Avoid material bottlenecks
with resilient supply chains

The coronavirus pandemic hit the global market hard in 2020 and caused huge fluctuations in demand. Companies are still feeling the consequences today. Across all sectors, there is talk of the most serious supply bottlenecks in decades. And so far, there does not appear to be any significant recovery. Experts expect that there will still be serious supply bottlenecks in 2022.

Even if the current supply bottleneck is overcome at some point, it will not be the last. Even without a global health crisis, there will be shortages of raw materials, environmental disasters or simple traffic jams on the highway, which will be accompanied by bottlenecks or delays in the supply of materials, meaning that production cannot take place as planned.

In this article, I would therefore like to show you the consequences of the current supply bottlenecks and how you can achieve a resilient supply chain in the future through resilient supply chains. We will be happy to support you in this.

The global market is fluctuating

The impact of the coronavirus pandemic on supply chains

The rapid spread of the coronavirus in 2020 led to the closure of industries around the world. As a result of the lockdown, consumer demand and industrial activity fell at the same time. After the end of the lockdowns, demand has skyrocketed. Nevertheless, supply chains that were disrupted during the pandemic are still facing major challenges and are only recovering slowly. This is leading to a state of chaos for manufacturers and distributors of goods who, for various reasons, are no longer able to produce or supply as much as before the pandemic.

Euro Area Supply Constraint Indicator

The Euro Area Supply Constraint Indicator reflects this problem. While the indicator fell rapidly to -2.64 in May 2020, it quickly rose again. Within a year, it rose to 3.16. A positive value means a supply deficit, a negative one a supply surplus. The downward trend in May 2020 is due to the first lockdown. Due to the decline in demand and, above all, the uncertainty, companies scaled back their production. As the economy recovered from the pandemic in 2021 and companies’ order books are now full again, this is causing significant problems on the market. The indicator has not yet fallen again. So there is still a supply deficit.

Sea freight from the Far East

The consequences of the coronavirus pandemic include, for example, increased delivery times from the Far East and the explosion in container prices. Before the crisis, delivery times from China to Germany by ship were 5 to 7 weeks. Today, companies expect delivery times to be closer to 8 to 10 weeks. Even if the materials leave the factory in the Far East on time, they do not arrive at the downstream stage of the supply chain on time. This may be due to the current shortage of containers on the one hand and corona-related port closures on the other. As a result, material is accumulating in the hinterland of the port and delivery times are increasing.

There is also an increase in container costs. The cost of a 40-foot container from China to the Mediterranean increased more than fivefold between October 2020 and October 2021. These prices have an immense impact on purchase prices, which in turn means that the selling prices of products have to be increased and inflation rises. This example illustrates the extent to which the pandemic has affected the global economy.

Firefighting

Appropriate countermeasures are required to counter fluctuations in the market. Typically, companies implement short-term measures that often only solve an acute problem and are short-lived. These include procuring materials from brokers at a significantly higher purchase price, increasing safety stocks, changing the type of freight from sea freight to air freight or adjusting the production schedule.

However, such measures and decisions only serve the purpose of firefighting and cause high costs. To escape this situation, you need an effective and appropriate supply chain strategy – and above all a deep understanding of your supply chain to make it agile and resilient.

Risk minimization with resilient supply chains

In order to create a resilient supply chain, various success factors are relevant. As a basis, I will first explain what resilience means and why it is necessary. I will then show you relevant success factors for avoiding cost-intensive supply bottlenecks, escaping the passive firefighting position and actively shaping your network.

Definition: What does resilience mean in supply chain management?

Resilient supply chains are supply chains that independently restore their original state despite disruptive factors and react agilely to changes. They are resilient, can recover from disruptions and thus return to their original state or even improve. Resilient supply chains delay disruptions and reduce the impact of disruptive factors on production or the end product.

Why are resilient supply chains becoming increasingly important?

The current developments described above clearly show why resilient supply chains are so relevant. In addition to the disruptive factors, there are also typical market characteristics that require a more resilient supply chain . Nowadays, customers expect a high level of responsiveness and demand that goods arrive as quickly as possible – ideally as same-day delivery. Customers also expect the service to respond flexibly to their wishes and to be able to customize orders. As a result, the delivery date may be postponed or even brought forward, for example, or quantities and partial deliveries may change.

In order to master such challenges and meet these requirements, the supply chain needs to be agile and resilient. We will show you how to develop a resilient supply chain using key factors.

