The Wall Street Journal (Aug. 1, 2022) headline reads “The Supply Chain, Explained,” and proposes that supply chains can be understood through 7 basic principles:
- Supply chains have many moving parts and layers. Some products have lots of parts—3,000 for a smartphone and 30,000 for a car. McKinsey estimates that an auto maker has 250 tier-one suppliers and 18,000 suppliers across all layers. On the product side, companies can run out of parts, and on the distribution side, shipping companies run into bottlenecks due to such factors as labor shortages and congested ports.
- Sudden spikes in demand can be easily misread. Consumers signal demand by buying things, and companies in the chain respond by placing orders upstream. But when there are many companies in a chain, the signals can run amok. This is called the “bullwhip effect.”
- Because demand is hard to predict, many companies had turned to JIT production. But scheduling deliveries for exactly when needed is complex. Things may fall apart when demand spikes, bottlenecks start disrupting international cargo shipments, and parts stop showing up in time. So more firms adopting a just in case philosophy of carrying more inventory.
- Ordering more than you actually need makes shortages worse. Typically, a company only orders as much as they think they can sell or consume until the next cycle begins. But sometimes a hot seller comes along, or they hear a part is going to be in short supply, they decide to order extra—just in case.
- The longer the distribution chain, the more susceptible it is to disruption. Shipping a TV set from a factory in China to a store in the Midwest might mean a dozen truck transfers, an ocean leg and a rail leg. Big delays at one or two transfers ripples across the whole chain.
- Congestion removes capacity from the system. The more vehicles in the chain, the more backed up things get, and the less stuff gets moved each day. The increase in the number of ships and containers. because of high consumer demand in the U.S.. meant fewer ships per hour made it to the ports because of the increased congestion.
- Bottlenecks are hard to spot because so few can see the whole picture. Managers throw money at what they think is the bottleneck only to find that it didn’t help much because the real bottleneck was somewhere else in the system.
Classroom discussion questions:
- What are “tier 2” suppliers, and why are they a potential problem in supply chains?
- Explain the difference between just-in-time and just-in-case inventory.