Three lessons companies can learn from the supply chain crisis

All eyes are on the global supply chain as the United States prepares for the upcoming holiday shopping season. The pandemic and resulting inefficiencies have significantly disrupted shipping and manufacturing production, and after a year of shortages and bottlenecks, it’s still unclear when operations will return to normal and consumers are feeling the squeeze. One study of 1,000 US consumers found that 82% fear that ongoing supply chain disruptions will ruin their life plans such as birthdays and holidays.

To find out how companies can navigate this crisis and learn from it going forward, we spoke to two School of Business faculty members, Joe Walden and Jessica Li.

Associate teaching professor of supply chain management Joe Walden said companies today have overlooked the importance of risk analysis and strategic planning. He said that when everything is going well in the supply chain, companies become complacent and don’t stop to think about what could go wrong and how it would impact the company.

“Here’s where most risk analyses stop short,” he said. “People say, ‘Well the probability of this happening is so low, I won’t worry about it.’ But the next step they should have taken is, ‘If this happens, what’s the impact?’”

Assessing the impact of an unlikely disruption allows you to be prepared and prevent it from breaking down your system entirely, as some companies have learned the hard way.

Strategic planning is also crucial. Walden said companies need to assess what their needs will be 10, 15, and 20 years down the line in order to be prepared for changes in demand. Beyond thinking about what capacity issues they can fix now, companies should consider what capacity constraints they will encounter in the future to prevent something like this happening again.

“Infrastructure doesn’t change overnight, so what do we need to start thinking about now for additional infrastructure, additional factories, additional distribution centers, and improving the road network?” Walden said.

Even when things are going well in the system, it’s important for companies to continuously assess their processes and keep their eyes fixed on the future.

A container ship off the coast of Baltimore, Maryland. Shipping by water on ships like these has gone up in price by 326% in 2021. Photo by David Dilbert from Pexels.

Shipping by water has gone up in price by 326% this year. Walden said that while some companies are throwing up their hands in defeat, others are thinking of creative solutions to get their products on the shelves.

Walmart, Target and Home Depot have been leasing their own ships in order to avoid high shipping costs. Amazon has even created its own fleet of ships in addition to semi-trucks and smaller vans that transport packages door to door to reduce their reliance on the private shipping companies.

These types of solutions aren’t just useful for large retailers, but smaller companies too. Walden cited an example from 2 years ago where several small retailers in Chicago partnered to lease a 747 to fly in products when shipping by water was not fast enough to meet their needs for Black Friday.

Creative solutions like these are key to maintaining profitability during the holiday shopping season.

Smart retailers are also paying attention to consumer behavior trends. Associate marketing professor and consumer behavior specialist Jessica Li says that customers are buying holiday gifts earlier than they normally would this year because they perceive significant issues in the supply chain.

“That’s related to what’s known as the psychology of scarcity,” she said. “We know that when people perceive a product to be scarce, then they are more likely to act impulsively and to do things like start shopping earlier. So what we’re seeing now is a trend where consumers are buying products and gifts for the upcoming holiday season earlier than they normally would.”

In order to accommodate this need, retailers like Amazon and Walmart have started their holiday promotions much earlier.

The psychology of scarcity can benefit companies as it encourages people to buy more. In fact, companies try to re-create this fervor in typical years through Black Friday doorbuster sales and limited-run promotions. However, according to Li, this can be a trap if companies can’t deliver on their promises.

If a company promises customer guaranteed shipping in five business days and it is not able to deliver the product by that date, even if it is because of a factor out of their control, the customer will blame the company. Li said that because of the claim they made, the customer will attribute the blame to the company rather than global supply chain backlogs that caused the issue. Companies should be wary of this before celebrating high sales numbers ahead of the holiday season.

By Meaghan Boyd

Stories about the students, alumni, faculty and staff of the University of Kansas School of Business.