Success factors for a resilient supply chain

Digital supply chain for resilient supply chains

Due to complex and global supply chains, it is almost impossible to create a high level of transparency without digital images. As it is important to work together with real-time data and the various players in the supply chain, data exchange in the supply chain is essential. However, SMEs in particular are often still equipped with legacy systems and rely on paper. As a result, processes cannot react quickly and flexibly to changes.

Interfaces to logistics service providers and a direct connection to suppliers promote greater transparency. This means, for example, that material movements can be tracked in real time without having to call the supplier or freight forwarder. This means you can see when the materials were dispatched and where they are currently located. This makes you more responsive in the subsequent process steps and saves your employees time. If the delivery is delayed, the production plan can be adjusted in good time without having to wait until the materials are picked to discover the missing parts.

Targeted interfaces between the individual systems are essential in order to save time and money. The digital networking of systems also makes it possible to identify disruptive factors such as late deliveries or missing quantities at an early stage and take appropriate countermeasures. We are happy to support you in the effective networking of systems along the entire supply chain.

Digital Twin

Digital twins enable maximum transparency through a virtual image of your supply chain. In the first step, the digital image shows you exactly how your supply chain is structured. In the next step, you can use the digital twin to develop “what-if scenarios” using modeling and simulate events that could potentially occur.

Using the example of port closures in the Far East, the digital twin model can simulate the specific impact this has on your ability to deliver. It is possible to show the effects on service levels, delivery times, inventories or other KPIs – including the impact on products and end customers. It is also possible to run through and compare scenarios for other routes while avoiding the closed port.

Using “what-if scenarios”, you can consider potential disruptive factors and check which risks your supply chain is exposed to. This enables you to initiate countermeasures for relevant risks in good time.

You can find out more details about the benefits and the procedure for introducing digital twins in the supply chain in this article.

Single Source of Truth

High data quality is essential for a digital supply chain or the implementation of a digital twin. The principle of single source of truth applies in order to avoid redundancies in the data and generate a high level of informative value. This avoids both a delay in determining the relevant data and subjective interpretations by the sender and recipient of the data.

For example, corporate groups are often confronted with the problem of having different ERP systems that do not contain exactly the same information. As a result, supplier master data differs and the total order volume is not visible at a glance, but has to be checked in the individual ERP systems. If there are also relocations or internal sales of raw materials between companies, the total purchasing volume often does not match or is interpreted subjectively by the user. As there are several data sources that make different statements, no single data source is 100% accurate.

The principle of the single source of truth is not only relevant for creating resilient supply chains. It also promotes synergies within your company and the reliability of data sources. As a result, this increases transparency in your company, with your suppliers and with your customers, enabling reliable statements and decisions to be made.

Decentralized Supply Chain

To create resilient supply chains, decentralization of the supply chain is recommended. Sourcing materials from just one region carries the risk of disruptions in the region and the entire supply chain being interrupted. This can be caused by political, socio-cultural, legal, economic or environmental events. The risk is therefore minimized if you distribute the supply chain across different locations and do not rely solely on suppliers from the Far East, for example.

Multiple sourcing

The aim is to design supply chains in such a way that production supply is still guaranteed in the event of a supplier failure. In any case, it makes sense to define critical components whose missing quantities would lead to direct and considerable consequences. For these materials in particular, it is expedient to develop individual sourcing strategies and to identify their risk factors and minimize them as far as possible. It is important to consider not only the directly upstream supply chain stage, but also the suppliers of your suppliers. Ideally, therefore, several suppliers should be available for critical materials in order to reduce the risk of faulty materials.

KPI Tracking

It is also important to keep an eye on changes in disruptive factors. Without the right context of key figures, there is a danger of not recognizing risks in time. For example, you can use BI systems to continuously visualize changes and define threshold values that you are notified immediately if they are exceeded or not reached. This allows you to recognize atypical changes at an early stage and initiate countermeasures in good time.

For example, it is possible to use live tracking of containers to forecast their goods receipt date in order to adjust the production plan accordingly if, for example, the latest possible delivery date is exceeded. You can also determine statements on on-time delivery or quantity reliability in real time and take specific optimization measures with suppliers in the event of poor performance.

In this article, you will learn more about how you can set up a meaningful key performance indicator system based on your objectives and use it in a targeted manner.

Summary

Using the success factors outlined, you can build resilient supply chains and respond to disruptions early and appropriately.

Even after the pandemic, unknown risks will arise in the supply chain in the future, presenting your company with similar challenges once again. Supply chain resilience is essential to minimize the risk of material bottlenecks and still secure your production supply.