A business is only as strong as the weakest link in its supply chain — a lesson painfully learned by countless thousands of organizations over the course of the past two years. The pandemic, as well as a handful of other unforeseeable disasters like weather events, canal blockages, and an unprecedented leap in consumer demand, showed business leaders just how fragile their supply chains had become and how grave the consequences could be.
Unfortunately, breaks in supply chains are not reserved for international crises. Any business can suffer a break in their supply chain due to a small, localized event a highway closure, or a business failure. If an organization’s supply chain is not sufficiently strong to withstand these small hiccups, it could shatter, leaving the company scrambling to find solutions.
Every business is at risk of supply chain disruptions, but not every business needs to suffer the following ramifications of a weak and oft-broken supply chain:
Businesses Opt to Carry Excess Stock
An unstable supply chain is stressful to a business, which cannot rely on regular goods or services to offer its clients. Thus, to counteract the negative impact of frequent supply chain disruptions, organizations that suffer from supply chain breaks tend to invest in safety stock. Carrying excess stock means that a business can continue catering to customer needs when their supply chain fails to deliver — but it has some noteworthy downsides.
To start, buying more stock than an organization needs is expensive, and it almost certainly will negatively impact the company’s cash flow both in the purchase and the management of the safety stock. When liquidity is low, business leaders have less cash available for projects that have the potential to grow and expand the organization. Worse, if consumer demand is lower than anticipated, the excess stock will remain an exceedingly costly mistake.
Operational Waste Worsens Delays
When manufacturing organizations are waiting for materials from their supply chains, they will almost undoubtedly endure excessive amounts of waste. Typically, manufacturing floors are exceedingly efficient operations, where every minute is planned months in advance to optimize output and maximize profits. When manufacturing is paused while companies work to resolve supply chain disruptions, businesses suffer.
The primary source of waste during manufacturing downtime is labor. Companies are forced to choose between paying laborers’ wages despite non-operational manufacturing floors or letting their manufacturing staff go until their supply chain is back up and running. Both cases are time-consuming and costly. Businesses might also waste equipment if their machinery falls out of calibration and into disrepair during downtime, or they might waste other supplies, which could expire. At the same time, some crucial component is delayed in the broken supply chain.
Organizations Lose Significant Revenue
This should be the most obvious consequence of a broken supply chain: lost revenue. Sometimes, the cost of supply chain disruptions is not immediately obvious, as a business might experience a rush on certain products, which causes revenues to increase — before a stockout occurs. Unfortunately, when unreliable supply chains or rampant disruptions result in frequent stockouts, businesses lose the revenue they would have gained had they maintained consistent stock, but they might also lose customers, who will migrate to other organizations that have stronger supply chains and more reliable inventory. Consumer trust is fragile, and once a company breaks that trust, that company must work much, much harder to win it back.
Companies Can Avoid These Consequences
International crises aside, companies do not need to commit to their weak and easily broken supply chains. In fact, business leaders should work toward developing supply chain resiliency, investing time, energy, and other resources into suppliers that can be more dependable in any economic climate. By developing relationships with similar suppliers in different regions, organizations gain access to backup goods and services should their primary or secondary sources experience disruption.
A business could fail as a result of poor supply chain performance. The sooner business leaders identify and address their supply chain issues, the more successful they will see regardless of environmental factors like public health, weather, economic activity, and more.
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