Analysis: How businesses respond to supply-chain issues
By Rob Griffin
11:54, 10 November 2021
Restarting industrial production after the Covid-19 shutdown was never going to be easy – but ongoing supply-chain problems have made it even more challenging.
Virtually every industry has been affected by global bottlenecks over the past six months as companies around the world have started to reopen.
Yet, according to a report from forecasting firm Oxford Economics, senior executives have responded to the problems in many different ways. Here we take a look at the main findings.
Backdrop
The study, which has been reviewed by Capital.com, points out that the outbreak of the pandemic in 2020 caused one of the largest drops in global industrial production in modern history.
This was followed by a fast rebound due the fact that consumer spending, fuelled by limited opportunities to spend on services, pivoted to goods such as cars, home furnishings and electronics.
“While demand always tends to outpace supply in the early stages of economic upcycles, the pace of the post-pandemic industrial expansion has been unprecedented,” stated the report.
Supply-side bottlenecks
The study findings also pointed to the burden placed on industrial production, which it said has since been “amplified by a range of supply-side” bottlenecks.
“The joint surge in industrial demand and persistent blockages has resulted in a sharper-than-usual drawdown of inventories relative to demand,” it added.
However, recent data has suggested this inventory tightness has begun to ease in several sectors, although there is still some way to go.
Notable exceptions
The global auto and electronics sectors have been suffering the most from the semiconductor-chip crisis, but there have also been equipment and material shortages elsewhere.
“In quarter four 2021, a record 49% of EU [European Union] manufacturing firms reported equipment as a factor limiting production, with this number as high as 86% in Germany,” stated the report.
Alongside microchip shortages, German firms have also been reporting a lack of steel, plastics, electronics and metals.
Easing not expected for months
Oxford Economics retains a cautious outlook as it doesn’t see these supply constraints easing completely before the second half of 2022.
Its recent global risk survey found two-thirds of respondents expected disruption to their businesses would continue to the latter part of next year.
“This sentiment matches what we have heard in conversations with US-based technology executives, many of whom expect relief from the semiconductor crisis and other supply woes by mid-2022 at the earliest,” it added.
Response of manufacturers
According to Oxford Economics, manufacturers have responded to surging goods demand by raising operating rates, which are now close to their pre-pandemic ceilings.
“Insufficient capacity investments may be an explanation for why utilisation rates are not boosted further,” it noted.
However, as the temporary push from inventory restocking fades and consumers rotate spending towards services, the expects some of the strains on production capacity to ease naturally.
How executives are responding
The report also suggested that labour shortages have emerged as another key risk for the industrial recovery in both the US and eurozone, most notably in Germany.
However, the analysis also highlights how companies have started to rethink their supply-chain management in the wake of the problems, and suggests some trends are likely to become permanent post-pandemic.
“We see several major trends at play as organisations of all sizes continue to cope with current disruptions while preparing for those over the horizon,” Oxford Economics added.
The trends
Oxford Economics has also outlined several trends it expects to see from businesses as they look to adapt to the prevailing conditions, as listed below.
- The evolution of a “just in time” inventory model to a “just in case” model, which could reduce exposure to some bottlenecks that may re-emerge in the future.
- An emphasis on flexibility, not only in terms of reacting to macro events – such as switching from ocean shipping to air freight – but even moving suppliers or manufacturers, redesigning products using existing inventories or adapting to hybrid working models.
- A major focus on supply-chain visibility and deepening connections, including suppliers, sub-suppliers and employees. The study also notes that increased visibility may not allow companies to completely avert supply logjams, but may provide enough advance notice to activate contingencies.
- Greater integration of supply-chain components, such as shipping systems and fulfilment centres. Systems integration can lead to efficiency gains and other benefits.
- Advanced solutions – such as robotic process automation – can increase the accuracy of order fulfilment while increasing volume, reducing accidents and boosting agility.
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