As the Covid-19 pandemic shines a light on supply chain disruption and the importance of risk mitigation strategies, researchers at The Hackett Group are digging into the ways in which disruptions hurt companies the most and how they can react and improve performance.
The Hackett Group published research on the topic earlier this fall that reveals three main business impacts of supply chain disruption: operational waste, excess safety stock, and revenue loss. Interviews with business leaders across a range of industries showed that most organizations “incur significant costs” in order to manage those challenges. A closer look revealed that:
Excess safety stock adds up. “Due to ongoing disruption, many manufacturers opt to carry additional safety stock to provide a buffer for unforeseen changes, often carrying 10% more inventory than target levels,” the researchers wrote. “The cost of carrying this additional stock adds up. On average, inventory carrying costs are 10% to 20% of total inventory value.” That adds up to millions of dollars for larger organizations. At best, it ties up working capital that could be invested in other ways; at worst, it will be written off if customer demand doesn’t match up, they also wrote.
Operational waste leads to inefficiency, delays. “Disruption also brings unintended consequences to the manufacturing floor, interrupting day-to-day operations and creating waste,” according to the research. “Production downtime, time lost retooling machines, expedite fees, and overtime pay can affect operational efficiency and potentially delay shipments.”
Revenue loss is real. Poor performance due to disruptions can cause lost revenue or customers—the most serious consequence of all supply disruptions. “In the case of retail and consumer packaged goods brands, missing critical orders can result in stockouts and lost revenue, as well as loss of customer trust,” the researchers wrote.
The research also quantifies the early impact of the pandemic on global supply chains, noting that purchase order line item changes increased dramatically at the outset—from an average of 40% in 2019 to over 60% in February 2020. What’s more, it shows how effective buyers and suppliers are at dealing with interruptions. A total of 19% consistently fell short, the research shows, and another 38% performed unevenly, sometimes meeting on-time delivery targets and sometimes falling short. An analysis of individual suppliers revealed similar statistics, with 25% consistently late and 26% seeing sporadic performance, according to the research.
When it comes to solutions for managing disruption—whether pandemic-related or due to natural disasters, geopolitical shifts, or other issues—the authors point to technology as a differentiator.
“Today, software solutions can take disparate data about changes taking place between purchase orders and supplier fulfillment and link it back to company ERPs [enterprise resource planning systems],” they wrote. “In this way, performance can be monitored and blind spots eliminated.”