How do we manage supply and demand in a constrained market?

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This is an extraordinarily challenging time for people working in procurement and supply chain. But what are the most pressing issues – and how can people and organisations working in this area cope with a difficult present and future?

 

Ross Dawson, Operations, Procurement and Supply Chain Practice Lead, with her Eton Bridge Partners colleague Ivan Bates, shares the insights from a recent discussion with several senior figures in the sector:

> David Loseby: Global CPO, Business Transformation, Advisor, Author & Speaker

> David Stringer: Head of Supply Chain UK and Ireland, Costa Coffee

> Guy Dunkerley: Interim Head of Supply Chain and Procurement, ATS Euromaster

> Hari Sundaresan: Vice-chair, NHS London Procurement Programme

> Howard Pearson: Interim Supply chain director / Supply chain recovery and turnaround specialist

> Keith Hallam: Group Supply Chain Director, Hillarys

> Nigel Hobson: previously Senior Vice President / COO – Global Trading and Supply Director, Shell UK Limited

> Paolo Tegazzin: Managing Director, Maxipro Ltd

What is the biggest challenge facing supply chains at present?

Keith: For me it’s global shipping. I’m working for a business that over the last two years has increased its outsourcing to, and reliance on, a far east supply chain. The lead times and costs have increased significantly.

Nigel: I’d say instability. Thinking primarily around the energy market and the impact it has had, particularly on the gas market, in terms of demand.

We’re also seeing a lot of over-contracting. Demand might say you need six, but you may put a bit of flex in and order eight, and then you may even put some fat in the system and order ten.

In terms of demand, do you supply term customers or spot customers? I see complete instability in the energy market, and I can see only one way for prices to move at the moment.

What changes are you seeing now?

David S: I’m trying to encourage my business to use less stuff. Costa uses a frightening number of paper cups on a weekly basis – and demand is outstripping capacity and raw materials.

“All of my stakeholders and stores say we need more… give me more! I say OK, but you need to think a lot harder about how we can use less, because there is going to be less in the market for the foreseeable future.
It’s a real cultural change and a change of mindset that we need to get certain businesses into.”

Nigel: Could governments intervene in supply and allocation? Undoubtedly. We’ve already seen the UK government do so when it comes to energy. The question is, which government controls the global supply chain? Politics will start to come into play where you have global companies.

David L: There has to be a moment that pushes us towards the closed loop supply chain in reality, as opposed to academic theory. A point where you say, ‘now is the time to think about things differently’.

“There are only a finite number of containers in supply, and of ships that comply to the new energy regulations – this has to be the time to say we can’t keep doing the same as we’ve always done.”

So, let’s get serious let’s start to experiment, but also collaborate. There are many instances where non-competing industries such as aerospace, defence and automotive can start to collaborate, particularly if they’re drawing from similar supply bases through similar shipping channels.

But this will not happen organically, and it does need some intervention to make it happen.

Hari: Every healthcare provider around the world over the last two years has turned completely left and just worried about Covid. This now means that  procurement teams within the NHS are going to be really busy for the next 18 months because the bow wave of normal healthcare provision is so enormous. They are throwing money at it because the backlog is so big.

The interesting thing is, every government and every healthcare provider in the world is in the same position.

Everybody wants their knee and hip operations which have been put back due to the pandemic, and it’s a perfect storm of demand in the market place. I don’t see any way prices will not shoot up, because over the next two years everybody is going to be doing the same thing.

“I keep saying that Covid has actually been the best thing that’s happened to procurement in the NHS. Before we were the dog in the corner that you patted on the head and said: “Yeah, just give me something cheaper.”

Now the transformation agenda is really there, people are looking at changing how a hospital works and not just from a finance perspective but in HR, clinics and estates. How do we do things completely differently on a budget that’s fixed, but where demand is 50 per cent higher?

Is the capacity available to cope with revitalised demand?

Paolo: In the middle of the Covid storm, people started slashing everything possible to hit the numbers. They started cutting capacity and investment.

People weren’t questioning what they would do in two years’ time; they had to hit their numbers. Now here we are and most industries are facing more demand than pre-Covid times; and they don’t have the capacity.

