Strategies for Beating Brazil’s Supply Chain Complexities quoted the following figures in these key performance metrics:
- Inventory levels varying from between 10 days and 14 times that at 141 days
- Warehousing costs ranging from $0.11 per case to 40 times that at $4.28
- Transportation costs from anywhere between $49.25 per ton to 34 times that at $1,665.50 per ton
- Customer cycle times from 1 day to 14 times that at 14 days
- Case fill rates varying from 85% to 99.6%
These wide ranges show some impressive results proving that some companies have achieved optimisation despite difficult operating conditions. It will be interesting to see if as investment from major international retailers enters the country how this will affect competitiveness and customisation.
Production costs have always been a driving factor in optimisation and yet increasing awareness of the climate crisis is highlighting that this race to the bottom is not sustainable. It’s ironic that Amazon is entering the territory of its namesake, the Amazon rainforest, which is one of the world’s largest carbon sinks and generators of oxygen. Can Amazon and its last mile delivery services continue to bring innovation to supply chain network design with the increased focus on sustainability?
Do you have what it takes to be a supply chain expert?
Logistics and supply chain management is an increasingly demanding and dynamic field that requires depth of knowledge and experience for the most effective decision-making. We live in a world that needs expertise in these areas more than ever to help problem-solve and innovate in a way that prioritises sustainability alongside business needs.
Ready to take the next step? Find out more about specialising in logistics, procurement, or supply chain management with an online MSc Management with Supply Chain from the University of Lincoln.