senior client partner, global industrial practice
This Week in Leadership (June 7 - June 13)
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During the early days of the pandemic, manufacturers were stuck scrambling to find anyone who could supply them with essential components, and retailers wound up with empty shelves.
Fast-forward a year, and manufacturers are still stuck scrambling and retailers still have empty shelves. The problem, experts say, remains the same—the supply chains of an overwhelming number of firms are struggling. The latest example: there’s a shortage of trucks and drivers to deliver goods, including gasoline, across the United States.
While the supply issues of a year ago were somewhat understandable—COVID-19 has been the worst pandemic in a century, after all—the latest problems stem from a seemingly good development: demand for nearly everything is surging. But in the past few weeks, companies have told customers to expect delivery days, higher prices, or even wholesale substitution of products. “The chains were built for efficiency, and for the most part, they haven’t been able to pivot,” says Dustin Ogden, a senior client partner in Korn Ferry’s Global Industrial practice.
The most notable supply problem may be in the automotive sector, as a worldwide shortage of semiconductors forced a production cut of an estimated 100,000 vehicles in the first three months of the year. It’s ironic since automakers showed remarkable agility at the onset of the pandemic, setting up new assembly lines to pump out surgical masks and other equipment for employees as well as first responders and frontline medical workers. The microchip shortage, meanwhile, has left makers of a variety of technology, entertainment, and industrial products high and dry. Third-party logistics firms, organizations that could potentially help firms with supply crunches, are themselves maxed out. “All their customers are going through the same thing,” Ogden says.
Bad luck has only added to the troubles. A wayward freighter entirely blocking the Suez Canal caused backups in international shipping for several days in March, and there’s an ongoing backlog of ships to be unloaded at the Port of Los Angeles. Plus, India’s terrible surge of COVID-19 cases has hindered many firms’ ability to get some basic components. Nevertheless, experts say many supply chain were ignored. “There were other issues where you could shy away from supply chain, other issues on which to concentrate,” says Greg Morris, a director for Korn Ferry Consulting.
The flaws that the pandemic exposed have proven too complex for any long-term fixes. Successful demand forecasting has been a recurring issue in some industries, but almost no one did a good job forecasting for 2021. “Everyone started planning for doom and gloom, but boom happened in some sectors,” says Ogden. February imports of household appliances to the United States surged about 75% versus a year ago, while imports for leisure products grew almost 62%, according to the market-data firm Panjiva, which monitors shipping traffic. Some companies have never experienced, or even imagined, such a spike in demand. Plus, industries that did surge during the pandemic, namely residential construction, didn’t anticipate that the boom would continue well into 2021.
The other issue is that supply chains aren’t agile. While firms still work on a just-in-time philosophy—which may keep excess inventories lean and save costs when demand is stable—they’ve learned a hard lesson as demand cratered and spiked within the past year. Some firms are now reverting to supply chain models from decades ago, believing that the cost of building more slack into the system is better than facing a debilitating crunch. “If you lose one component, a screw, a fastener, even a piece of gauze, you lose the entire device on time,” says David Vied, global sector leader of Korn Ferry’s Medical Devices and Diagnostics practice.
Experts say companies in nearly every industry need to do a better job at scenario planning—imagining what the supply chain would need to function well under a variety of circumstances—and tailor their processes accordingly. At the same time, they say, CEOs should make sure their top supply chain executives not only have excellent operating experience but also the ability to weigh in on how to reshape business models and other aspects of corporate strategy.