By Shirish Joshi, Practice Lead – Operations and Supply Chain
The COVID-19 pandemic has led to significant changes in our day-to-day lives; changes which may have an impact for years to come. Unfortunately, the global supply chain was also victim to these pandemic-related disruptions. Should these disruptions have an equally lasting impact, will it forever alter the global supply chain? Or will things go back to normal as the pandemic phases out? In light of recent struggles, it is important to reflect—from a U.S. perspective—on our supply chains, which are frequently reliant on foreign materials and manufacturing; these have made us especially vulnerable. This article focuses on a few key trends spurring the supply chain crisis, and in the U.S. in particular:
1. Electronics components.
In general, the lead time for these components has increased astronomically. Lead times are no longer predictable and often times go far beyond what is reasonable, which is hugely problematic for end customers. In fact, the Institute for Supply Management (ISM) recently noted that June numbers for lead time for production materials are the highest since they started surveying in 1987. Primarily affected are electronic components, for which the average lead time has increased from 16 weeks to more than 52– an increase of over three-fold as of June. This has led to major shutdowns as well as reliance on risky (and costly) purchases of grey market components. Let’s look at the auto industry as a key example of this trend. Recently Tesla had to cease production of their less popular models due to unavailability of electronic parts, in order to save the computer chips to build their higher selling vehicles. General Motors had to shut down an entire plant, which still has not reopened.
2. Shortage of raw materials.
If we go back to the auto industry example, we can see that a backlog of computer chip production has caused major shutdowns. Why? Break it down further and we can trace the backlog back to shortages in raw materials. Harder to get materials equals longer time to make chips, which leads to longer time to get chips. Given that materials shortages are global, moving manufacturing onshore will not solve the problem. This makes everything fall victim to the age-old issue of limited supply not being able to meet the high demand, with both raw material and component prices skyrocketing due to the inability to meet the increasing global need for these assets.
3. Massive shortages in labor force.
Tying into the aforementioned increased costs is the significant workforce shortage in manufacturing- a lack of people to do the work – which has led to further supply chain delays and higher prices. As the jobs start to come back post-pandemic, there are still expected to be challenges in filling them, with a recent report by Deloitte stating that the U.S. is expected to have 2.1 million unfilled manufacturing jobs by 2030. There are several reasons for this issue: (a) an actual lack of skills required for these roles, (b) when people in these roles were impacted by the pandemic, some of them left the industry altogether, (c) the current workforce is aging out, (d) new graduates are just not interested in manufacturing positions (or the associated lower salaries), and (e) less local workers are available, leading to a reliance on more and more migrant workers who have to travel longer distances to get to the factories.
4. Transportation—logistics and cost.
When it comes to supply chain logistics, upwards of 50 percent of overall logistics spending can go into transportation. With rising fuel costs contributing the most to this increased spending, companies are trying to recover costs by increasing product prices and exacting the price difference from consumers. Apart from fuel costs there are also the concerns of workforce shortages, changes in government regulations, rising industrial output, limited space on the transport vessels, and inefficiencies in port-to-port transfers. As the manufacturing industry picks back up post-pandemic, the competition to find space on trucks is becoming heated, especially with many trucking companies being at capacity. In fact, even many maritime transporters are slammed. This has led to not enough drivers, not enough truck space, congestion at major ports or transfer points, and delays, delays, delays. All of these factors further contribute to the backlog plaguing supply chains today.
Managing these supply chain disruptions moving forward will not be simple, as they are likely to continue to grow, at least for the next 12 months. From the start of raw materials production to delivery of end product to the customer, each step of the supply chain process has been affected. Each challenge along the way is akin to a domino falling over and “tipping” the next step or domino in the chain, each compounding the negative effects of the other. The final result: a cumulative delay, increase in cost, and overall headache for everyone involved, especially the consumer.