Read this blog to discover the perspectives on Supply Chain Management through 2022
The 2021 holiday season is plagued with long lead times, port congestions, bad forecasts, raw materials stuck overseas, and labor shortages. How will these disruptions affect supply chains not just for the remainder of the season, but onward into 2022?
The worldwide supply chain chaos we are experiencing today will continue beyond year end. For most companies, the last quarter of the year represents a significant portion of annual transactions and revenue. And the impacts supply chains are facing right now, such as supply shortages and backed up ports, cannot be solved by expediting and increasing labor because we are also experiencing labor shortages. Of course, there’s the added complexity of renewed country shutdowns as well. Issues such as these cannot be remediated overnight or with a flip of a switch.
Questions about the future abound as a result. How do we plan for the near- and long terms? How do we generate accurate forecasts right now, and going into next year? How do we take into account the uncertainties on the supply side? How will we transition to understanding the current disruptions and how they will affect supply chain management in 2022?
We sat down with Brian Lewis, Product Manager of CCH® Tagetik Supply Chain Planning and an industrial operations engineer with 16-years of experience working with supply chain management teams, to address some of these questions and gain a better understanding of what we are experiencing now and what we should plan for in the future.
As 2021 is coming to a close, we have been seeing longer and longer lead times and high volumes of backups of goods for delivery to consumers. What are the areas of greatest impact of this when it comes to supply planning and demand planning? And what is the relationship on the financial planning side of things?
From the retail side, if we don’t have goods on our shelves that our customers are looking for, are they going to a competitive retail location that has the goods? Chances are these kinds of delays are across the board, so the same product is out of stock at multiple locations. With that in mind, is it truly lost demand? That brings into consideration that one part of demand planning is whether – in the scenario where we don’t have the product or raw material we need - that’s truly lost demand that we can never recover, or whether it’s actually pent-up demand. In the case of the latter, once the product does come back into stock, we will be able to sell it or consume it. That difference in lost versus pent-up is how I would plan for demand.
If it’s pent-up demand, I want to make sure that I've got orders from a supply planning perspective. I want to make sure that I have orders in the pipeline because I know there is demand for the goods or materials.
If the product is not going to make it in time for the holidays and will not be backordered into January/February, the demand is truly lost. In this scenario, we probably don’t want that product anymore. This is when we start to look at the supply planning side and say, ‘Can I cancel any orders from my vendors?’
If it's already in a container sitting off the coast of Long Beach, it might be too late. It’s already on its way. I can’t do anything about that. It’s going to show up at some point. So, if I can’t cancel or delay it, and it’s going to show up anyway, then I need to start thinking about what we’re going to do with all this product that nobody wants because the holidays have passed. We need to start talking to sales and marketing about selling the product - special promotions and the like - because now we're going to have more than we really need on the shelves. So, we're already now thinking about new ways to sell it because the demand is basically gone.
TIP: Look at demand through two lenses. Is it pent-up demand or is it lost demand? That’ll dictate whether people will start trying to cancel orders. When that happens, plan for seeing a cascade of order cancelations move throughout the year.
Even if you can’t cancel orders, products are in cargo ships sitting off the coast of California anchored, waiting to be unloaded. The products in those containers are products that people want to buy and they just can’t get off the ships fast enough. If the holiday season passes by the time the containers are offloaded, that product will be sent somewhere, possibly to a distributer who now has all this product they don’t want. They are going to start to look at secondary markets.
Switching gears to a financial perspective, these disruptions have great effects on the revenue of retailers and distributors. Retailers start the ripple effect of canceled orders that goes all the way upstream to raw materials. If customers can’t buy because there is no product on the shelf, retailers start canceling orders to distributors. Then distributors cancel orders to manufacturers. Then manufacturers cancel raw material orders to their suppliers. Those suppliers are distributors or manufacturers themselves, who in turn cancel orders to their suppliers. And on and on. Every order that is canceled affects revenue at each point in the supply change. And that lost revenue depends on when those orders are canceled and the state of the shipping or production.