The oil and gas industry is claiming record revenue because of oil prices.

“I know a lot of companies didn’t have any disruption in terms of profitability, so how did they do that? Volume went down, the price went up, you hit the numbers. There should be more contingency planning.”

In electronics, they are generally more prepared because they face disruption every year because there is always new technology, so they have to have a contingency plan.

Nigel: Capacity has been significantly cut in a number of areas, and people are unsure how it is going to come back. Many of the big oil majors are now not investing in hydrocarbons, but are putting investment in other areas.

How will the current economic situation affect supply chain?

David S: We’ve talked about supply chain as a point of difference for a long time and previously, that was all about efficiency. Driving towards just-in-time, reducing stock in the chain, that was how you got your advantage.

We’re moving into an era in which security of supply is going to become more important. In the coffee world, we’ve still got people who aren’t serving coffee because they can’t get hold of it.

In the last six months, we’ve done very well because we’ve managed to keep things moving – even though it’s cost us a lot.

David L: It’s classic economics in terms of the cycles we go through. If we’ve got any sort of conscience about future generations, it’s in our hands to be slightly more cerebral about the choices we make.

“We need a few brave souls out there to start breaking a few moulds. Saying we’ll wait until it circles back in seven or eight years probably isn’t good enough. We have a fundamental opportunity to do something different.”

Howard: In the retail industry, there has been a move over the last decade to open up channels of collaboration with suppliers, retailers and logistics organisations to work more closely together.

That has diminished over the pandemic as organisations have become more profit-orientated and focused on survival. Some retailers cancelled orders two years ago and refused to pay suppliers, and I think there’s been some profiteering in the global freight industry to make the most of the pandemic.

“There is now a fundamental lack of trust in organisations within the value chain that’s got to be built back up again, which will take some time.”

Paolo: One thing we can do is to model the supply chain to really test how strong it is. That requires collaboration and humility from all involved – to accept any findings and have the appetite to move from good to excellent. There can be some resistance to this. You suddenly tell a supply chain director who has been doing the same thing for 20 years that you are going to model his work – and the same for procurement and the warehouse. It can create friction, so it’s important that nobody is made to feel guilty.

How has Covid-19 changed the way in which organisations and customers behave?

Hari: The NHS used to be like a big supertanker, like that cargo ship that got stuck in the Suez Canal! What it’s now creating is a lot of little lifeboats so we can move with more nimbleness than before.

Traditionally it’s been easy for procurement to get some big guys in and give them massive contracts. Now we’re saying, ‘why not look for smaller local people?’

“I’m seeing a very rapid mind shift, one with a completely different supply chain. Picking more locally has its own challenges, but it’s far more community based. The way we look at our supply chain is changing very quickly and people are getting very excited by that.”

Keith: The pandemic has really changed people’s lifestyles and behaviours. Understanding the consumer is even more important than it ever has been, particularly for retailers. Value continues to be one of the most important drivers, but customers’ preferences for online channels are accelerating, so data security is something for us to look at.

“Consumers are also more aware of their health, and want to buy brands that offer healthier alternatives and ESG credentials are becoming increasingly important in people’s purchasing decisions.”

Howard: Now that availability is improving, organisations will go back to being more aggressive in choosing who they’re going to partner with. That’s going to help reset the prices within the value chains, but this needs to happen quite quickly, because there are certain sectors in the chain who are still riding on the pandemic wave.

Organisations just want a period of stability to try and work out what the customer is going to do and be able to react to that.

Nigel: There is probably no more transparent market than energy at the moment; you can see the price of gas or oil immediately. Where you lose transparency is down towards the end consumer. We’ve seen so many energy companies go out of business because they essentially did not see the price changes coming, and they didn’t manage their exposure.

People want to see more of that transparency down the supply chain, but it won’t fundamentally alter the supply and demand in the global market.

“With such volume of challenges across just this small selection of industries, it’s no wonder everyone is talking about the importance of a revived approach to supply chain and procurement.

It will be fascinating to see how it manifests this year now the world is emerging from the fog of Covid, and the markets are opening up more.” Ross reflects.

If you would like any information about our work within operations, procurement and supply chain transformation, please contact Ross at [email protected] who will be delighted to support you.