Discovering the Hidden Complexities in Supply Chain Management

Author

Yaw Asamoa Adoo

Supply Chains have risen in importance over the years. In a world where e-commerce and rapidly evolving customer preferences are the norm, global supply chains have become the bedrock on which trade and exchange are heavily reliant. Despite their immense importance, they are fraught with complexities and challenges, usually unknown or unseen by the end-user. This post explores the intricacies of supply chain management, pointing out common hurdles and offering valuable strategies for effective navigation.

Supply chain management involves the end-to-end process that ranges from sourcing, production, and distribution of goods. It includes various stakeholders, such as suppliers, manufacturers, logistics providers, and retailers. Each party plays a crucial role in ensuring products reach consumers efficiently.

It is often stated that every product or service you see or use results from supply chains in motion or having completed its task. In the past, the focus of supply chains largely emphasized third-party logistics, gradually evolving to optimize the various touchpoints from the placement of an order through to its eventual fulfillment. Scholars like Martin Christopher have theorized about the future competitiveness of businesses being dependent on the supply chain networks that they are a part of. Businesses face the challenge of navigating a variety of factors that contribute to supply chain complexity.

Common Challenges in Supply Chain Management

1. Macro-environmental factors

External influences, usually beyond the control of business entities adversely impact operations. For instance, the Suez Canal blockage in 2021 in Egypt caused by the Ever Given Shipping vessel that lasted 6 days not only cost the Egyptian government $15 million daily in lost transit fees but also led to panic and disruption in global trade with crude oil prices rising about 10%. This canal accounts for about 30% of all global container traffic and 12% of global trade in general. The loss of revenue and rifts in diplomatic relations was palpable.

Similarly, geo-political conflicts are major influences in distorting trade flows. A recent example is the semiconductor chip shortage, which started in 2021 and was acute through to 2023. The shortage resulted largely from the effects of the COVID-19 pandemic and the trade wars between the United States of America and China. The former event necessitated a temporary halt in production activities, and given the increased demand for computers for remote work, which requires significant computing power, the supply could not match the need. With regards to the trade wars between the USA and China, the supply of chips from China was halted by the USA following import embargoes, thus resulting in Taiwan Semiconductor Manufacturing Company (TSMC), the market leader, bearing most of the load of global demand.

To exacerbate the situation, the Russia-Ukraine war led to an acute shortage of raw materials as Ukraine produces over 50% of global neon gas, essential in semiconductor chip lithography. Needless to say, most industries globally were affected, with the automotive and consumer electronics market hardest hit.

2. Demand Uncertainty

Demand uncertainty is one of the major challenges in this domain. Changes in consumer preferences can lead to excess inventory or stock-outs, either of which can harm a company's bottom line. This creates what is referred to as the bull-whip effect, where small changes in client demand lead to significant variations in production data, which consequently impacts the coordination of resources and operations needed to fulfill the demand.

Uncertainty also reflects in the level of stock that is required and for what duration. Understocking raw materials or goods may lead to lost sales and revenue, inefficient production cycles, and extra costs related to emergency stock ordering. On the other hand, overstocking leads to goods expiration, obsolescence, and holding costs and may hinder the responsiveness of client orders and occasional spikes in market demand. Either side of the spectrum is disruptive to the proper execution of supply chains.

To reduce this risk, businesses adopt a myriad of strategies, including advanced forecasting tools that apply data analytics and machine learning to improve demand predictions by up to 25% to 30%. Safety stocks and trend analysis are equally useful to deal with this risk.

Order batching is also recommended to ensure stable demand by placing orders in large quantities at given periods (not frequently). For suppliers, this offers economies of scale and predictability that enable them to adequately respond to client needs.

Businesses equally need to adjust their pricing strategies by reducing the regularity of promotions, discounts, and other price incentives that spike demand. A stable pricing strategy also reduces the distortion of long-term demand.

Overall, regular communication between businesses, their suppliers, and vendors is critical to managing uncertainty in the chain of activities since the resultant benefit will be evident in their responsiveness to end-user needs and the sustained levels of quality service delivery.

