This Week: An Inventory Crisis

Supply Chained is a weekly newsletter discussing trends, tools, and principles of Supply Chain Management and Engineering.

We’re facing an inventory crisis in many of our supply chains, so this week’s newsletter is about managing inventory stockouts.

Right now it seems like everyone is asking, "Where's my stuff?" Folks who work in the supply chain understand that we are sitting squarely in the center of the Mother of all Bullwhips. In the past few weeks we’ve seen headlines about shortages of semiconductors, lumber, coffee, and even boba tea. Of course, I've gotten a lot of emails and phone calls about it.

My answer? Brace yourself... this could last a while!

Can all of these problems really be blamed on COVID? Well, yes, probably. There are other factors, too - Brexit and China tariffs come to mind. But I think that COVID has either dwarfed or amplified those forces. This seems like a good time to bring up my ineloquent prediction on Tucker Carlson’s show last March, at the peak of the toilet paper famine:

“We talked about the short-term demand disruptions but we’ve got supply disruptions too. Factories in China that haven’t been making things or haven’t been able to ship things, and those go into all kinds of things we buy, electronics, automobiles, basically any type of engineered manufactured product.” (Mr. Supply Chain, March 2020)

We all knew that COVID was going to trigger a lot of disruptions, but it was hard to predict what would be affected and when it would happen. Sure enough, one year later we have a huge capacity imbalance in transportation and logistics. Warehouses are full. There aren't enough trucks, trailers, trains, or railcars to go around. And there aren't enough airplanes to expedite freight. CSCMP's Logistics Managers Index, which measures transportation and warehousing, is at 72.2 this month - that's the 3rd highest level in the history of the index!

And with capacity turned up to 11 and ships piling up at ports, we then had a disruption of the Suez Canal, and a blizzard in Texas, too!

Whoa!

Is it any wonder that companies are facing shortages of critical items that they need to manufacture and distribute their products?

Why does it matter?

Running out of inventory is bad. Really bad!

I call this a "stockout," but in true supply chain fashion there are lots of other names and spellings, too. "Out of Stock (OOS)", "stock-out", "stock out", etc. We also sometimes talk about it in terms of "service failures," "service levels" or "product availability".

For retailers and distributors, a stockout means they can't sell products. No revenue, no profits. Some customers may wait, but many will walk away. They may decide not to buy the product after all, or they may go up the street (or to another website) and buy from a competitor. And that's not the worst of it - because a one-time stockout of a single item can actually cause customers to change their buying behavior, and start shopping somewhere else on a regular basis. In other words, it's pretty easy to draw a link between stockouts and strategic business priorities like profitability, brand loyalty, and market share.

For manufacturers, stockouts can be even more expensive. Imagine the situation that auto companies are facing right now - where you have invested billions of dollars in factories and employees and materials to build cars that should sell for tens of thousands of dollars each - and all of that investment is suddenly idled because you aren't able to find one part... semiconductors. You don't have any cars to sell, meanwhile you still have bills piling up and more materials flowing in for cars that you had planned to make.

No matter where you sit in the supply chain, stockouts are ugly.

What should we do now?

We make lots of choices when we're designing and managing a supply chain. Some academics refer to these as "real options" and have developed tools for analyzing the value of our choices. I've included a link to a paper about real options analysis in the "additional references" section. But the important point is that this is not just a gut decision - you can absolutely put a value on the choices we make, just like insurance companies put a value on insurance policies and investors put a value on put and call options. The math is exactly the same!

If you have time to prepare in advance, then there are four real options that can help you mitigate the risk of a supply disruption:

• The first is to have safety stock inventory.
• The second is to have alternate suppliers.
• The third is to use expedited transportation.
• And the fourth is to transfer inventory from one facility to another. 

That's pretty much it. If you really need a product, you have to choose among those four options to protect yourself from a supply disruption. 

But what happens when none of those supply side options are available? At that point, then you have to look at what you can do on the demand side:

• Conserve. Look for ways to change your process and stretch the inventory you have so that it lasts longer. 
• Identify substitutes. Use a different product that you do have available instead of the one that you'd use normally.
• Use demand shaping. Offer promotions, or introduce price increases, in order to change customer buying behavior.

Hang on for the ride!

This storm is probably going to last for a while, and we just need to do the best we can.

Hopefully we can all learn from this episode and use it as a lesson to make our supply chains more resilient to future disruptions in both supply and demand.

My take on how this affects supply chain professionals. Supply and demand can both be unpredictable. We usually focus on obtaining the supply we need so that we can serve our customers. But when there's no supply to be had, anywhere, we need to pivot and focus on conservation, substitution, and demand shaping.

What do you think? Are you experiencing stock outs of key products? What have you done to address the imbalance between supply and demand in your supply chain?

Featured Video

Additional Resources

• Remember the pandemic stockpiling last year? Consumer products companies are still catching up by Amelia Lucas (CNBC)
• Demand-Shaping With Supply in Mind by Larry Lapide (Supply Chain 24/7)
• A Comparison of Actual and Intended Consumer Behavior In Response To Retail Stockouts by Walter Zinn and Peter C. Liu (Journal of Business Logistics)
• Building the Resilient Supply Chain by Martin Christopher and Helen Peck (International Journal of Logistics Management)
• Risk Uncertainty and Supply Chain Decisions: A Real Options Perspective by G. Tomas Hult, Christopher Craighead, David Ketchen, Jr. (Decisions Sciences)
• Option-based disruption mitigation system in a logistics network (USPTO)

Who is Mr. Supply Chain?

Daniel Stanton is a supply chain industry veteran and the best-selling author of Supply Chain Management For Dummies. He is dedicated to empowering professionals through education and technology. His courses on LinkedIn Learning (formerly Lynda.com) have been viewed by students around the world, and he's a frequent speaker at educational conferences and industry events.