What do toilet paper shortages, long lines at the gas station and a hand sanitizer surplus have in common? They’re all results of recent disruptions in supply chains, the networks businesses manage so that products are available for consumers when they want them.
When supply chain management is running smoothly, the general public pays little attention to it. But when weather, pandemic or world events disrupt the supply chain, experts like the ones at Kenan-Flagler Business School get calls from businesses asking for advice and from news outlets asking for explanations.
“Our department is very well known for supply chain management,” said Vinayak Deshpande, professor and area chair of operations and Mann Family Distinguished Scholar. His research focuses on supply chain collaboration, inventory management and addressing security and privacy issues in supply chains.
With so many supply chain disruptions in the news, The Well asked Deshpande to help readers understand strategies behind supply chain management and how they affect consumers.
What is supply chain management and why is it so important in the economy?
A supply chain, broadly speaking, is a network of all entities and facilities that are involved in getting a product or service to the end-customer. There’s a lot that goes on behind the scenes to get that product on the shelf. And that’s what our supply chain management is about. How do you manage that entire supply chain so that consumers get the product when they need it? The primary role of a supply chain is matching demand and supply.
What happens when there’s a disruption to a supply chain?
One of the things that I talk about in my class in supply chains is a phenomenon known as the bullwhip effect. You take a whip and just give it a little twist at one end, and what you see is a big lash at the other end of the whip. That is what is seen in many supply chains. Consumer demand might go up by just 10%, but then it trickles down the supply chain and it gets amplified by a lot.
For example, when the coronavirus struck, everybody was scrambling for personal protective equipment, hand sanitizer, bathroom tissues. You had a run on these products and that caused a shortage because the manufacturers were not prepared for that kind of demand. Later, when they were able to respond, the supply exceeded the demand resulting in surplus inventory.
What are the predominant strategies behind supply chain management?
Supply chain strategy is about defining the objective of the supply chain. Different companies have different objectives. The two dimensions that are particularly important in supply chain management are efficiency or cost and speed or time. And that can lead to very different supply chain designs.
Companies that focus on efficiency or cost often practice lean operations. Toyota was one of the first proponents of lean manufacturing, and they became highly successful with the “just in time” system. This means that instead of keeping a big inventory of supplies, the company stocks items as close as possible to when and where they are actually needed. But one of the risks of being lean is that when things go wrong, they go spectacularly wrong, as we saw during the pandemic.
By contrast, Amazon has recently focused on speed. Amazon has a strategy of getting the product into the consumer’s hands as fast as possible. Amazon is not necessarily the place where you’ll find the cheapest product anymore, but what they are hoping is that, if they can get the product to you today, that’s going to draw customers. You need a lot of supply chain expertise to be able to pull this off.
What disruptors threaten modern supply chain management?
There are a lot of different types of risks that one has to consider in supply chain management. The pandemic is just one. The top risk is climate change because that potentially has long-term consequences on how supply chains could be managed. A second risk factor is natural disasters, like earthquakes. The earthquake and the tsunami that happened in Japan had a really big impact on global supply chains and deeply disrupted the automobile sector in the United States.
A third one is global trade wars. Supply chains today are global. Companies have changed the design of their products to make them modular, like the Lego toys that my boys play with. You break down the product into individual modules that can be slapped on one another, and then you start slapping these pieces together and what you eventually get is the final product. In that way, a product as complex as an airplane is made by using the global supply chain dispersed across dozens of countries. But if you suddenly have tariffs imposed, then importing components from other countries is no longer feasible or too expensive.
Another risk factor is security. Things that used to be done manually now run through software and automation, which improves the efficiency of the supply chain. But it also exposes the supply chain to risks associated with hacking and ransomware, like we saw recently with the Colonial Pipeline being hacked.
How has the pandemic changed supply chain management strategy?
The pandemic has led companies to reexamine how they practice supply chain management. The two key words that I’ve been hearing a lot from different companies are agility and resilience. Agility is the ability to respond rapidly and cost effectively to short term changes in demand or supply disruptions. If we see a coronavirus unfolding, how do we change our supply chain quickly enough so that we can adapt to that? Resilience is the ability to adapt to structural changes by modifying supply chain strategies, products and technologies. If we are reliant on so much of our supply from China, for example, do we need to diversify our supply chain so that — if things go wrong — we can still continue to function?
What is needed is more transparency in the supply chain. As companies share information, it will enable agility and resilience. For example, if everybody knows that there’s enough bathroom tissue in the supply chain, then you don’t need to run to the store to grab everything on the shelf.
What role should government play in supply chain management?
The United States strongly believes in letting markets work. But at the same time, there is a role for the government. We don’t want hackers to hold our economy for ransom because they have infiltrated the infrastructure, so the role of the government is to protect against these kinds of vulnerabilities so that businesses can function as smoothly as possible.