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Making Sense of Supply Chains

News headlines have been rather apocalyptic recently. An impending third world war, an imminent food shortage disaster, the cost-of-living crisis, and finally, continued supply chain disruption.

Last week, it was announced that President Biden would invoke Korean War-era powers to tackle the US’ baby formula shortage – the latest casualty of broader turmoil in global supply chains in the wake of the pandemic.

Following the closure of manufacturer Abbott’s Michigan factory, approximately 43 per cent of baby formula products became out of stock. Medical professionals have had to warn desperate mother’s not to risk their children’s health by diluting or making their own formula.

Attributed to both specific and general factors, this article will introduce the rudimentary concepts of supply chains most relevant to case study interviews.

What is a supply chain?

A supply chain is a network between a company and its suppliers to produce and distribute a specific product to the final buyer. This network includes different activities, people, entities, information, and resources. The supply chain also represents the steps it takes to get the product or service from its original state to the customer (Investopedia).

The development of supply chains is crucial to reducing costs and remaining competitive. It is often confused with Supply Chain Management, which is the process of optimizing supply chains to lower costs and speed up production cycles.

Integral to the operation of a business, risks and vulnerabilities present within any given supply chain entail drastic ramifications.

The Impact of COVID-19

Some 94% of Fortune 1000 companies (the top 1,000 largest American businesses by revenue) reported supply chain disruptions from COVID-19. The pandemic impacted global supply chains in two distinct ways.

Firstly, as reported by Morgan Stanley, ‘the single largest culprit of disruptions has been the unexpected and unprecedented surge in demand for goods’. A sharp but short-lived decline in demand early in the pandemic prompted many firms to trim inventories and production.

However, soon after, the combination of fiscal stimulus and social distancing drove demand for goods to new highs. Supply chains could not keep up.

Secondly, transportation costs also reached all-time highs. While normalizing consumer demands should take pressure off supply chains for now, bottlenecks remain an issue. The trucking industry is facing persistent labour shortages, and airfreight capacity is at a substantial decline – approximately 65 per cent in the US.

These issues have been reinforced by the ongoing Russia-Ukraine war and the persistence of China’s lockdowns. China’s dominant role as the “world’s factory” means that any major disruption puts global supply chains at significant risk – and lo and behold, the failure to diversify has materialised.

Supply Chain Disruption and Baby Formula

Whilst challenges in the global supply chain have had some influence on the baby formula shortage, domestic factors played a larger role.

Firstly, the US formula market is incredibly concentrated. It is dominated by just three players: Abbott, Gerber, and Mead Johnson, who owe their strength to the US government. An estimated two-thirds of all formula is purchased via the Women, Infants and Children nutrition programme – a federal funding scheme for low-income families with contracts solely with these three companies.

Due to tight safety restrictions and import duties, competition from Europe and Canada has been ruled out. Therefore, 98 per cent of US formula is made domestically. If any of the three companies were to face challenges (Abbott in this instance), then supply would inevitably dip drastically.

Secondly, COVID-19 brought an unexpected dip in the birth rate. The number of daily births had already been falling by an average of 0.39 per cent annually from 2000 to 2019, but this dropped significantly in the winter of 2020.

Parents who initially hoarded baby formula, along with toilet paper and pasta, began using their stockpiles which led to a drop in-store orders. Formula makers, impacted by transportation bottlenecks, have since struggled to keep up with demand when the birth rate recovered, and demand surged.

Despite Biden’s efforts, Republicans have sought to turn the issues into a political attack on the administration, saying officials have ignored the problem for weeks. To prevent disruptions, permanent changes that drop important barriers whilst still adhering to stringent health requirements are needed.

General points to consider for case studies

Supply chains were a topic that came up several times during my interviews. Understanding a few simple points will put you in a competitive position.

The key steps in a supply chain include (Investopedia):

1. Planning the inventory and manufacturing processes to ensure supply and demand are adequately balanced.

2. Manufacturing or sourcing materials needed to create the final product.

3. Assembling parts and testing the product.

4. Packaging the product for shipment (or holding in inventory until a later date).

5. Transporting and delivering the finished product to the distributor, retailer, or consumer.

6. Providing customer service support for returned items.

A summary of global supply chain challenges

The need to diversify manufacturing away from China has led to a trend of ‘deglobalization’. Triggered by temporary trade restrictions, shortages of pharmaceuticals and critical medical supplies, and the lasting consequences of the U.S.-China trade war, economic nationalism is on the rise.

Manufacturers worldwide are therefore under greater political and competitive pressures to increase domestic production, grow employment in their home countries, reduce or eliminate dependence on perceivably risky sources, and rethink lean manufacturing strategies.

Yet, simultaneously, consumers will continue to want low prices (as we head into a recession). Firms will not be able to charge more just because they manufacture in higher-cost home markets (no brownie points for ‘Made in England’, unfortunately). Moreover, pressures to employ more capital to improve operational efficiency and manufacturing capacity frugally will remain unrelenting.

Potential Solutions

Lawyers are solution oriented. To impress your interviewers, remember the following points:

1. Uncover and identify hidden risks and vulnerabilities

One challenge facing modern global supply chains is the complexity of its components. It is very difficult for a single firm to possess the breadth of capabilities necessary to produce everything for itself.

For example, automakers are not equipped to create the touchscreen displays nor the countless microprocessors fettered throughout their cars. Tesla may be an exception.

It is crucial that businesses comprehensively identify which suppliers are low-, medium-, or high-risk and draft corresponding contingency plans.

2. Diversifying supply base

Businesses should add more sources in locations not vulnerable to the same risks. A recent trend has been “China plus one” – a strategy of spreading production between China and a southeast Asian country such as Vietnam, Indonesia, or Thailand.

Whilst this does not prevent regionwide problems, such as the 1997 Asian financial crisis, it acts as a positive step in the right direction.

3. Hold intermediate inventory/safety stock

Part of the problem is the model that current businesses operate with. Most use ‘just-in-time’ replenishment, which means that inventories are incredibly lean (the supply is made to match demand as closely as possible).

Businesses should determine how much extra stock to hold in the interim, in what form, and where in the value chain. Although, this runs the risk of obsolescence.

4. Use technology

As firms relocate parts of their supply chain, this is a great opportunity to make major process improvements. The following technologies can be taken advantage of:

· Automation.

· New processing technologies. (e.g., capitalizing upon new innovative and market-leading machines and resources).

· Additive manufacturing (3D printing).

As you can see, supply chains are a big deal. Most of us are ignorant of the sheer complexity of processes and logistics that goes into the things we consume every day. This rudimentary introduction should put you in good stead to explain this macro commercial trend.

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