3. Supplier Reliability

Reliable suppliers are essential for a smooth supply chain. Yet, factors like geopolitical instability or natural disasters can disrupt supplier reliability. For instance, the Russia-Ukraine conflict adversely affected the supply of gas across Europe, with prices surging about 120% -130% in the initial 6 months of the hostilities in 2022. This also impacted the availability of crucial food commodities such as sunflower oil, of which Ukraine is the largest exporter worldwide, closely followed by Russia. These two countries accounted for about 55% of the global supply in 2021. With the advent of the war, shortages were commonplace across many countries in Europe as supply chains were disrupted.

Suppliers have to demonstrably prove their ability to consistently offer high-quality goods and meet performance standards, including default rate (quality), invoice accuracy (cost), on-time delivery (delivery), and compliance rate (risk), among others. Suppliers are an integral part of the success of a business as a result, businesses need to be invested in their development and grow the partnership through regular audits and capacity building initiatives.

Building strong relationships with diverse suppliers is essential, as well as developing a mitigation plan for risk management. Utilizing Supplier Relationship Management (SRM) software enhances visibility into supplier performance, allowing companies to make informed sourcing decisions. Scenario planning can also be a useful complement to risk planning to factor in such immense disruptions.

4. Transportation and Logistics

Transportation is a common bottleneck in managing supply chains. Rising fuel costs and delivery delays severely impact logistic activities. While speaking with a contact in the haulage industry in France, I discovered that annual fuel costs per truck hover around €60,000, and the figure increases when you factor in a fleet of vehicles.

Investing in logistics management software can improve supply chain visibility, enabling businesses to optimize delivery routes and reduce shipping expenses. Exploring transportation options like air freight or ground shipping can also enhance logistics strategies in the long term.

5. Regulatory hurdles

Operating on a global scale involves manoeuvring various regulatory requirements, such as tariffs and environmental standards. These regulations can add significant complexity to supply chains resulting in the disruption of the ease of business. Data from IATA indicates that transporting a single consignment by airfreight typically requires about 30 paper documents and each year, over 7800 tons of paper documents are processed.

To navigate these issues effectively, compliance experts are useful resources in mastering the different facets of the industry's regulations. Regular audits and staff training can further ensure adherence to relevant standards.

6. Cybersecurity

Data storage and sharing are fundamental in the effective operations of supply chains. Companies, clients, suppliers, transporters, regulators, and financial institutions all share relayed data relating to order fulfillment.

Some instances of cyber attacks include the Maersk Ransomware Attack in 2017, where a NotPetya malware infected the global operations of the company, causing a $300 million loss due to interruptions of their activities. It was later discovered that the attack was possible due to a software update from a supplier in Ukraine.

Another notable example is that of SolarWind in 2020, a Texas-based technology company that develops IT systems for multinational companies and government agencies globally. Hackers managed to insert Sunburst malware into third-party software update, thus gaining access to SolaWind's Orion Platform and gaining access to over 18,000 client data.

This makes data security a fiduciary responsibility for all entities involved during transactions. Typically, the most invested in these transactions tend to be businesses that sell directly to clients since they suffer reputational damage when things go wrong. For this reason, collaboration, proper vetting of business partners, and capacity building to meet industry standards are essential to ensure the security of customer data. Listed below are some examples of standards that businesses and their suppliers and vendors should uphold.

• ISO/IEC 27001

Procedures to regularly improve security management systems

• General Data Protection Regulation (GDPR)

Protection of personal data access, storage, and processing

• National Institute of Standards and Technology (NIST)

Essential for risk management and compliance actions

• Payment Card Industry Data Security Standard (PCI DSS)

Retailers and financial outlets safeguards to access and encryption of card and financial data

The Role of Technology

Embracing Digital Transformation

With the increasing complexity of supply chains, integrating technological tools is imperative. Digital transformation is not merely a choice; it is a necessity for thriving as a business.

