Solving the Supply Chain
How to Outsmart Algorithmic ERP and Explosive
Demand to Get Growing Again
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Solving The Supply Chain
While 2021 was a growth year for many businesses, there’s little doubt that supply chain issues left significant earning potential on the table. Here are just two examples:
A regional distributor of payment technologies was in the midst of a transformative 2021 growth plan. 2020 was a year of survival, but having shifted into touchless technologies and e-commerce solutions the distributor was well positioned for solid growth. Despite all-time-high orders and demand for new recurring revenue solutions, by August revenues were declining and growth was slowing. The reason: the distributor couldn’t get its hands on the hardware to complete orders.
With record government investment in state infrastructure, a smaller construction company was poised to bid on and win bigger business. Despite an unprecedented number of jobs awarded, 2021 yielded only moderate improvement. The company was ultimately unable to execute on all the opportunities awarded and capitalize on transformative growth. The reason: equipment and rental fleets were so depleted that the construction company couldn’t get equipped to execute.
LEAF Commercial Capital, Inc. is a subsidiary of People's United Bank, N.A.
Order Delivery Times
Empty shelves, raw material delays, and back orders – 2021 introduced the supply chain lexicon into mainstream life. Last year the following commercial equipment asset classes faced record order delivery times, and many are still struggling against the trend:
While 2021 was a growth year and profitable for most businesses, there’s little doubt that supply chain issues left significant earning potential on the table. While news headlines and vendor conversations emphasize shortages, point to ‘chips’ and issues offloading shipping containers, a complete explanation of what could be happening feels lacking.
Machine tool sellers report an average order lead time 3x longer than 2019
Technology resellers report an average order lead time 1.5x longer than 2019
Vocational truck dealers report an average order lead time 3.5x longer than 2019
Healthcare equipment sellers report an average order lead time 4.1x longer than 2019
Food Service equipment sellers report an average order lead time 5.3x longer than 2019
What's Going On?
In September 2021, a survey of the top 200 commercial good supply chain leaders in the United States was deployed in an attempt to understand potential causes of this challenge and what to expect in the months and year ahead. These survey participants represent companies that account for over $8 trillion of the U.S. GDP. The companies source materials and ship finished goods internationally, and they cover a variety of industries, from agriculture to information technology.
The findings were surprising:
Overwhelmingly, survey participants said the source of these challenges had much to do with algorithmic ERP ordering for safety stock. Here’s some background.
94% of survey respondents strongly disagreed that people are well informed on the cause of current supply chain challenges
65% strongly agreed that current supply chain challenges could have been prevented
90% strongly agreed that ERP-driven safety stock surges and unprecedented growth in order volume are the primary drivers of supply chain problems
Enterprise Resource Planning (ERP)
Enterprise Resource Planning
ERP, Enterprise Resource Planning, is a software system that helps you run your entire business, including processes in finance, human resources, manufacturing, supply chain, services, procurement, and more. ERP technologies power the purchasing engines of companies large and small all over the world. In recent years, ERP providers have worked to make their software smarter by collecting and accessing thousands – and in some cases millions – of data points to offer companies the ability to purchase materials, inventories, and services at the right place and right time. Powered by thousands of algorithms, the software models purchasing and selling behaviors to not only show procurement leaders what is happening now, but also to anticipate what is about to happen.
Automating the Decisioning Process
As big data and software technologies converge, business leaders can now leverage ERP systems to automate decisioning. So rather than a person having to evaluate a purchasing opportunity and approve it, as long as it is within certain parameters, the ERP system can drive a big part of the procurement machine.
This is innovative, powerful, and enormously value-added technology. But what if unprecedented circumstances arise where there are no historical behavioral data points to guide how much to buy or sell and when to do it?
Safety stock is an extra quantity of a product which is stored in the warehouse to prevent an out-of-stock situation. It serves as insurance against fluctuations in demand, buffers longer lead times, and shields price fluctuations. Planning for safety stock levels is relatively simple unless market forces cause unreasonable disruption.
Enter the events of 2020. The pandemic caused sudden, unprecedented shortages combined with entire sectors of manufacturing shuttered or vastly slowed leading to bare safety stock inventories.
