We all know that there are currently some pretty serious disruptions in supply chains around the world. Without rehashing why this is happening lets look at how we got into a situation that might not have occurred 15 or 20 years ago.
One of the industry related groups that I have enjoyed over the last few years is focused on the warehouse and distribution markets. While it might seem that these types of buildings pop up at random there is actually quite a bit of research about the specific location where one of these facilities will be built. The obvious purpose of these buildings was to build a buffer into the overall supply chain by providing space to hold goods and materials until they would be needed at the next step in the chain. In the case of retail goods the next step in the chain was a store with adequate shelf space and backroom space to accommodate demand for several days, if not weeks. When I was much younger one of my first “real jobs” was at a food distribution warehouse where we had racks and racks of goods simply waiting for the next grocery store order. When the time came for me to hop on my fork truck and fill an order it generally involved pallet loads of products that would last a store for at least a couple of weeks. The concept was the same for manufacturing related products and materials. Factories would place orders for several weeks or months of anticipated demand that was stored at a warehouse some days away. The factory had their warehouse space and the supplier had theirs. Plenty of buffer time.
But as we also all know inventory is money that is not returning value until it is used. So stores and manufacturers started to get smarter about inventory and utilizing “just in time” processes. Those processes were, at first, pretty manual calculations. Walmart was among the first companies to automate the process with sophisticated computer programs and, soon, other companies followed. This thinking started “backing up” the supply chain. If Walmart needed less inventory in their stores then the warehouse/distribution center could get by with less also if they employed the same thinking and automation.
As companies started stripping out costs through better inventory management and sharing some of those savings with their customers in order to build market share they had to also look for other cost reductions. Pushing production offshore to take advantage of much lower labor rates provided that gain in profit margin but added another level of complexity to the supply chain…transportation time. Once again sophisticated computer models were applied to the logistics and “just in time” transportation became real. Original manufacturers of products followed the same thinking and only produced what was needed for the next computer programmed delivery cycle.
But…..all of this did one significant thing….it removed almost all the time buffers along the entire supply chain. Any glitch along the way would result in a shortage. A ship gets stuck waiting to unload at Long Beach…a trucking strike keeps things stuck in Long Beach….a critical component has a defect…or just bad weather…could all create a serious problem because the computer programs that drive the supply chain are focused on creating the shortest possible time from source to site under normal circumstances. Recovery from many of those events is usually relatively quick because the source factories are still up and running...and logistics companies can anticipate those events and have backup simulations ready to go. Factory lights are still on, machines are still on and available, employees are doing maintenance work at the plant and are available to start up again in hours.
This time though those source plants are not still up and running. Nobody is there. Lights are off, machines and computers are turned off, employees are at home. Restarting a factory is not as simple as flipping a switch and we are seeing the results of that today. The entire supply chain needs to be “rebooted” and filled in again from the source end. Four weeks to produce enough product to fill the open orders, one week from factory to port of exit, three weeks at sea, two weeks waiting in the queue to unload, another one or two weeks from port to local warehouse, and another week to the point of use…all after the source factory is cleared to reopen.
So file this one away under the category of unintended consequences. We have created really smart computer programs to streamline the time from source to site but as a consequence we are vulnerable to even microscopic disrupters.
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