After Car Chip and Baby Formula Shortages, It’s Time to Rethink Your Supply Chain Strategy

Critical scarcities of items ranging from semiconductors for cars to lumber for new homes to infant-nourishing baby formula have characterized a global supply chain crisis that has driven up prices and led to still-more shortages for more than two years. Keep reading to find out what is causing global supply chain issues and learn tips from experts ]on how small-business owners can revisit their own supply chain strategy.

What Is Causing Global Supply Chain Issues?

Supply chain experts agree that the widespread insufficiencies that have dogged businesses and consumers have more than a single cause. Here's a look at three of the most high-profile shortfalls.

Car Chip Shortage

Modern vehicles use semiconductors to power many features including basics like anti-lock brakes as well as niceties like heated steering wheels. In 2021, however, a Commerce Department report said median inventory of chips by manufacturers including automakers fell from 40 days in 2019 to less than 5 days in 2021. As a result, companies missed millions of sales during the year because they lacked vehicles to sell.

Behind the car chip shortage is a phenomenon known as the “bullwhip effect.” In short, car makers expecting a sharp sales slump during COVID drastically reduced chip orders. When the pandemic recession proved short-lived and customers flush with stimulus cash flocked to showrooms, carmakers couldn’t refill supply chains fast enough to meet demand.

Today the car chip shortage is easing as the semiconductor industry moves to fill carmakers’ orders. However, it’s expected to persist at least through 2022. Longer term, expansion of chipmaking capacity, especially that based in the U.S., may help avoid a repeat.

Baby Formula Shortage

During 2022, parents of infants shopping for baby formula found shelves at many retailers were bare, and those with the product limited purchases to prevent hoarding. The baby formula shortage understandably felt more personal and threatening than the car chip shortage, which illustrates an atypical supply chain problem.

What happened to create a baby formula shortage was an interruption in supply from a single major manufacturer that exposed problems with the overall formula supply system. When inspectors found potential contamination at one Michigan plant that made as much as one-fifth of all the nation’s formula, it was forced to cease production and issue a recall. With nationwide production concentrated at only a handful of large, highly efficient formula factories, there was no excess capacity to take up the slack. And, due to regulatory barriers and high tariffs on imported formula, formula made in other countries couldn’t be shipped in.

After several weeks, the Michigan plant began producing again. The federal government relaxed regulations and tariffs to encourage imports. Military aircraft were even used to speed emergency supplies. Refilling supply lines with domestic and imported formula is a several-week-long process, however, so some are calling for measures to encourage more domestic suppliers and a permanent lowering of import barriers to avoid a repeat of the baby formula shortage.

Lumber Shortage

The lumber shortage that hit housing primarily sprang from forces similar to those that hammered autos. Builders anticipating a sales slump stopped ordering lumber in 2020 and, when buyers returned to the market in droves sooner than expected, it took time to re-activate furloughed sawmill workers and re-energize lumber production. Another problem, similar to the infant formula shortage situation, was high tariffs on imported Canadian lumber. Finally, a pandemic-caused lack of truck drivers made it hard to get trees from forests to sawmills and then to building sites.

The result was a lumber shortage that, at its peak in mid-2021, saw prices hit more than three times the pre-pandemic record, according to the National Association of Home Builders (NAHB). As with the other shortages, rectifying the lumber shortage will take time. However, in this case, thanks to higher interest rates and higher home prices (lumber price volatility added more than $18,600 to the price of a new home from August 2021 to June 2022, according to NAHB), the lumber shortage will also likely be helped by reduced demand.

When you are aware what your supply chain looks like and which parties are involved, when there’s a problem you will be able to react much more quickly.

—David Dreyfus, assistant professor of supply chain management, Rutgers Business School

How to Rethink Your Supply Chain Strategy

With all these and other supply shortages in mind, how can small-business owners rethink their own supply chains and strengthen their ability to satisfy demand? Here are some ideas from experts:

1. Stay Close to Home

Shrinking the length of supply chains is a near-universal suggestion. “Globalization has been knocked out of synch by the array of crises,” explains Michael Hales, a partner with consulting firm A.T. Kearney. “Complications will continue as companies move to Globalization 2.0 that includes distinct regional supply chains.” Business owners should consider not sourcing from China merely because it’s less expensive and instead develop sources closer to home, Hales adds.

2. Develop Strategic Relationships

Hales also encourages that businesses get better at identifying and acting quickly when a supply chain risk arises. To make it easier to respond, he suggests developing strategic rather than transactional relationships with suppliers. That way, if difficulties arise, businesses and suppliers can more readily work together to find fixes.

3. Take Advantage of Technology

Technology is a critical part of rethinking supply chains for small businesses, says Sam Polakoff, CEO of supply chain management software firm Nexterus. “Understand the supply chain processes and technologies that are employed by the largest companies in the world and emulate them with consideration to scale and affordability,” Polakoff stresses.

4. Use Your Data

Every business’s supply chain is rich in data, Polakoff says. Information from purchase orders, shipping manifests, invoices, and other sources combined with analytics can provide insight into supply chains that could help avoid global supply shortages. It can also boost profits in normal times. For instance, he says many businesses may issue multiple purchase orders for shipments from one supplier that, if bundled together into one shipment, could save significantly on shipping costs.

5. Take a Deep Dive

Taking a deeper dive into your supply chain is the top tip from Kelly Lynch, director of corporate and student relations for the department of supply chain management at Michigan State University’s Broad College of Business. “Your company needs to understand the suppliers below your direct Tier 1 suppliers and see where the significant risks are and then take appropriate action,” Lynch explains.

6. Be a Better Customer

One action likely to help is developing tighter supplier relationships. Try to be a better customer, Lynch suggests. This doesn't necessarily mean paying more, but sharing more, including information about demand projections and future product plans. “If your strategy is to beat up suppliers for lower prices, then that will catch up to you eventually,” he says.

7. Create a Map

Create a detailed map of your supply chain showing where all your products and services come from, advises David Dreyfus, assistant professor of supply chain management at Rutgers Business School. “When you are aware what your supply chain looks like and which parties are involved, when there’s a problem you will be able to react much more quickly,” Dreyfus says.

8. Make a "What If?" Plan

Prepare contingencies to cope with faltering suppliers. “Do a lot of what-if planning,” Dreyfus says. “If this happens, what do we do?” Potential remedies range from implementing redundancies by splitting sole-source contracts between multiple suppliers to possible collaborations with competitors.

9. Consider Sharing

Considering shared supply chains is also part of the advice from Rick Blasgen, immediate past president of the Council of Supply Chain Management Professionals. “Can I collaborate with somebody?” he asks. “We’ve all wanted our own vertically integrated supply chains because we didn’t want our information to get out to competitors. But those days are gone.”

Blasgen says today more companies are sharing warehouses and distribution centers, much as they have always shared highways, rail lines, and airports. “You’re going to see more people saying let’s fight it out on the store shelf and use the country’s distribution assets to help each other,” he says. “That will lower costs and benefit everybody.”

The Supply Chain Outlook

Overall, supply is likely to become more closely balanced with demand in the next year or so. Meanwhile, businesses seem certain to shorten their supply chains, source more domestically, improve supplier relations, and work harder and spend more on technology to give them insight into their sources of supply. It could be a while before anybody forgets the current global supply chain issues and the potential for a repeat.

“I don’t want to paint a picture that the future is grim,” Polakoff says. “But there’s always going to be something. Some version of those problems or variants will always be around to cause some kind of supply chain disruption.”

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