Top 5 biggest Supply Chain pain points - #4 Shortage of raw materials
In a series of five blog posts, we are going to do a deep dive on the top 5 biggest supply chain pain points, experienced by the business. How did we came up with this top 5? By researching the Internet to look for articles that describe current pain points and keep score of the number of articles. And by the interactions we had with our customers, we listened to the issues they brought to the table.
The top 5 of the biggest supply chain pain points:
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Lack of end-to-end visibility
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Rising supply chain costs
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Demand volatility and forecast accuracy
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Shortage of raw materials
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Out-of-stock items
In this blog post we’ll do a deep dive on the pain point ‘shortage of raw materials’, what is the impact on the business if not addressed and how it can be solved.
Why is a shortage of materials such an issue?
Shortages of materials are everywhere. Think of shortages of
- raw materials
- semi-finished goods
- energy
- skilled staff
Before COVID, shortages were causing issues in specific supply chains (for example specific materials for the chip industry), but not visible at that time yet. During and after COVID, this became more clear and even more widespread across different industries.
These shortages are caused due to different reasons:
- Geopolitics: China & Russia sit on top of most rare materials in the world. Nowhere in the world are these rare materials found and mined in the quantities as in Russia and China. Due to the geopolitical tensions, these countries use these rare materials as a lever to negotiate. See also the wheat production in Ukraine, the biggest producer of wheat in Europe. Russia is using the situation to create shortages.
- Increased demand: over the years, demand in specific (raw) materials have increased. In the case of rare materials, it is costly to find and mine these and even more difficult to keep up with the demand. In the example of chips, COVID increased the demand for laptops in order to facilitate working from home. This increased demand resulted in less chips for other industries, like automotive. Causing long lead times and queues if you wanted to order a new car.
- Lower supply: in the case of skilled staff, we see an decrease in the number of workers participating in the workforce. Mainly due to retirement (large amounts of skilled workers will retire the next couple of years) and the lower influx of new employees puts a serious pressure on the remaining staff.
Different reasons resulting in shortages and we need to deal with these shortages to keep pace with the demand. But how?
What is the impact of a shortage of raw materials?
Shortages of any kind can have a severe impact on the daily lives of us all. If you want to buy a new car and you have to wait 6 – 9 months due to a shortage of the chips required to complete the car, that is a long time. Or you want to increase production and need additional staff, but due to labor shortages, you cannot find the right people and are not able to meet the additional demand.
Shortages will play a bigger part of our lives now and in the future. Shortages will have different impacts:
- Increased prices: if the supply of wheat is decreased, prices of bread will go up. Demand stays the same, but supply is not enough to meet the demand.
- Substitution (consumers): consumers start to look for alternatives that are less costly. For example if a new car becomes too expensive, why not look for a used car? Less expensive and you do not need to wait 6 – 9 months before you can drive it.
- Timed consumption: due to a shortage, electric car drivers (in the Netherlands at least) cannot charge their cars during peak hours on the net. If you want to charge, you are forced to do thisĀ at specific times.
- Substitution (production): if the supply of (raw) materials falls behind the demand and this shortages is permanent, manufactures will look for alternatives. They will replace the material(s) with something else if possible.
- Increased innovation/ automation: if you need to produce the same amount of goods or even more with less employees, you will look for ways to innovate and automate the process. As mentioned in my previous blog [+LINK], the times we live in now will be a very fruitful soil for innovations. These innovations will be visible in the next coming months to years.
How to deal with shortages
Shortages will always be a part of our lives. Depending on the type of shortage, companies will find ways to increase the supply to level demand, substitute the (raw) material of low supply for something else or we accept the shortage and find other products, or wait until the product becomes available again.
For example the infrastructure for energy (in the Netherlands) is at its peak capacity. The old infrastructure has been maintained, but never upgraded. The implementation of solar panels at roof tops, the installation of wind turbines changed the supply. On the demand side, we tend to consume more energy every day. The old infrastructure is not able to cope with this changed supply and demand patterns and much needed updates on the infrastructure are on the way. But these take time (years) and are very costly. In the meantime, solar panel owners are looking for alternatives to store the generated energy in home batteries to use whenever needed and become more self sufficient.
Another way to deal with shortages is to create higher supplies. If a (raw) material has less supply, try to find and buy as many supplies that you can find and store these for later us. This can only be applied to materials that do not become obsolete or outdated in the near future.
If the shortages are causing price increases, you can hedge these increased prices. Most commodities can be hedged to make sure that prices to be paid stay within acceptable boundaries. With hedging you pay a small price to secure future supply at acceptable price levels.
Conclusion
As mentioned, shortages will always be a part of our lives. We only need to find ways to deal with these shortages. This blog described a few options how to deal with shortages.
Most important lesson from the last years is that companies need to become more resilient, look ahead for alternatives and be prepared for any shortages. Shortages like materials, energy, personnel. When creating the strategy of an organisation, make sure you create and think through several scenarios. For example: “what if we experience a black out of three days, what if the workforce declines with 10% over the next 3 years?”.
This strategic focus translated in day-to-day operations also needs a resilient mindset. The use of scenarios in your tactical and operational planning becomes a necessity! Not willing to think through possible options and the consequence will lead to unpleasant surprises. Being prepared is half the work done and can be the difference between staying alive of go bankrupt.
Let’s meet to discuss your options and create different scenarios for your business to see the impact. To be able to create mitigation plans and be prepared for the future, to be resilient!