Supply Chain Disruption: Causes, Impacts, Strategies

In recent years, the phrase “Supply Chain Disruption” has become commonplace. The supply chain is, in fact, going through a particularly critical period due to factors of various natures. Factors that, thanks to their increasingly frequent combination, are bringing to light its vulnerabilities.

When we talk about supply chain disruption, we refer to all those situations where the supply and management of the Supply Chain are jeopardized by causes that are not intrinsic to a company’s business. In this regard, we speak of Supply Chain risks. These causes are to be found outside the characteristic activities of a company. Some examples include: pandemics, natural disasters, global conflict situations, and environmental issues.

It is necessary to implement Supply Chain Management strategies that prevent risks, in order to avoid financial, operational, and strategic damages. In this regard, we speak of a resilient Supply Chain, which prioritizes preventive actions.

Supply Chain Disruption Due to Natural Disasters: How to Act

The supply chain is undermined by increasingly frequent phenomena related to nature and ongoing climate change. In the world of Supply Chain, damages are recorded in the production sector, infrastructures, and logistics planning, with a particular influence on the transportation sector.

Some striking and recent global cases that have led to supply chain disruption include:

• the major drought that affected the Panama Canal region, which led to a significant slowdown in maritime traffic;
• Hurricane Florence in the States, which caused extensive damage to major logistics hubs such as ports, railways, and roads. Damages that resulted in delays in material deliveries.

The impacts of natural disasters on the supply chain manifest through a significant increase in Lead Times. These are the so-called transit times between the beginning and end of a production process. Increases are due to the fact that companies are put in a position where they cannot produce and deliver the final product to their customers.

In turn, companies are forced to increase their inventories, intervening not only on safety stocks but also on so-called “cycle stocks,” which, as they increase, allow for greater economic benefits when purchasing from suppliers. This dynamic translates into a considerable increase in immobilized capital and a corresponding increase in warehouse values.

Supply Chain Management Strategies That Can Be Adopted

In order to mitigate Supply Chain risks arising from natural disasters, companies are increasingly adopting the following Supply Chain Management strategies:

• diversifying transport routes and their supplier base, through the use of rigorous analysis processes that identify the best solutions in terms of quality and finance, by introducing effective supplier scouting and market analysis methodologies;
• monitoring the rotation and consumption of raw materials, semi-finished products, consumables, and finished products to intercept any actions, such as disposal, recovery, or resale. Objectives: to reduce immobilized capital costs and address significant increases in warehouse values;
• revising logistics parameters and reordering policies, in order to optimize the mix of products in stock.

Causes Related to Political Dynamics: How to Act

From nearshoring to friend-shoring, let’s explore their meaning.

Political dynamics, geopolitical instability, and trade conflicts represent fundamental variables capable of significantly impacting the regularity and dynamics of global trade.

From Nearshoring

The long-term consequences related to ongoing armed conflicts have undoubtedly contributed to supply chain disruption. The economic sanctions implemented during the conflicts have generated immediate global effects, causing interference that has affected a wide range of goods (some examples: wheat, oil, nickel, and palladium) and leading to a general increase in prices.

This has stimulated the adoption of nearshoring by companies, a practice that involves positioning production close to the customer. Companies operating in the consumer goods and retail sectors are progressively diversifying and relocating their Supply Chains.

To Friend-shoring

In 2024, political elections taking place in most industrialized countries could influence the political landscape and international markets.

Their outcome is, in fact, a random variable, and the consequences can have a significant impact on global trade balances. In the past, such uncertainty has led to the failure of raw material suppliers, forcing companies to seek new supply partners, but running the risk of a reduction in the quality of goods shipped.

Numerous organizations are therefore actively investing in the practice of friend-shoring, focusing the Supply Chain on countries considered political and economic allies. The concept underlying this risk mitigation strategy refers to the activity of reducing the probability of investing resources for geopolitical purposes, building collaborative relationships exclusively with customers and/or suppliers from countries considered friends.

It should be emphasized that this practice divides public opinion. While the benefit of potential synergies between countries is evident, there is also a concrete risk of increasing the gap, especially towards developing countries.

To identify a common denominator, to address the political dynamics that undermine the integrity of the supply chain, it is necessary to implement strategies for diversifying one’s production network, without sacrificing the necessary quality prerogatives.

In this case too, an investigation process for the appointment of new potential partners is therefore fundamental, through a set of procedures that minimize research costs. Procedures that, at the same time, guarantee the identification of effective and efficient solutions, temporary and, why not, definitive.

Disruptions Due to Health Crises: How to Act

The recent Covid-19 pandemic has, without a doubt, had a disruptive effect on Supply Chains worldwide. In particular, the commercial relationships in force between China and the rest of the world were entirely called into question.

The impacting causes on the supply chain related to health crises do not differ significantly from those already mentioned. These refer to supply delays, longer procurement lead times, etc.

However, regarding the strategies implemented by companies, it is necessary to refer to actions aimed at re-evaluating the local production sector.

Companies have also focused their energies on developing their know-how, in order to internalize production processes that, before the pandemic, were outsourced to third parties and, in most cases, resided on the other side of the globe.

The occurrence of such a significant event has also stimulated the management of many companies to approach Risk Management issues in a structured and organic way. Risk Management is a business process aimed at identifying and studying the main risks in the Supply Chain (endogenous and exogenous). Risks that can affect company personnel. Not only that, it is also a process aimed at determining action plans to be implemented when particular risk situations occur. The construction of a contingency plan is increasingly frequent. This is a formal document that contains all strategies to prevent or mitigate risks. A document that effectively becomes part of the company’s operational assets.

Resilient Supply Chain: Actions to Prioritize

In conclusion, in a world increasingly characterized by a high level of entropy, generated not only by factors that develop within the company’s characteristic management but also by exogenous factors, it is necessary to organize one’s Supply Chain in such a way that it can be as resilient as possible.

This means prioritizing preventive actions over reactive ones. Consider the issue of diversifying the supplier base. It is very common to find cases where corrective actions are undertaken only after the problem has manifested.

Instead, good practice is:

• continuously maintaining one’s supplier base through scouting processes that allow for the identification of so-called “backup suppliers”, to be activated when needed or integrated organically;
• adopting an accurate decision-making strategy on make-or-buy issues. A strong external dependence can prove critical in cases where the previously analyzed causes occur. A careful study on the feasibility of internalizing company processes currently outsourced to third parties (supported by solid data and business cases) could reduce the risk of supply disruptions;
• correctly evaluating the logistical parameters assigned to the codes managed in daily activity (safety stocks, cycle stocks, protection lead times, etc.). A correct evaluation is fundamental for facing situations of supply uncertainty. It should be noted that these parameters require continuous maintenance and should in no way be considered static and untouchable entities.

In conclusion, particular attention should be given to technology, which has reached very high levels of maturity regarding the Supply Chain. Technology can represent a valid ally in facing continuous situations of uncertainty, supporting and facilitating the research, analysis, and decision-making processes listed above. This includes supplier management portals, warehouse management systems, and artificial intelligence IT tools applied to logistics planning.

Makeitalia: Your Ally for a Resilient Supply Chain

Supply Chain and Supply Chains: as we have seen, today this is a topic that should be on everyone’s agenda, to prevent situations of uncertainty and act proactively. A topic that characterizes the current landscape.

In a context marked by factors of various natures, it becomes fundamental to create reliable supply chains and manage them efficiently, preventing risks. It is in this area that Makeitalia has been an expert for over 15 years.

Our goal has always been to support our clients in these fundamental aspects for a company.

If you want to learn more, write to us through the Contact Us page. We will be happy to present our Supply Chain projects to you.