The Supply Chain Challenge

Companies are seeking a variety of solutions to avoid disruptions
and keep customers happy

Businesses continue to grapple with recurring supply chain issues in the wake of a rebounding U.S. economy. Faced with robust consumer and commercial demand, companies are beefing up costly inventories and wooing second-tier suppliers to help close the gaps when shortages arise.

Product shortages and delays — and associated price hikes — have been no strangers to companies, including those in the mattress industry, in recent years. In 2020, some mattress materials, such as polypropylene nonwovens, were diverted from consumer products like pocketed coils to create personal protective equipment in the fight against Covid-19. Weather also has been — and continues to be — a factor. Winter storms that hit in early 2020 unsettled the petrochemical industry in the Gulf States, disrupting foam supplies for months into the pandemic. Various international trade disputes have added to the disruptions. Most recently, trucker protests over Covid-19 protocols have slowed truck shipments, especially among automakers and suppliers.

Two years of bottlenecked ports and shorthanded production facilities have transformed an exercise in efficient materials distribution into a full-scale crisis. 

“Everyone in manufacturing and wholesale distribution seems to be dealing with supply chain disruptions,” says Bill Conerly, principal of Conerly Consulting in Lake Oswego, Oregon.

The economic rebound now underway in the United States, while a welcome development, has increased delivery pressures when many companies were starting to get things under control. “Many companies are telling me the problem seems to be getting worse as pent-up demand creates additional pressures,” Conerly says. And steep production cuts of early 2020, the result of government-mandated closures in many parts of the United States and the world, have only made the establishment of reliable delivery patterns more difficult.

“The solution is to develop a

playbook to address possible

disruptions and evaluate risks up and down the supply chain,

then develop a plan to address those risks.”

Broad effects

The supply chain imbroglio has affected a broad spectrum of industries. “For a number of years, our member companies have been dealing with disruptions caused by factors such as tariffs and higher energy costs,” says Tom Palisin, executive director of The Manufacturers’ Association, a York, Pennsylvania-based regional employers’ group with more than 370 member companies. With its diverse membership in food processing, defense, fabrication and machinery building, Palisin’s association can be viewed as a proxy for American industry. “The Covid-19 pandemic has given the supply chain a whole new level of priority. Companies in just about all sectors have experienced pauses and shutdowns. Some have even gone out of business.”

Labor shortages are one of the most persistent causes of distribution slowdowns. “One banker told me that his four manufacturing customers could each hire 50 additional workers if enough applicants were to show up,” Conerly says. “When a company I work with in Portland was awaiting a shipment of brass from Los Angeles, it turned out there was no driver for the truck.”

The reasons for labor shortages vary. “Part of the problem is that people are not yet willing to come back to work,” Conerly says. “But the fact is that there were not as many pandemic-related layoffs in manufacturing as in, say, food service. A larger issue is demographics: Older people are retiring, and younger people don’t want to go into dirty, noisy factories. And then you have government cash payments for people who get laid off. And finally, there are childcare issues.” 

The labor shortage has caused an increase in automation as a way to produce goods with fewer staff 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 fuel this trend. “The cost of labor has gone up while the cost of electronic equipment has gone down,” he 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 fewer workers, running machinery beyond its prime and collaborating with vendors to predict shipping delays. Manufacturers are scrutinizing every aspect of their business to root out waste and bottlenecks, identify risks and vulnerabilities, and seek new opportunities. Such moves strike a familiar chord with Palisin at the manufacturers association. 

“The pandemic has really highlighted the need to develop strategies to mitigate potential disruptions in the flow of critical components,” Palisin says. “That means doing a deep dive into the supply chain, mapping the geographical locations of the first tier of suppliers and learning about the reliability of second tier, as well.”

“The Covid-19 pandemic has

given the supply chain a whole new level of priority.”

Many manufacturers have found that purchasing certain materials from a single vendor to negotiate a lower price might not be the best overall strategy when the supply chain is disrupted. “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 at consulting firm Withum, headquartered in Princeton, New Jersey. 

When deliveries become 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 waning customer goodwill. “Many companies are investing more cash in inventories, and banks seem content with lending against that,” Hannan says. 

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. But another important revenue loss is that the business can’t make the sale because it doesn’t have product to ship. This happens when a mattress manufacturer can’t confirm a retailer’s order or when it can’t deliver an online sale. As they balance such costs, many companies are viewing higher cashflow on the shelf as acceptable. “Risk mitigation has become more important than efficiency gains,” Manzella says.

Furthermore, three historic costs of inventories — 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,” he says. Shrinkage, Conerly adds, is not an issue in some industries and in others 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.”

Despite the inventory mind shift, business owners feel that a return to the days of warehouses bulging with expensive inventory is not in the cards. “Everybody has become accustomed to reducing costs by minimizing touch points, moving goods from the ship straight to the distribution facility and on to the customer,” one operator says. Indeed, cooperative efforts with suppliers and customers may help bring back a greater emphasis on JIT. “I believe that the economy will eventually get back to that just-in-time concept as market disruptions lapse and the continued collaborative partnerships with vendors and suppliers remain a priority,” Hannan says.

The road ahead

Businesses face a conundrum in the coming months: As different segments of the economy attempt to return to pre-pandemic conditions, what will that mean for its industry? Will demand for its products grow, remain steady or decrease? The wrong answers can result in a pile-up of inventory or lost revenues and customers. “The risk is especially great for consumer and business goods requiring long lead times where businesses can’t easily turn the supply chain spigot on and off,” Hannan says. 

The solution, he says, is to develop a playbook to address possible disruptions and evaluate risks up and down the supply chain, then develop a plan to address those risks. And management must grapple with other unknowns, such as whether the recent surge in the price of manufactured goods can be passed along to the consumer. 

All this may soften profits until everything shakes out. “Revenues will probably hold up or even increase because of higher demand, but margins will likely be hit because of increases in the costs of raw materials, labor and inventory,” Palisin says. “It’s a very unusual situation where all of these cost increases are happening at once. Companies just can’t pass along everything to customers.” •

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