Supply chain disruption is a major concern for companies around the world. As the last couple of years have demonstrated, even the most optimized supply chains are not immune to the risk presented by possible disruption – and this, in turn, can make it difficult for companies to meet orders on time. But while it may not be possible to eliminate supply chain risk entirely, there are plenty of actions that companies can take to minimize the impact of any disruption that might occur.
So which types of disruption should you be aware of? Read on to learn more about potential risks and find out how to overcome supply chain disruptions.
What is supply chain disruption?
A supply chain can be described as the sequence of steps taken by a company and its suppliers to produce a product. As such, supply chain disruption includes any internal or external factor that might hinder the usual flow of materials or goods through that supply chain.
Supply chains are often highly complex in today’s globalized environment. In some cases, creating a finished product involves sourcing numerous different items from different locations – all of which have to be aligned if the process is to work smoothly. The supply chain typically spans a number of steps as items move between the supplier, manufacturer, distributor, retailer and consumer. Any disruption that occurs along the supply chain can affect one or more of these moving parts – resulting in a domino effect that can throw the entire supply chain into disarray.
Types of supply chain disruptions
Supply chain disruption can come in many different forms – although some are more likely to come to pass than others. Likewise, the impact on the supply chain can vary considerably between different types of disruption.
Some types of disruption to bear in mind include:
From earthquakes and tornadoes to wildfires and floods, natural disasters can cause major disruption to suppliers’ operations – and they can also wreak havoc with the transportation of goods between different players in the supply chain.
Some locations experience more large-scale natural disasters than others. But while countries such as the UK or the US may be less at risk of such events, companies in those countries can nevertheless experience disruption to their supply chains as a result of natural disasters in other countries.
For example, the 2011 earthquake and subsequent tsunami in Fukushima, Japan had a disproportionate impact on the supply chains of automotive companies around the world, due to their reliance on parts manufactured in that region.
War and civil unrest can also cause major disruption to supply chains, as can developments such as export tariff hikes. Depending on the type of disruption, geopolitical events can lead to price rises, delays that extend lead times – or even cut suppliers off from a supply chain completely.
One study revealed that more than two-thirds of survey respondents in the US had been impacted by the US-China trade war, and that almost half of businesses in the most affected industries had no contingency plan.
More recently, Russia’s invasion of Ukraine has implications for everything from semiconductor chips to food supplies and energy prices.
The arrival of the COVID-19 pandemic in 2020 highlighted just how disruptive a viral pandemic can be to global supply chains – not only because of factory shutdowns and logistical challenges, but also because of abrupt changes to consumer behavior.
While the events of the pandemic were highly unusual, it has been hypothesized that pandemics may become more frequent in the future due to the prevalence of global travel, ongoing climate change, and increasing urbanization.
Fluctuations in demand for certain products or materials can also have a significant effect on supply chains. As well as finding it difficult to access the components needed for manufacturing, companies may also find that prices rise beyond a viable level during shortages.
Driven in part by increased household and industry demand, the semiconductor shortage has demonstrated just how wide ranging the impact of such a shortage can be, affecting everything from the automotive industry to games consoles, microwaves and refrigerators.
Finally, supply chains can be disrupted by risks intrinsic to suppliers themselves, such as poor financial health, reputational issues and legal problems. This type of disruption can be particularly challenging for buyers that are reliant on a single supplier for a particular material or product.
Potential impact of disruptions on the supply chain
From natural disasters and pandemics to shortages and geopolitical developments, it’s clear that supply chains can be affected by many types of disruption. While different events will affect supply chains in different ways, the possible impact can include soaring costs of materials of goods, shortages of materials and labor, and delays that may result in longer delivery or manufacturing lead times.
As such, companies should consider how they can avoid these risks, and/or mitigate the impact and duration of any disruption that might occur.
How to avoid supply chain disruptions
There are a number of ways that you can prepare for different types of disruption before they arise – both by increasing the resilience of your supply chain, and by reducing the impact of any future disruptions. These include:
- Carry out regular supply chain risk assessments to identify the most likely disruptions before they arise.
- Review your approach to inventory management to ensure you have appropriate safety stock levels.
- Make sure you have contingency suppliers available so there is a back-up option when disruption strikes.
- Improve visibility over your supply chain by using an inventory management solution that enables you to spot disruptions quicker.
How to overcome supply chain disruptions
While the steps detailed above can help you avoid disruption to your supply chain, it’s impossible to avoid all instances of supply chain disruption. As such, it’s also important to have a plan in place that enables you to overcome issues and resume normal operations as quickly as possible when the need arises.
In the event of a disruption, you should consider the following points:
- Communicate with customers. Sometimes delays are inevitable – but being transparent with your customers can make a big difference when it comes to maintaining strong relationships even in times of difficulty.
- Audit your inventory. Assess your inventory levels to gauge the level of operational risk your business is facing.
- Optimize production and distribution plans. Make the most of the elements of your supply chain that have not been disrupted. This is the time to activate any contingency suppliers you may have available.
- Evaluate the cash flow impact. It’s essential to determine what impact the disruption will have on your company’s bottom line. If required, take appropriate steps to free up working capital.
- Support your suppliers. Last but not least, supporting your suppliers through times of difficulty can keep the whole supply chain moving – so consider speeding up customer payments using solutions such as supply chain finance.