How companies can help solve the supply chain mess

There's no shortage of explanations for the logistical snarls denying consumers the abundance they once took for granted. Persistent pandemic-related shutdowns, extreme weather, demand swings, hoarding, politics, underinvestment in infrastructure, and just plain bad luck have all played a part in fouling up supplies of everything from toilet paper to automobiles.

It didn't need to be quite this bad. President Joe Biden talked to the leaders of Walmart Inc., United Parcel Service Inc., FedEx Corp. and Target Corp. this week to see what might be done. He also announced some shifts of funding to help ports relieve logjams and said that parts of the infrastructure plan recently approved by Congress would guard against future disruption. For the most part, though, this isn't a job for the government. If the manufacturers, distributors and retailers responsible for making and delivering goods had adopted some long-known best practices, the disruption could have been much less severe. These lessons are worth learning before the next time.

Over the past several decades, a combination of trends — including containerisation, e-commerce and freer trade — put comparative advantage to work with a vengeance. Activities shifted to wherever they could be done most efficiently. Supply lines grew longer and more complex, snaking around the planet in a relentless search for the best configuration.

This brought benefits, but also risks. The growth of supply chains often exceeded companies' efforts to keep track, from time to time causing unpleasant surprises — as in 2012, when an explosion at a German chemical factory triggered parts shortages that threatened US auto production. The sheer number of links amplified the so-called "bullwhip effect," in which initial fluctuations in demand grow larger the farther they move up the chain.

The pandemic compounded the issue in an unprecedented way. Companies discovered the full extent of their exposure to producers in locked-down parts of China and elsewhere — often deep in their supply chains, beyond their own suppliers' suppliers, where they hadn't judged the risks. As consumers began hoarding and purchasing managers inflated orders to get whatever they could, the bullwhip lashed wildly, overloading already-clogged transportation channels. Economic recovery has added to the chaos: As of September, unfilled orders of consumer durables were at their highest in the US since 2005, up nearly 50% from before the pandemic.

What to do? In some ways, the problem is no longer so acute: Shortages of pickup trucks and Squishmallows are less grave than lack of essentials such as ventilators and N95 masks. In other ways, the damage has been done. Some economic growth will be postponed as consumers hold off on purchases until better times, and a lot of production will end up wasted, arriving too late or too old to be of use. In the short term, sorting out the tangles will be mainly a matter of individual initiative and ingenuity.

In the longer term, though, companies can do a lot to avoid a repeat. For one, they can get a better grip on their supply chains — something surveys suggest many are already doing. Thorough mapping, all the way to suppliers several tiers down, can allow them to identify vulnerabilities, diversify suppliers, improve resilience, and improve their processes in ways that pay for themselves. Renault, for example, is using simulations aimed at helping it navigate disasters. VF Corp., maker of brands such as The North Face and Eastpak, recently started publishing product-specific maps that go down to the fourth tier of suppliers. 

Cooperation and information-sharing are the best antidotes to the bullwhip effect. Instead of guessing at demand based on information from the nearest middleman, producers can gain access to point-of-sale data to build better forecasts, and in some cases even manage retail inventory directly. Procter & Gamble, for example, uses such "vendor-managed inventory," reportedly with positive effects on sales and productivity. Many other companies have yet to follow suit.

Executives shouldn't need a nudge from the government. Subpar supply-chain management leads to production delays, higher transportation costs, missed sales and wasteful surpluses. But forcing companies to share information, as the Biden administration has been attempting, is counterproductive: Commerce Department questionnaires are just another nuisance, collecting data that's stale by the time it's received.

Building a more flexible and resilient system won't be easy, and can't be mandated from on high. It'll require the efforts of operations experts at thousands of individual firms, and might entail significant upfront costs. Ultimately, it's a matter of adopting best practices in pursuit of profit — a self-interested endeavour that will help the system as a whole work more smoothly.

Mark Whitehouse writes editorials on global economics and finance for Bloomberg Opinion.

Clive Crook is a Bloomberg Opinion columnist and writes editorials on economics, finance and politics.

Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement.