Keep Your Seatbelts Buckled. Don’t Expect A Return To Supply Chain Normalcy In 2023.

A couple of news articles lie on my bedside table reporting that the supply chain is back to normal. As I read them, I scratch my head and open my dictionary to refer to the definition of normal. According to Merriam-Webster, the definition of normal is conformance to a standard, or regular pattern : characterized by that which is considered usual, typical, or routine. While supply chain leaders are ready to say goodbye to 2022, supply chain operations are far from normal.

While the uneducated might argue that the supply chain is back to normal as goods are moving more freely avoiding the logistics snarls of late 2021, they are wrong. Logistics is only one of many factors supply chain teams balance each day. The pressures on the supply chains continue, but are shifting taking a new form. The primary issues are no longer logistics. For example the daily spot rate to move a container from Asia to the U.S. west coast is now at $1,400 down from $15,000 a year ago. Container trade is down 30% on Asian-U.S. trade lanes, and large manufacturers like P&G report a reduction in transportation and warehouse spending of $100M less than budgeted for 2023.

The focus is now juggling the issues with recovery from record inflation, radical shifts in demand, slowing growth, bloated warehouses with wrong inventories, and supply shortages. On the horizon is the unknown risk of the lifting of the Chinese zero-lockdown policy and the risk of new variants. Covid impact on supply is far from over. As seen in the Global Supply Chain Pressure Index, the issues are greater today than during the past decade. Now is not the time for organizations to declare victory.

Managing The Supply Chain In the Slowing Economy

As we face the 2023 headwinds, supply-centric thinking abounds, but demand-thinking is conspicuously absent. By definition, the GSCPI is supply-centric index ignoring the pressure from economic factors and shifts in demand. When both are considered together, the current state is far from a new normal.

Organizations perform better when growth is on the upswing than when the pendulum swings downward. The transition from 6-7% global growth at the end of 2021, to the 3.7% at the end of 2022, and followed by the forecasted 2.2% for 2023 is a tap on the brakes. In the words of one of my Fortune 500 clients using a bike analogy, “As an organization, we pedal better uphill than downhill.” Pedaling downhill is tough when the process latency for the average organization to sense market shifts and align on new plans takes four-to-six months. Bonus incentives reward a positive bias in sales and marketing that is tough to reconcile with declining and shifting demand. The process is longer and more problematic in large global manufacturers fraught with organizational politics.

Traditional supply chain planning assumes that history is a good predictor to model the current state. Optimization using history as input into planning is a risk to the organization. The reason? History is a distorted pattern, almost worthless, in a rapidly changing market.

Here are factors that are not in the index, but will weigh heavily in the upcoming juggling act in managing supply chain disruption:

• Inflation. Recession. Over the past year, companies managed supply chains in a period of record inflation. The price tension from rising commodities and lack of supply dominated the discussions in many board rooms. Market stability is still a factor especially in commodities affected by Russian-Ukraine war (especially oil and metals). In a recessionary market, it is also important for companies to manage inventories closely through the shifts. Today, the average warehouse is bloated with the wrong inventory (with higher carrying costs from inflationary times). In the slowing economy,ccompanies will shy-away from declaring the write-offs needed to free-up warehouse capacity, but will miss the price opportunities of managing demand in a volatile economic environment.
• Demand Downturn. As the markets slow and recessionary pressures evolve, buying patterns shift. The story will not be of demand decline, but of basic changes in consumption. As this story unfolds, historic demand is not a good predictor of future demand. The answer is the use of channel data, but only 2% of manufacturers and retailers can effectively use market data to sense and predict market shifts with minimal latency. Just as the shelves are empty for flu and cold medicine at present, the use of legacy approaches to planning will cast a dark shadow over 2023. Current approaches to planning will yield many empty shelves in consumer goods and healthcare.
• Supply Shortages. The issues of supply will continue as companies sort through the issues with Covid, war-torn Ukraine, and food insecurity in Africa. Pressure on armaments and healthcare will ripple through the supply chain.
• Weather Disruption. The shifts in global water patterns will continue to be problematic impacting manufacturing capacities and barge transport on major rivers like the Rhine and Mississippi. Now is a good time to design flows and contingency patterns to move goods and services seamlessly through changing weather patterns. Only 9% of companies actively design supply chain flows.

Conclusion

Supply chain leaders need to continue to keep their seat belts buckled. While it is welcome relief to say goodbye to 2022, the New Year offers a new set of challenges that companies are not ready for. Best of luck in your journey.

Federal Reserve Bank of New York, Global Supply Chain Pressure Index, https://www.newyorkfed.org/research/gscpi.html