How to navigate and overcome supply chain challenges

The labor shortage led to an increase in automation as a means to produce goods with fewer man-hours.

“In recent months, there’s been a surge of business orders for capital equipment,” Conerly says. “The fact that manufacturing production has not reached all-time highs, though, indicates that the new equipment is not intended to boost capacity. So I think a lot of the business capital spending is intended to replace empty positions with machines. The idea is: ‘If I can’t hire somebody to assemble this product, maybe I can hire a robot to do it.’ And I think that’s a good strategy.”

A decline in the cost of automation has helped duel this trend.

“The cost of labor has gone up while the cost of electronic equipment has gone down,” Conerly says. “Something that did not pencil out a few years ago may well do so today.”

New strategies

Companies are responding to the supply chain challenge by doing more with less, running machinery beyond its prime and collaborating with vendors to predict shipping delays.

“The pandemic has really highlighted the need to develop strategies to mitigate potential disruptions in the flow of critical components,” says Tom Palisin, executive director of The Manufacturers’ Association, a York, Pennsylvania-based regional employers’ group with more than 370 member companies. “That means doing a deep dive into the supply chain, mapping the geographical locations of the first tier of suppliers and learning about the reliance of second tier as well.”

Pandemic-related shortages affirmed the need for backup vendors, even for lower-volume items.

“Instead of relying on one supplier, a company might have three to manage risks,” says Jim Hannan, practice leader of the manufacturing, distribution and logistics service group Withum, a consulting firm. “We expect this trend to continue with the advent of environmental, social governance standards at larger companies.”

When deliveries are spotty, companies are tempted to keep more stock on hand.

“Companies should no longer rely on just-in-time inventory strategies, which too often have become just-too-late failures, and stockpile more supplies both in the United States and abroad,” says John Manzella, a consultant on global business and economic trends in East Amherst, New York. “This approach reduces efficiencies but favors risk reduction.”

Companies are willing to turn upside down the traditional views of inventory control, given the increased risk of shortages and customer goodwill.

“Many of our members are increasing their inventories, stockpiling more if they can,” Tanel says. “They’re increasing the number of suppliers they’re working with. They’re looking at shortening their supply chains. And they are looking at improving communications with suppliers. Some members are using air freight for smaller components, which is more expensive but necessary to maintain production.”

While businesses must pay the price for bolstering inventory levels, such costs must be balanced against operational expenses such as the need to pay higher prices for goods when a company scrambles to fill customer orders, or lost revenues when an unhappy customer jumps ship for a competitor. As they balance such costs, many companies are viewing higher cash flow on the shelf as acceptable.

“Risk mitigation has become more important than efficiency gains,” Manzella says.

Furthermore, three historic inventory costs – interest, obsolescence and shrinkage – no longer universally apply.

“The interest rate you get for having cash in the bank now is approximately diddly squat,” Conerly says.

And obsolescence would only be an issue if something were expected to go out of fashion.

“Many products in short supply today are the same products as last year’s model, and they are not going to go obsolete,” Conerly says.

Shrinkage, he adds, is not an issue in some industries. In others, it can be controlled with requisite security steps.

Cheap or not, inventory storage must be allocated selectively.

“Companies need to be thinking: ‘What might be in short supply when we try to ramp up our production?’” Conerly says. “They may well buy a year’s supply of a relatively cheap item that is a small part of what a company uses but is vital to producing a finished product.”

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