Technologies such as the Internet of Things (IoT), artificial intelligence, blockchain, etc., are transforming supply chain management. For example, IoT devices can provide real-time inventory tracking, while AI can enhance predictive analytics, improving automated decision-making speeds between 60% and 80%. Digital twin virtual tools can reliably simulate disruptions in operations, while blockchain technologies can be useful in securing end-to-end data transparency and robustness, thus reducing the risk of tampering and fraud.

ERP (Enterprise Resource Planning) software, synonymous with digital transformation typically of medium to large organizations, comprises notable brands like SAP, Oracle, Microsoft Dynamics 365, IFS, Sage, etc. These software aggregate functionalities that optimize productivity, visibility, and decision-making, usually in real time, thus facilitating their end-to-end business processes. ERP platforms not only enable interoperability of processes and activities but are also available in SAAS (software-as-a-service) formats, ensuring that business can be done remotely, which is ideal for connectivity and quick decision-making.

Supply Chain Resilience through Technology

The COVID-19 pandemic exposed vulnerabilities in global supply chains. Organizations ought to re-strategize by implementing, among others, cloud-based solutions to foster collaboration between stakeholders to enable quicker interfacing during disruptions.

Adopting a dual-sourcing strategy or near-shoring can reduce reliance on single suppliers, decreasing risks. Companies that demonstrated supply chain resilience during the pandemic reported 20% fewer operational disruptions.

With online retail saturating, automation is prominent as a key differentiator for productivity. The initial investment costs are monumental and thus offer a defensible competitive advantage over companies that cannot afford the upfront costs of investments. There is also a growing trend of companies investing in warehouse-automated guided vehicles (AGV’s) and other intelligrated infrastructure to enhance storage and order fulfillment operations, ultimately leading to improved lead-times.

According to Future Market Insights (2018), Amazon USA in December of 2014, installed 15,000 robots in its warehouses to improve its operations to meet an expectant spike in consumer demands for the festive period. This move cut its operations costs by a fifth and also markedly shortened its lead times to orders. Amazon’s buy out of Kiva Systems (the robotics company that installed it’s AGV’s) for USD 775 million, and later rebranded as Amazon Robotics largely enabled the company to improve its logistics efficiencies. The Automated Guided Vehicles (AGV) market has been expanding exponentially. As of 2017, the sector had recorded a USD 2 billion market size with a forecasted CAGR of 16.5% between 2018 to 2025. The current market value is US$ 1,540.57 million (2024) with a projected CAGR growth of 3.8% in 2034 equating to US$ 5,609.75 million (2034).

Technology is a major enabler for competitiveness and as well as to reduce the complexities that usually fraught supply chain operations. User-adoption rate is equally important to ensure that adoption and integration into daily activities can be sustained over long periods, particularly with regard to updates and version releases that could potentially disrupt the usability of the software.

Preparing your Team to Manage Supply Chain Complexity

1. Invest in Training and Development

Providing employees with the skills they need to manage supply chain complexities is essential. Ongoing training sessions and scenario planning and simulations can prepare teams for unexpected challenges.

2. Foster Collaboration and Communication

Facilitating effective communication among stakeholders can significantly improve supply chain management. Collaborative platforms that encourage real-time information sharing create transparency and trust.

An aligned team can respond to developments promptly, ensuring a swift and effective response to market changes.

3. Adopt a Customer-Centric Approach

Placing customer needs at the center of supply chain strategies leads to more flexible and responsive systems. By leveraging customer relationship management (CRM) systems, businesses can gain valuable insights into consumer behaviour.

Final notes

Navigating the intricacies of supply chain management requires a strategic approach that addresses demand forecasting, supplier reliability, logistics optimization, and regulatory compliance.

By leveraging technology and implementing best practices, organizations can create resilient supply chains capable of weathering unforeseen disturbances. As the global landscape continues to change, staying informed about emerging trends and tools will be crucial in effectively managing the complexities of supply chains.

Ultimately, it's not just about managing the supply chain; it's also about planning for the unknowns while striving for efficiency and excellence.