Why are There Supply Chain Disruptions?
It often feels like there is no end in sight regarding supply chain disruptions. If it’s not a pandemic, it’s geopolitical strife or shifting consumer demands shaping the landscape of supply chain issues today.
While the landscape is continually changing, today’s consumer goods companies need to better predict future disruptions and understand today’s supply chain technology trends in order to maintain longevity.
How did Covid affect supply and demand?
The pandemic caused a flurry of challenges, some of which are continuing to impact supply chain issues today. According to CGT’s supply chain special report, 3 Supply Chain Trends to Track in 2023, persistent high demand coupled with shrinking lead times severely impacted supply and overall operations.
According to EY research, there were consumer products that were flying off the shelves in the early days of the pandemic: toilet paper, canned goods, flour, and other staples.
Sean Harapko, EY Americas supply chain transformation and global supply chain RPA leader, said that by harnessing demand-sensing signals from consumer sentiment, companies can “influence production and ensure true collaboration with suppliers for real-time decision making.”
What is an example of a supply chain disruption?
If there’s one story that showcases just how vulnerable and easy to disrupt the supply chain is, it’s the Ever Given. The ship, which dominated supply chain news headlines, got stuck across the Suez Canal on March 23 in 2021, holding up nearly $60 billion of trade, according to Wired.
While not all disruptions are quite as dramatic, CPG companies are no strangers to disruption in many forms: from inventory slogs and low visibility to disconnected communications with suppliers to challenges related to getting products in the hands of consumers.
A story of persistence that everyone knows about: Amazon. The marketplace giant is known for its expedited shipping, getting consumers their products as quickly as same- or next-day, and overcoming even the biggest inventory crunches brought on by this volatile environment.
How are they accomplishing this? Amazon has continued to add same-day fulfillment centers across the country and overhauled its value chain, reducing the number of touches for a delivered package by 20% and shortening miles traveled to deliver packages to customers by 19%. The company has also increased the number of deliveries fulfilled within a region to 76%.
“While we're seeing strong early results from this regionalization effort, we still see several ways in which we can be more efficient in this structure and we believe will improve productivity further,” said CEO Andy Jassy in a recent earnings call. “We've also reevaluated virtually every part of our fulfillment network this past year and see additional structural changes we can make that provide future upside.”
What is the financial impact of supply chain disruption?
Supply chain disruptions can have a significant impact on the financial landscape for consumer goods businesses.
Christian Roeloffs, co-founder and CEO of Container xChange, an online container logistics operating platform, said global supply chain disruptions can be both short- and long-term, impacting operations, revenue, and profitability. They often stem from factors like natural disasters, geopolitical tensions, labor strikes, transportation challenges, demand fluctuations, and more.
On the line, he said, are:
1. Shipping: Market fluctuations lead to increased shipping prices related to fuel, charter vessels, and container handling.
“We know that the demand for freight declined significantly after it reached its peak in September 2021. The profit margins reported in the Q1 of 2023 by shipping lines were still strong because of the pre-negotiated contract rates, but we do expect these to be sliding significantly,” said Roeloffs. “As the contract negotiations are underway, we will soon see revised rates which will then impact the profitability of the shipping lines in the second half of 2023 and into the year 2024.”
Additionally, operating costs have increased due to skyrocketing energy and labor costs.
“Shortage of depot space remains a struggle and depots are charging enough to cause burdens,” he said. “Terminal tariff hikes in Europe and in India (as informed by our customers) are causing further worries to carriers.”
2. Revenue: Supply chain-related disruptions can result in slowed or halted production, which then impacts output and ends in reduced revenue. “If products are not available when customers want to purchase them, sales can be lost to competitors or postponed indefinitely,” Roeloffs notes.
3. Resources: Any delays in operation can result in idle resources related to labor, machinery, and facilities.
4. Supply Chain Redesign: In order to adapt to future disruptions, companies may need to invest in a supply chain redesign, which can be expensive, as there are costs associated with new suppliers, establishing redundant production lines, and implementing risk mitigation.
5. Cash Flow: Increased costs and potential revenue loss can put a strain on a company's cash flow, impacting its ability to invest in growth initiatives or meet financial goals.
“Supply chain disruptions can have far-reaching financial implications, affecting a company's bottom line, operational efficiency, customer relationships, and overall business performance,” said Roeloffs. “Developing robust risk management strategies, diversifying suppliers, and building flexibility into supply chains are essential steps to minimize these financial impacts.”