The Intersection of Safety
Stock and ERP
The Interaction of Safety Stock and ERP
The resulting boom in orders to replenish safety stock, combined with the return of demand in late 2020, and an anticipated surge in demand for 2021, meant record orders for inventories and finished goods by the end of Q1. The ERP systems automated and pushed all time high material, product, and safety stock reorders into a manufacturing sector still recovering from pandemic impacts.
Algorithmic ERP responding to unprecedented circumstances led to almost every company in the world ordering unprecedented quantities of everything all
at the same time from a manufacturing sector not
yet on its feet. The resulting choke point means longer
lead times, empty shelves, and the supply chain malaise we find ourselves in.
The Perils of Partial Shipments
When a manufacturer gets an order, they rarely ship what they have finished when it’s finished. Just-in-time movement of goods is reserved for few sectors. Partial shipments are expensive and more difficult to manage for all involved.
Manufacturers are far more likely to ship complete orders. But what happens when the average order volume increases by 213% in six months (which it did)? Even operating at optimal production volume, manufacturers took longer to fill orders. Multiply that by every order coming in all at once, and most manufacturers found themselves unable to keep up.
Bad to Worse
Bad to Worse
To meet order volume, manufacturers needed to ramp up capacity. To power production, many sectors needed to invest in equipment and technology they couldn’t get their hands on because those sectors were affected by the same illness they were facing. And with the worst labor markets in recent memory, manufacturers were also left unable to increase throughput without staff producing more goods.
Some manufacturers were able to quickly adapt, automate, and staff up to meet demand. But they were still left unable to solve for the supply chain contagion. Why?
Shipping. 2021 was the single worst labor market for truck drivers in over 40 years. With huge demand, many transporters needed new equipment and were left wanting. Some trailer order lead times extended to 21 months by October of 2021 for equipment needed in three months. Crane operators saw their largest retirement volume and lowest new trainee volume ever, meaning there were fewer trained experts to unload container ships. This, at least in part, caused the images of ships anchored at sea awaiting offloading.
All in, we simply didn’t have the equipment and labor infrastructure to manage our way through massive simultaneous order volume, choking the ability of suppliers to meet demand.
Worst labor market for truck drivers in 40 years
Some order lead times extended to 21 months
From shortages to overstocks? Procurement leaders in this country certainly think so. The manufacturing sector is still working on these huge order volumes and will deliver on them eventually. It has, however, taken so long that new models of product will need to be produced before half or more of the previous models have been delivered.
Take the Ford F150, for example. By August 2021, there were an estimated 40,000 trucks awaiting chips. The 2022 model year was already being produced. At historical production rates, there will be more new Ford F150s available for sale than ever before in 2022.
This is just one example illustrating a huge challenge for procurement and production teams across all industries.
How much of the order surge is a new normal? Is any of it normal? Do we limit new model production until older model volume normalizes, whatever that means? How can you plan for what’s next?
86% of survey respondents believe we are in a multiyear swing of shortage and surplus until demand, order volumes,
production, labor, and inflation normalize.
82% of surveyed supply chain leaders believe we will
have overstocks as soon as summer 2022.
What to Do About It?
Moving forward, swings in inventory levels are likely to happen more in pockets than across the entire chain, which means there will be some opportunities to take advantage of inventory surpluses. Look for sales, incentives, discounts, and bulk ordering of the materials and assets that power your business more than ever before. This is especially important given current rates of inflation.
Make sure you have the capital to act quickly. Whether it’s a quick move to secure a great deal on raw material inventory, purchase hard-to-find, revenue-producing equipment, or acquire technologies in bulk to reduce costs of a digital transformation effort, ensuring you have the access to flexible capital is essential.
Finally, be intentional. Talk to your vendors and suppliers about their forecasts, anticipated deliveries, and inventory levels. Understand what your budget and capital limitations are while bringing in your finance partners on your strategic growth plans. If you’re selling commercial equipment and services, payments have never been more important in the face of rising inflation and potentially higher interest rates on the horizon.
2022 growth plans are on the move and can’t wait for resolution to the supply chain issues. Armed with a stronger understanding of why these issues have arisen and what to look for next, you can move on from the disruption and turn unprecedented challenge into breakthrough opportunities. Contact your LEAF Account Champion to learn more.
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