5 Areas of Production Significantly Affected by Supply Chain Disruption
Supply chain disruptions have become an unfortunate and often inescapable reality for many companies. Virtually every industry has experienced at least some ripple effects as persisting woes impact production.
These disruptions have become the norm, with 94% of Fortune 1000 companies experiencing them and 75% facing negative business impacts as a result. Organizations that hope to minimize these effects must understand how these challenges affect them. Here’s a look at five production areas that significantly impact supply chain disruption.
1. Raw Material Availability
One of the most significant production aspects suffering from supply chain disruption is the availability of raw materials. Early COVID lockdowns limited the acquisition and production of
materials like metals and plastics. Factory shutdowns lead to considerable supply constraints, with U.S. polyurethane and polypropylene production falling 10%-15% in 2020.
Subsequent demand spikes from limited supply and rising consumer spending in some areas exacerbated this strain. Production facilities face considerable backlogs from these early disruptions even as workplace restrictions fade. As a result, demand remains remarkably high, making it difficult for all facilities to acquire needed materials.
Manufacturers need more materials than usual to resolve backlogs, but supply chains are still slow as they recover from early disruptions. This is an almost universal issue, so it’s also harder
to get enough materials everywhere they’re needed.
2. Material Costs
A related consequence of supply chain disruptions is that material costs are rising. About 86.6% of global manufacturers cited rising material costs as their leading business challenge in early 2021, and this issue has persisted. Slowly recovering supplies and skyrocketing demand from other producers foster higher prices.
Material supplies will eventually reach their pre-pandemic levels, but supply chain disruptions will likely outlast these initial challenges. High demand will persist until manufacturers can fully
address their backlogs, contributing to higher prices without an increase in supply. This demand could also lead to the bullwhip effect as facilities over-adjust if new risks or changes arise.
These higher costs, in turn, translate into greater expenses for consumers on the other side of the supply chain. For example, boat prices have risen by almost 10% over the past year as manufacturers have to pay more for raw materials.
3. Freight Rates
The materials themselves are not the only production factor with surging prices. Supply chain disruptions have also driven up freight rates worldwide. These higher expenses may further strain manufacturers’ economic mobility and contribute to rising end-user costs. This could affect demand, leading to further disruption.
The global container freight index rose from $1,733 to $4,359 between January and December 2020. Shutdowns and tighter restrictions on cross-border traffic made international shipping
slower and more complicated, leading to this price hike. Backlogs and continued delays pushed these disruptions further in 2021, with the index reaching a record $10,361 in September.
Freight rates have since declined, but they still linger above the $7,000 mark. These rates will fluctuate more and remain well above their early 2020 lows as COVID variants and international tension create more obstacles in global shipping.
Some production areas may not seem directly related to supply chain disruptions but have still experienced substantial changes. Labor shortages have proved particularly challenging, with
manufacturing seeing the largest growth in job quitting of any sector. This is due to many factors, but supply chain disruptions are part of it.
Continued supply chain disruptions have led to skyrocketing demand in some segments, especially considering early pandemic backlogs. Production resumed and working conditions became increasingly stressful as companies rushed to meet this demand. Jobs in this sector are already among the most demanding in the world, so these extra stressors push many workers to quit.
These labor strains create a cycle of challenges, too. As more employees quit amid rising stress, the remaining workers must do more to compensate for lost productivity. This creates even more stress for the workforce, exacerbating the labor crisis.
Supply chain disruptions have also muddied production and demand forecasts. Raw material shortages and international shipping complications persist, influencing consumer demand. How this demand responds to these challenges can be difficult to predict, leading to forecasting trouble.
In some circumstances, slower supply chains and stock shortages may lead to rising demand, as the toilet paper shortage early in the pandemic exemplified. However, consumers may stop buying a product type because of higher costs. Either option could happen, so responding to forecasts one way or another can be risky.
People’s uneven responses to supply chain disruptions make it virtually impossible to forecast demand shifts accurately. As a result, production facilities can easily end up with surpluses and shortages. Adapting to a forecast in either direction could result in losses.
When and How Will Supply Chain Disruption Resolve?
Challenges in any of these five areas can hinder companies’ success, and most production facilities will experience most, if not all, of them. These factors are closely related, stemming from similar supply chain obstacles or one another. That means each disruption has a larger impact, and it also means strategies that improve one area could strengthen them all.
Manufacturers, logistics professionals and other supply chain parties should adapt to prevent similar issues in the future. One of the most important steps is to maximize visibility. It would be
easier to spot and respond to potential disruptions as they arise if all supply chain partners collected and shared more real-time data.
Visibility and communication are critical, but they’re only part of the solution. Supply chains must also become more flexible to respond to these insights faster. That may mean moving away from lean principles in favor of distributed sourcing, reshoring and establishing production buffers.
It’s also important to realize that even with these steps, current disruptions will last for some time. Federal reports suggest manufacturers can anticipate supply chain issues for another six
months, though it may be safer to expect more delay. Preparing for at least another year of delays and shortages may help avoid premature expansion or over-corrective steps.
Businesses Must Anticipate and Adapt to Disruption
Supply chain disruptions affect production along almost every factor. Current challenges may last several months, but businesses can now act to mitigate future obstacles.
These widespread disruptions highlight how impactful supply chain shifts can be across various processes. Businesses must reorganize their operations to be flexible and transparent, considering the scope of this impact. That allows them to adapt to incoming challenges more effectively.