We are experiencing epic situations in 2021 with many new changes around our lives. We no longer operate our businesses the way we used to do, we can no longer predict the upcoming changes that may turn our businesses upside down. Even worse, EVERYTHING is getting more and more expensive!
How do we get here?
In the beginning of the pandemic, we expected that the demand in the market will shrink, sales will be decreased. Most of businesses made the decisions to cancel new productions and lower the inventory levels without knowing what the world in pandemic will be. The entire world was unprepared and uncertain about what we should do. It turns out that the pandemic has reshaped our lives in many perspectives. We spent more time at home – the demand of PC/laptop/displays increased. We preferred to drive our own cars instead of taking transportations- the demand of cars/used cars increased. We cooked our own food- the demands of housewares increased. In result, carmakers and electronic makers forecasted the productions wrongly, meanwhile, Asia, the hub of chip producers took a great hit when the first wave of pandemic spread from Wuhan, China. Lead time had been delayed all over again and again, productions were not completed due to lack of important component- chips. (How did the shortage of chips happened) Due to the overwhelming demand and short of supply, raise in prices became the only answer. Unfortunately, the cost of product or material is not the only item that has been high in the sky.
Click here to view the current lead time of all types of chips
So, what are short of supply?
We have known that automakers and PC makers do not have enough supply for the new productions, in fact, it impacts more than what we thought it would. Lacking of new cars supply has also boosted price of second hand car. This is the price of second hand car since September 2020 -July 2021. The price has reached its peak thanks to the shortage of new cars and the surging demands.
However, we can stay at home and have access to everything online through internet even though we can’t buy a new car. But, the pandemic has taught us that buying a new PC has got more expensive as well. Here is an overview of PC demand analysis.
“PC prices are likely to move higher in the second quarter and rest of 2021 as vendors pass along higher component and logistics costs amid strong demand. If earnings from HP, Dell Technologies and Lenovo are any indication, inflation is likely coming to the PC market in a perfect storm.”
Again, we know it’s because of high demand and shortage of chips, but, to PC makers, increased shipping cost has played an important role as well.
We are not just dealing with increasing product cost
The pandemic has also changed our shopping pattern. As we spent more time at home and on quarantine, we rely on online orders to support our daily lives. It has overwhelmed the logistic company’s capacity, while they have been understaffed due to the pandemic as well. The unexpected demand pushed the air freight rate up in the sky. At the same time, suppliers started restock their inventory as they saw the raising demand.
We can see the freight rate index in 2021 compared to 2020, the pricing trend has tripled in 2021. Right now the biggest challenge is not the increase in product costs anymore, but the shipping costs. We know that we are paying more on shipping than product, we have absolutely justified reason to tell our customers that we need to increase the prices, but, customers won’t pay for tripled shipping. Except for logistic companies, everybody is suffering in this game. In summary, we are facing the shortage of raw materials, chips and increasing prices in logistics. Among all of these, new variant of Covid is still going on. It’s mad, isn’t it?
So what has gone wrong?
Back in ‘normal’ days, we have been relying on ‘Lean Operation’. Lean operation has taught us to control the cost of production, minimize the waste, decrease the product SKUs and rely on fixed supply chain. Our businesses operated like this for many decades, but none of them is designed to handle crisis- Covid. What has this crisis taught us?
Unless you are Apple, which managed their supply chain very well and make products that customers are willing to wait for months. Otherwise, all of our supply chain management should be secured from different sources and have warehouses in different regions to ensure steady supply from different suppliers and warehouses.
In the future, the global business will not stop growing, which means a small change in parts of the world can cause a major impact on our business. Butterfly effect will be more obvious and more influential in the global supply chain world.
In post pandemic, How will it change our supply chain and affect our management in bussiness?
- Bolster the inventories and ensure the safety stock: The pandemic has shown us how important it is to have good control over our inventory status and ensure we have safety stock to handle the sudden demand. After the crisis, rearranging the inventory and safety stock is critical.
- Diversity our suppliers: In the past, we rely on developing countries to manufacture products with low costs. But when the pandemic hits, those countries suffer the most. It leaves us unprepared and cut the only chance to get back on the feet in the pandemic. Diversity the supply chain is the top priority to manage the risk in the post pandemic time.
- Reconsider the operation model-WFH in some organizations: We have learned that working from home is possible to manage our businesses, and there are more benefits, such as: providing more productivities, improving employee physical and mental health by diminishing commute time. Offering the flexibility of working from home could be a must in future talent recruitment.
- Outsourcing services and working with local partners to enhance the risk management: When travel is banned, we have no better ways of managing our businesses from the other side of the world. Lacking of understanding about how the local supply chain is and how the market moves can cause big damage to our businesses. Especially in some countries, when information is not all disclosed online, without agents, we will have hard time seizing the best market opportunities. In the future, outsourcing services to local partners and working with local agents to reduce the risks will be totally necessary.
Reference:
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