If a retailer cancels an order, their distributor now has a shipment locked up in a container on a ship off the coast of California. This distributor is hit with a double whammy of lost revenue and having already paid for the product from their manufacturers and to ship it to their distribution centers, and is now stuck with unsold products. The retailer loses revenue, but the distributor loses revenue and is stuck with all this inventory that is no longer wanted by anyone.
We’ve seen a perfect storm of disruptions from the COVID-19 pandemic hitting the 2021 holiday season with some vendors and shippers unable to predict delivery dates, materials and goods being held up on the water, and more. How does this impact those responsible for supply, demand, inventory and S&OP planning? What should be areas of focus for trusted planning? How should planning shift going into 2022?
A lot will come down to how companies want to plan for uncertainty. Already companies are thinking about whether the supply chain will get flowing again next year, and can they reasonably expect the entire backlog to be fully flushed through by sometime next year? I guarantee there are companies already thinking about the 2022 holiday season. What will that mean for the supply chain, will it be working enough to be more predictable? Do we already need to start thinking about ordering now for products we’ll need end of 2022?
Certainly, you are looking at how far in advance you’re planning. And for highly seasonal items such as holiday toys, you’re thinking differently than you would have in 2019 or even 2020.
Considering the disruptions being faced in the current holiday season, companies start to hedge and over-order now since you can no longer rely on regular shipments. That, though, creates the bullwhip effect, in which small changes at the endpoint amplify and amplify through the supply chain until –seemingly suddenly - manufacturers of raw materials are ordering significantly more due to the amplified signals.
TIP: Just like a literal bull whip, if you do the smallest flick of the wrist, by the time it reaches the end, you get a big crack! The same goes for your supply chain. If you're unable to model these small fluctuations and uncertainties, their effects will be amplified as they flow through your supply chain.
Is there a light at the end of the tunnel? Should we expect to break out of these disruptions? What are the characteristics of effective, efficient, value planning into and beyond 2022?
Fortunately, the answer is yes. One way or another, with enough time, we will get through this the same way that we got though previous major disruptions. There are always going to be events, such as hurricanes or strikes at the ports that will cause changes or acute disruptions that may seem catastrophic in the moment but have rather small impacts in the long term.
TIP: We are in a kind of temporary normal where everything is stuck, requiring us all to plan ahead to the best of our – and our softwares’ - ability. What we are experiencing is still an acute issue. It feels chronic because we’ve been in the thick of it for well over a year. It will eventually work its way through to resolution. We don’t know when, that’s the one certainty.
Every company right now is planning for the current state of things. You’re planning on current long lead times, uncertain of what you're going to get. You’re making alternative plans. You're prioritizing different products to make or buy based on this. You’re looking at new products coming from different markets, because maybe it's easier to get product in.
CCH® Tagetik Supply Chain Planning customers using our solutions prior to the pandemic were able to see the widening uncertainty in supply and demand because our system picked up the signals and said, ‘Your lead times are getting longer and longer. Therefore, you should be ordering more or ordering ahead of your normal timeframe.’ That’s how adaptive our system is. Our customers were in a position to react more quickly. Which isn't to say they were untouched by many of the sudden changes – after all, not every disruption can be planned for down to the utmost detail. But they were ahead of the game because they could plan for uncertainty better. By planning under uncertainty, they are set up for success. And that means, eventually as we start to come out of this situation, with demand beginning to stabilize and lead times starting to become less volatile, our customers can order less and order more frequently, and they'll be again ahead of the curve.
Companies without best-in-class adaptive, predictive supply chain planning system probably got walloped pretty hard. So my final tips for you are: ensure your systems are robust and resilient; plan for uncertainty using the right tools; and make the most of adaptive forecasting that takes into account all the data needed from various systems so you can better weather the current chaos, and the disruptions of the future.