Businesses should work with suppliers in an effort to address potential short-term product shortages and carry out a review of their supply chain arrangements and test their resilience in the longer term.
The actions are recommended in light of evidence recently given to a committee of UK MPs which has warned that supply chain problems – reported globally and stalling many countries’ economic recovery from the Covid-19 pandemic – could last until 2023.
The immediate impact of supply chain disruption is likely to be particularly highlighted during the busy ‘Black Friday’ and Christmas period with retail groups warning that delays in the supply chain could lead to stock levels falling short of demand.
James McBurney
Partner
A better commercial approach might be for the parties to collaborate and try and prioritise delivery of certain products or components, and then work on finding a long term and sustainable solution
The problem
Supply chain issues are widespread. They span a range of industries, such as food, clothes and technology, and are impacting different “stages” of supply from manufacturing through to retail. The issue is global. For example, car exports in Japan are reportedly 37% lower than at the same time in 2020 with car manufacturers in particular feeling the effects of the well-publicised global shortage of semi-conductor chips.
There are many causes of the disruption to the supply chain. Many economies are reliant on imports from Asia Pacific, where the closure of many factories due the pandemic coupled with a quick rebound in consumer demand has seen demand outstrip supply. There have also been labour shortages at ports and in transport generally, with the Institute for Government in the UK recently reporting that the single biggest cause of supply chain disruption was labour shortages. Shortages of delivery drivers across Europe is a particularly acute issue. In the UK this was supported by evidence before the Business, Energy and Industrial Strategy Committee which heard that 1.4 million EU workers left the UK during the pandemic.
The impact of this disruption to the supply chain is felt in different ways depending on the nature of what is being supplied. For example, for manufacturers, vital components could be delayed, unavailable, or orders could be incomplete leading to production line stoppages. For products comprised of hundreds or thousands of parts, all it takes is for one component to be missing or late for the entire manufacturing process to be disrupted. The same issue affects fresh food retailers, where the absence of one important ingredient might be enough to cause a shortage in supply. In addition, many manufacturers operate a “just in time” workflow system and even a slight delay in delivery can affect production.
Delays to production can have an impact on retailers and consumers in terms of empty shelves and fewer product choices. Even when products are available there can be delays due to shortages in the logistics sector, where the shortage in delivery drivers is also contributing to the problem – the Office for National Statistics recently reported that there are 53,000 vacancies in the transport and storage sector in the UK. The issue is exacerbated by the additional demands placed on the supply chain in run up to Christmas.
Andrew Herring
Partner
A medium-term project for many companies will be to review and overhaul their supply chain and stress testing its resilience
Actions for businesses
There is no quick fix solution and there are a range of potential measures that a company might implement to improve the resilience of its supply chain. For example, some companies might be over-reliant on one supplier for a particular component and might diversify their supply chain to include additional suppliers. Manufacturers may also decide to produce a product itself rather than buying it from a third party, or switch from a global supply chain to a more localised supply chain which could help to reduce transit costs and reduce the delays that can result from cross-border trade.
A medium-term project for many companies will be to review and overhaul their supply chain and stress testing its resilience. In a relatively short space of time, logistics has become one of the priority issues for boards. Now more than ever it has become essential for a company to have a robust, responsive and reliable supply chain, and a way in which it can gain a competitive advantage in the marketplace. Failure could expose companies to the risk of not meeting contractual key performance indicators KPIs, possible contract termination scenarios and significant damages claims from customers.
Where delays result from a shortage of delivery drivers, retailers may look to the terms of their logistics contract for options. However, logistics contracts are often based on long-term and established business relationships, where both parties have invested time and effort in developing the relationship and have a good understanding of each other’s business. Switching to a different logistics firm is often not a viable option.
It is perhaps inevitable that there will be increased pressure on logistics firms due to the shortage of drivers. However, it isn’t a case of the customer simply considering switching supplier because the impact of the shortage will be felt across the sector. A better commercial approach might be for the parties to collaborate and try and prioritise delivery of certain products or components, and then work on finding a long term and sustainable solution.
The pandemic and labour shortages have highlighted the fragility of the supply chain, and businesses should act now to review their supply chain and make improvements to ensure future reliability resilience.
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